Unifi, Inc.
Q2 2018 Earnings Call Transcript

Published: 2 Aug 2018

[Operator:]

Good morning, everyone. Welcome to Unifi's Fourth 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, Chairman and Chief Executive Officer; Tom Caudle, President and Chief Operating Officer; and Jeff Ackerman, Executive Vice President and Chief Financial Officer. During this call, management will be referencing a webcast presentation that can be found at unifi.com and by clicking the fourth quarter conference call link. Management advises you that certain statements included in today's call will be forward-looking statements within the meaning of the federal securities laws. Management cautions that these statements are based on current expectations, estimates, and/or projections about the markets in which Unifi operates. These statements are not guarantees of future performance and involve certain risks that are difficult to predict. Actual outcomes and results may differ materially from what is expressed, forecast, or implied by these statements. You are directed to the disclosures filed with the SEC on Unifi's Forms 10-Q and 10-K regarding various factors that may impact these results. Also, please be advised that certain non-GAAP financial measures, such as adjusted EBITDA, adjusted working capital, adjusted net income and adjusted EPS, 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. Last year our goal was to further establish Unifi as the global leader in innovative recycle and synthetic textile solutions. Throughout fiscal 2018 we diligently invested in building our brand, our technologies, our partnership and our organization to solidify the foundation for long-term sustainable growth. Let’s start with the discussion of our fourth quarter highlights, where we see our strategy metalizing. Our fourth quarter results came in as expected with excellent growth in our top-line. This completed a year where we were able to lower sales growth in each of our four quarters, something that hasn’t happened in the last six years. For the fourth quarter our sales growth of 5.9% from the prior year period was carried by the strength of our premium, value-added product portfolio as total PDA sales to roughly 16% compared to the prior year period and represented approximately 45% of consolidated sales. On an annual basis and I’m proudly to add that PDA revenue exceeded $300 million for fiscal 2018, the strong PDA performance was a key contributor to our international sales growth, which was up 19% in the fourth quarter compared to the prior year period. This all leads to further progress against our goal of recycling 20 billion plastic bottles by 2020. On that front, I'm pleased to announce that we recently surpassed the 12 billion plastic bottle mark a very meaningful milestone. Given our top-line performance and initiatives to counter the recent rise and acceleration of raw material costs, we were able to make some progress on normalizing profitability even at significantly higher raw material costs remains a substantial headwinds. Crude oil prices were 50% higher in the fourth quarter of 2018 compared to the end of fourth quarter of 2017. The impact remains substantial due to the acceleration up to this level during the fiscal year. We have more work to do over the next couple of quarters for pricing to catch up to a high level of input costs and this remains a top priority. Partnering with Unifi has provided our customers with a clear opportunity to deliver on their sustainability goals by offering REPREVE based premium performance products. It’s been great to see the growing recognition of the REPREVE brand. In the fourth quarter, we were honored to receive the 2018 University of North Carolina Sustainability Award for our commitment to sustainability, innovative leadership and sustainable enterprise, as well as strategic and thoughtful business practices. It’s our privilege to be working with U&C on the greater North Carolina circular economy. We recently announced being named the family sustainability partner PAC-12 Team Green team a partnership with the PAC-12 Collegiate Conference. As part of the partnership Unifi will provide grant funding to conference member institutions to support sustainability initiatives and increased recycling efforts. And we will work with the PAC-12 impactful and PAC-12 Networks and creating custom content in media assets to future circular economy programs in order to ignite passion and increase understanding of the benefits of recycling plastic bottles. We have also had a very successful launch of our new Unifi positioning. True innovation starts in the fiber, which highlights our strategy of developing innovative and sustainable performance fibers. We timed the launch to take place during last week’s after our retail market, which continues to be a top customer shelves for Unifi. With our expanded presence, we displayed our REPREVE mobile tool on the shelf or up for the very first time. The event further position REPREVE as the number one branded cycle fiber in the world. It provided a great avenue to inspire and educate new performance of our brand, product designers and retailers. We have seen strong indications of success with the of our new branding and newly designed website unify.com with a 40% increase in June traffic to our website compared to the last year. The engagement with our content also improved with increase of in June page views and average session duration of 50%. Most importantly our V-tracking has resulted in a 10 fold increase in new leads generated from the unify.com website when compared to 2018 to June 2017. Our innovation focus this year is around combining new technologies with noticeable and superior consumer benefits into the REPREV platform. We also provide these technologies on our Vergin platform, but our primary focus is recycle. Key innovations in our product offerings being a little bit this year include thermal regulation, superior cushioning and coverage and improved wicking on moisture management. These benefits are supported by consumer and technical research data being used to demonstrate the superior performance. Some of these technologies are now in the marketplace like a new all season Khaki pants, the pant includes REPREVE and SORBTEK 365, which helps to keeps the wear cool and dry in the heat and warming comfortable in the cold. The pant is cobranded with REPREVE and SORBTEK 365 Hand Hang Tags and the thermal comfort benefits are featured in that promotional video created by the brand. [Indiscernible] incorporate our excess cushion technology into one of their leading performance stocks, which is now available through their normal retail and online channels. Excess provides light weight cushioning and resilience for more comfort as well as glassware interior on the user. We believe our momentum is strong and we expect more adoptions and expansions with these and other brands. Now I will turn over to our segment level performance. Starting with our international segment, the fourth quarter reflects ongoing momentum as sales grew 19% compared to the prior year period. We remain extremely proud of how well our teams have executed across the world and we continue to see strong opportunities for global expansion. In Asia, sales were again driven entirely by our PDA business an expansion of our supply chain. During the quarter, we saw a good performance from establishment brand partners as well as from some new brand adopter and have opportunities remaining in the pipeline. Moving to Brazil, both sales and gross profit were down during the quarter compared to the prior year period, which is primarily due to the weakening of the Brazilian real. We continue to monitor the volatility in this region, but are proud of our performance there and their opportunities that remain. Even with the headwinds, we believe our position is strong and our premium product remains in high demand. Looking at our domestic business, we made sequential quarterly improvements despite ongoing market headwinds driven by elevated raw material cost in a highly competitive regional environment. Even with these headwinds, we were able to produce another quarter of overall revenue growth from polyester, which was up 3.4% compared to the prior year period. Partially offsetting that growth of the 7.8% decline in the nylon segment sales compared to the period. I would like to spend a brief moment to acknowledge the recently proposed duties on Chinese imported growth and the trade regulatory environment as a whole. Today, there is great uncertainty in the space, but we haven't seen strong evidence that current proposals and negotiations will have a material impact on these overall cost structure or our competitive position. However, we are still assessing the impact of the current proposals and trade negotiations may close on both in the short and long-term, and we are preparing to take appropriate actions should any impacts materialize. One last mission on the regional business, I would like to comment briefly on our recent announcement regarding the end of our negotiations on the proposed joint venture in Guatemala. We remain committed to the Central America region. But were unable to reach a definitive agreement on this specific venture. We will continue to look at other opportunities across the America's that will both leverage our assets and help us expanding the most efficient manner possible, while meeting our financial requirements. As we look forward to fiscal year 2019. We will work to build upon the progress we made against our strategic growth plan. Our true innovation starts in the fiber positioning demonstrates our commitment to taking innovation, technology and sustainability to consumers around the world through our partnerships with leading brands in mills. The commitment is evidenced by both our bottle processing plant and recycling center now reaching the target production levels as we continue our march to $30 billion bottles recycled by 2022. With this U.S. based capacity, we are positioned to more efficiently deliver on the growing demand for REPREVE products as well as build out our innovation pipeline. Our dedication to recycling performance products is valuable to many partners including expanding list of Chief Sustainability Officers being assigned to important roles in like-minded companies. Many of these companies are establishing very meaningful and impactful stretch goals for its recycling around the world. We will focus diligently on expanding and optimizing our global supply chain, continuing to look for unique ways to expand the reach of our manufacturing assets and supply chain partnerships which allows us to adapt to the ever-changing needs of our customers in the regulatory environment in order to be where our customers need us. The strategy is helping us to drive growth. Many opportunities remain and we will be agile, responsive and competitive. As a result, we strive to be the world's most sought after performance and sustainability textile partner by acknowledging passion and inspiration among forward-looking designers, innovators, and consumers ultimately leading to further revenue growth and increased operating margin. Before I turn the call over to Jeff to provide more details on the financials, I would like to highlight our latest quarter edition Eva Atlantica from Value Add Capital. Eva has extensive experience within the network of sustainable companies and valuable insight into multinational environmental and social initiatives. As we continue to realize our vision of making everyday life better by transforming today's products through sustainable innovation, we welcome Eva's expertise. I will now turn the call over to Jeff.

[Jeffrey Ackerman:]

Thank you Kevin and good morning everyone. As Kevin noted, results for the quarter were in line with the expectations that we discussed on our last call. We outlined our plan to reignite our growth last year through strategic investments and we were pleased to see those investments contribute to solid top-line growth. Further, in the quarter, we were able to recapture some of the short-term profitability we have lost in Q3 due to higher raw material costs. However, the cost of raw materials still remain high in the environment in the region continues to be difficult. We have made progress that achieving cost efficiencies implementing price adjustments, and enriching our sales mix to improved margin remain ongoing areas of focus. I will get into more details on the drivers of our performance in my discussion today and share some of our progress on improving results. Throughout my discussion, I will be referencing the presentation that is available as part of the webcast and published on our website. Please turn to Slide 3 where we have provided a bridge for net income and diluted EPS. Consolidated net sales were $181.3 million a solid 5.9% increase from Q4, 2017. Sales were driven by an overall increase in volume lead by worldwide PDA product sales. Gross margin came in at 13.2% which was down from 16% in Q4, 2017. In the prior year fourth quarter, our margins experience a benefits of a declining raw materials cost environment where in this quarter our margins remain pressured by higher raw material costs, which in combination with a highly competitive regional environment puts pressure on our customer pricing. Consistent with our outlook on last quarter's call gross margin did increase more than 300 basis points sequentially from Q3, 2018. We talked last quarter about our customer pricing mechanisms for index based and non-index customers. For non-index customers, we historically have been able to recapture margin following an increase in the price of raw materials within a couple of quarters of raw material costs stabilizing. As a reminder, a good portion of our customers that are on our index pricing model receives automatic quarterly price adjustments to account for shifts in raw material costs, allowing for pricing to remedy itself overtime. Our non-index customers are in a more fluid position where we have to balance the raw material cost environment with the competitive dynamics in the market. We have been negotiating and implementing responsive price adjustments with our non-index customers, but we see pricing as a challenge that will require constant attention to account for the dynamic raw materials cost environment. Looking at operating expenses, incremental SG&A drove an increase in operating expenses, compared to Q4, 2017, stemming from our planned strategic investments in our expanded international and domestic commercial capabilities. The year-on-year impact at foreign exchange was a favorable $600,000 on a after-tax basis, primarily driven by the Chinese reminbi. The change in net income related to equity in affiliates, compared to Q4, 2017, relates primarily to reduce quarterly earnings at Parkdale. Parkdale continues to be impacted by similar domestic challenges that we have experienced, and they also spend time chasing prices in an inflationary environment which adversely impacted their earnings this quarter. Lastly, during the quarter, we experience a reversal of an uncertain tax position related to foreign exchange income recognized in fiscal 2015, amounting to $3.4 million. In summary, we saw net income grow to $10.8 million, up from $9.7 million to the same time last year. When evaluating the business using our adjusted non-GAAP measures, adjusted net income declined from $9.7 million in Q4, 2017 to $7.4 million in Q4, 2018, which we attribute to the higher operating expenses discussed earlier, partially offset by a more favorable tax rate on an adjusted basis. Similarly, adjusted EBITDA declined from $18.8 million in Q4, 2017 to $15.3 million in Q4, 2018, adversely impacted by higher operating expenses. Slide 4, shows the components of sales and gross profit for the fourth quarter. Segment net sales grew 5.9% from the prior year on 11% higher volume gross, while gross margin declined 280 basis points, due to the headwinds that I mentioned. Sales in our international and polyester segments continued to grow while nylon continued to be pressured by a secular decline. More specifically polyester volumes for the quarter increased 5% over the same period last year, driven by growing sales of plastic bottle like and replete chip. We are pleased with the sales growth that recognize that the associated that the associated margin profile is lower on the value chain. We will continue to push for product sales that carry higher margins utilizing the innovation strategies that we have outlined. Nylon sales performance reflects the ongoing decline in the category, we are investing in our commercial capabilities to improve sales volumes trend and working to identify efficiencies in our cost structure. Internationally, we have seen excellent performance across a broad sales mix, including significant expansion of REPREVE staple fiber, capturing share in the large market for blended apparel products. Now let’s look at gross margin performance for the quarter. We are pleased with the sequential improvement in performance compared to the third quarter. However, we have more work to do. We face a difficult comparison as the prior year quarter benefited from a declining raw material cost environment. For Q4, 2018 instead of a declining raw material cost environment, we experienced an uptick in average polyester raw material costs from Q3, 2018. This differential combined with disproportionate growth in some lower margin products depress our gross margins when compared to Q4, 2017. Looking at polyester margins. Volumes grew 5% but were slightly offset by raw material pricing challenges and disproportionate growth of chip and slate sales. These impacts equated to a 440 basis point reduction in gross margin. Moving to Nylon margins. Nylons volume decline and less favorable mix drove challenges and fixed cost absorption comprising a 220 basis point gross margin declined. International gross margins continue to outpace those at our regional segments and a higher growth of the international segments also helped offset some of the headwinds in our regional businesses. Gross margin for the fourth quarter was 150 basis points lower than Q4 2017 primarily due to a lower margin sales mix and higher costs in Asia. Slide 5, show equity affiliates. Parkdale are also experiencing difficult regional environments in combination with rising cotton prices, which resulted in a decline of $233,000 from Q4, 2017. Total distributions from equity affiliates were $1 million in the quarter and $12.2 million for the fiscal year. Slide 6, covers balance sheet highlights, including non-GAAP measures, working capital and adjusted working capital presented on the slide. Working capital was $189.3 million and adjusted working capital was $145.9 million. Adjusted working capital as a percentage of sales remained in our range of expectations in the low 20%. We ended the period with $131.2 million of debt principal and net debt of $86.3 million both in our range of expectations. Total liquidity and revolver availability were at $98.1 million and $53.2 million, respectively. Our total debt to adjusted EBITDA leverage ratio ended the year around 2.5 times, which leaves us with a strong balance sheet to continue to support our future growth objectives. We still have $27.6 million authorized remaining on our share repurchase program. While we prioritize growth investments, we remain open to considering multiple leverage to drive long-term shareholder value. Lastly, I would like to close with some thoughts around our outlook for fiscal 2019. We anticipate continued strength from our international operations increased contribution from our strategic investments to drive profitable growth. Despite the regional headwinds, we expect to deliver mid-single-digit percentage growth over fiscal 2018 for revenue in mid to high single-digit growth in operating income and adjusted EBITDA, these are exclusive of Parkdale. For revenue, we expect polyester growth rates to be in line with fiscal 2018 levels and to benefit from continued expansion of our chip and flake businesses. For nylon the decline in the category is ongoing, but we expect the commercial investments we made in 2018 to begin stabilizing the business. The strong growth rates in our international markets in fiscal 2018 will prove difficult to match, but we remain excited about what we have in the pipeline and are opportunities to grow in fiscal 2019. We expect operating income to grow from the additional revenue and some cost improvements. Notable assumptions for our outlook include no major fluctuations in the price of raw materials or changes in the regulatory environment. Also fiscal 2019 will continue 53 fiscal weeks with the additional week occurring in the first quarter ending September 30. Looking at our capital projects, we expect CapEx to remain around $25 million for fiscal 2019 consistent with the level and types of investments we made in fiscal 2018. On the tax front the changes included in the Tax Act are broad and complex, including the provision related to the global intangible low tax income or guilty tax. Guilty is currently expected to negatively impact full year earnings, although it is not expected to impact cash flow. Given the complexities and pending interpretations relating to the 2017 tax reform legislation, our initial expectations are for an effective tax rate in the low 30% range, but we are making it a priority to improve this right. As we receive more clarity on the regulations we will factor that into our expectations and update you accordingly. With that, I will now turn the call over to Kevin for closing remarks.

[Kevin Hall:]

Thanks Jeff. For fiscal 2018, we set fairly aggressive goals for our Company that hadn’t seen strong top-line growth in several years. We added talent to our high-performance team around the globe and are driving a cultural focused on our profitable growth. I'm more excited today about our global opportunity, then when I started a year ago. As I can see the differences we are making. Our current products and those that we are developing can provide our customers with innovative solutions that today's consumers desire which in turn will help them improve their own results and impact. We will remain focused on positioning our business for long-term profitable growth by executing on our strategic growth plan, while also further developing our productivity initiative. I'm also pleased to announce that we will be hosting an Investor Day on November 15th in New York City, where will we will have the opportunity to talk long-term targets and share more detail on our strategic plan. We hope to see many of you there in person. Please keep an eye out for more information to come. With that we will open the lines up for your questions. Operator.

[Operator:]

[Operator Instructions] And our first question comes from Chris McGinnis from Sidoti. Your line is open.

[Chris McGinnis:]

Good morning. Thanks for taking my questions and nice quarter. Just I guess touching on just the price increases maybe 2019 just looks as the - I would have thought that you would have seen a little bit more pricing benefit in Q4, is that just timing related. And I guess when you think about the expectation for next year, how much prices built in that that forecast. Thanks.

[Kevin Hall:]

Hey thanks Chris. This is Kevin and I will take the beginning of that and then I will hand it off to Jeff. So first of all, I would say that through the quarter really proud of our team, because getting pricing is never easy, but they have been out working aggressively on it and we assonated some good progress in the quarter. We got more work to do and as Jeff talked in the past with our index pricing, it lags a little bit. So, we see ourselves still working and focused on this over the next quarter or two, but we are making good progress on it. I would say overall one thing that is the benefit is that more people are I think recognizing the challenge of rising cost across the different conversations versus when we were first out there we were kind of early in and they were very tough conversations. So, the overall environment is a little bit better, but we are making really good progress. So Jeff.

[Jeffrey Ackerman:]

Yes Chris, its Jeff. Just on top of what Kevin said, I think as we look at going through the quarter, we definitely saw an uptake in our raw material costs from Q3. We saw that probably just in rising price of oil. And so, as Kevin mentioned, we are still chasing after that a little bit, we did make the sequential improvement as we talked about and our assumptions now are that those raw material costs while albeit at an elevated price will start to stabilize, because it's just hard to predict anything other than that. So if it stays fairly close to the current levels, we should be able to deliver on the guidance that mentioned.

[Chris McGinnis:]

Okay and then I guess just thinking about the operating margin targets for next year, is that I would have thought that would be a little bit higher, I'm just wondering is the gross margin still maybe a little lower or is there more investment on the SG&A side. I know actually you been doing over the work there as well. Thanks.

[Jeffrey Ackerman:]

Yes Chris, so let me just maybe touch on kind of the key points around our guidance. So our objective is always to try and grow the earnings faster than sales, and as I mentioned, we are expecting mid-single digit sales growth and earnings growth kind of in the mid to high single-digits. And here is maybe something, you might not be thinking about is that with the - on the revenue side, we are going to be facing an 8% to 10% headwind on international business and that is because of how much the renminbi and the Brazilian real had weaken. So that is about 8% to 10% headwind just on international business. So still strong growth U.S. dollars, but even stronger growth on a local currency basis. On the gross profit, we expect slight expansion in the poly business as we get more efficient and raw material cost starts to stabilize. That will be partially offset by some continued pressure on nylon. And then we are facing a 100 basis point headwind on the international business due to loss of important credits associated with the weakening in the Brazilian real, so that was 90 days ago or was not something that was anticipated. And then thinking about SG&A, if you look at the fourth quarter and just kind of consider that more or less a run rate that is kind how you get to the SG&A number. So those are the building blocks for our guidance.

[Chris McGinnis:]

Great. And I really appreciate that color. I will jump back in queue. I appreciate it.

[Kevin Hall:]

Thanks Chris.

[Jeffrey Ackerman:]

Thanks.

[Thomas Caudle:]

Thanks Chris.

[Operator:]

Thank you and our next question comes from Daniel Moore from CJS Securities. Your line is now open.

[Daniel Moore:]

Good morning gentlemen. Congrats on the UNC sustainability award and go target. Gross margin if you look at sequentially Q3 to Q4 improved 350 bps is it possible just to break that out between volume, fixed cost absorption, price increases slowing through and mix?

[Kevin Hall:]

Sure. Let me just take through those right in. So the sequentially from the third quarter of this year, our polyester margins improved by 360 basis point. [Audio Gap] and if I just kind of tick through the items and really order of significance the largest for sure was than improved - based on just the higher sales and better efficiencies that we saw. And then the next point would be the cost we incurred in the third quarter associated with the holiday start up and some upgrade cost that we talked about on the last call that totaled $1.2 million, that was probably the second factor that we didn’t have to anniversary that or we didn’t see those types of expenses in the quarter, so it benefited from that. And then finally, some progress on pricing that as I was just mentioning that was an item we are still chasing a bit because of the rising raw material costs. Nylon was really improvement on our mix and a little bit of the improvement on higher volumes and then international was up 70 basis points sequentially, that was primarily better mix in Asia, and a little bit of a headwind on in Brazil on our currency exchange rates.

[Daniel Moore:]

That’s great, perfect. Next the fiscal 2018 guide that give a little bit of margin improvement, is it fair to assume that somewhat second half weighted if we think about the tenor of the year given oil and PET prices have continued to move higher here?

[Kevin Hall:]

Yes, for sure. Thanks Dan for brining that up. The first quarter is going to be a very difficult comp for us. We had as you said, the lowest oil prices of the year, and then after that we were really chasing things. So things will definitely be more backend loaded.

[Daniel Moore:]

Got it and then shifting gears. Really interested in Kevin your comments around the new khaki pant having SORBTEK and REPREVE right on the tag. In conversations with Under Armour For example, using the cushioning technology, are you making any progress with customers like that in terms of getting Unify rate out on the tag, and maybe just a little bit of color about you know your ability and the Company's stability to really push branding up front in center in front of the consumer's mind. Thank you.

[Kevin Hall:]

Yes thanks Dan. You know what you can see with the really strong growth in the international in Q4, there is a lot of programs making their way to market and what you will see on several of those programs is more branding in-store. And so once it's on the shop, we will be able to directly attention more to it, but there is really good co-marketing efforts going on, I think a broader recognition that what you can give the REPREVE brand as well as calling out the benefits of the technology around thermal or the waking or the cushioning. So yes, there is more to come there and that is definitely a focus for us.

[Daniel Moore:]

Got it. Look forward to seeing those and then lastly you talked about trade and tariffs you prepare to take appropriate actions and I know it’s putting the cart ahead of horse a little bit. But what type of leverage can you pull and what type of actions might be appropriate if we do experience a little bit more pressure vis-à-vis China on the tariff front.

[Kevin Hall:]

So yes this has really kind of an interesting one for us to go through. We are doing the math on it. So, so far with the things that are in place, we really weren't seeing a material impact. Now with the announcements in the last 24 hours we are doing more math, we are taking a look at it. So far we don't see anything that would be a negative. But we have got to do more math on that, and we will continue to watch it. I think it’s kind of where we are at right now, we don’t really see a big negative, but we reserve the right to do a little bit more math on it.

[Daniel Moore:]

Understood. Thank you again.

[Kevin Hall:]

Thank you.

[Operator:]

Thank you. And our next question comes from Marco Rodriguez from Stonegate Capital Management. Your line is now open.

[Marco Rodriguez:]

Good morning guys, thank you for taking my questions.

[Kevin Hall:]

Good morning Marco.

[Jeffrey Ackerman:]

Good morning.

[Marco Rodriguez:]

Most of my question has been actually been asked and answered here. But just a couple quick follow-ups. Just first on the pricing aspect, talking about the non-indexed contracts kind of sounds like obviously you got a little bit more pressure there in terms of pushing through, but am I interpreting your comments that that’s starting to become easier conversation now, just as far as realization and where the prices are.

[Kevin Hall:]

Yes Marco, I would say I would never classify the pricing conversations as easy or easier or but always tough, but what I would say is I think there is a growing recognition in the conversation that our cost have gone up. And when we were first out, there was I think a real desire to just push back on that and for that not to be true. But I think now everybody sees that it’s a higher cost environment, so everybody is working through this now and I think that part of our partnership role as to really work with our customers and figure out how to navigate higher cost environment.

[Marco Rodriguez:]

Got you and if you could maybe talk about the contracts that are indexed. Has the pricing all been pushed through those types of contracts from those customers.

[Jeffrey Ackerman:]

Yes. Marco its Jeff, so the index pricing takes place on a one quarter lag, so it continues to kind of chase after any kind of changes in costs. So as I said, it's ongoing and we saw an increase in costs during the quarter. So we will be a little bit on the lag and if thing stabilize then starting next quarter we should be all caught up.

[Marco Rodriguez:]

Okay understood. Then in terms of the press release you guys had the other day or earlier this week in terms of kind of the rebranding for your outdoor retail summer market. I guess I think is what the headline was, if you can just maybe talk a little bit about that the Genesis of that and what your expectations are in terms of the rebranding.

[Kevin Hall:]

Yes. So the rebranding is consistent with what we have been talking about, about bringing innovative around or into the marketplace and particularity not sustainability but just improving and offering superior consumer benefit through the earn. So we really believe the whole idea of the two innovation starting in the fiber really captures that, if you want to deliver the superior benefits, it’s really important to start at the fiber level and what Unifi can offer are some technology approaches to that has some data around and it shows the benefits delivery. And so that's what that kind of things that we want to do it with the new brand is really be able to put out the superior benefit delivery and it will be able to help communicate that all the way through the consumer.

[Marco Rodriguez:]

Got you. And so the elevated cost so much that there are elevated cost from marketing or what have you to push the new branding out, that's already part of your new SG&A run rate at that Q4 number or are there are other expectations there?

[Kevin Hall:]

No. That’s all part of it, I mean obviously as we grow the PDA business and these programs are successful, we might invest if we see and ROI, but that's where we are at right now and we think we are in a good place.

[Marco Rodriguez:]

Got you. And last question, the CapEx guidance, if you can maybe talk to how you kind of look at the way that's going to be spent throughout the fiscal 2019 by quarter?

[Jeffrey Ackerman:]

Yes, at this point Marco, we are expecting it to be fairly evenly spent and so as we said its $25 million, so basically in line with what we saw in 2018 and the types of the spending will be very similar to what we did in 2018.

[Marco Rodriguez:]

Thanks a lot guys. I appreciate your time.

[Kevin Hall:]

Thanks.

[Jeffrey Ackerman:]

Thanks.

[Operator:]

Thank you. And that does conclude today’s question-and-answer session on today's conference. Ladies and gentlemen thank you for participating on today’s conference call. This does conclude the program, you may all disconnect. Everyone have a wonderful day.