Unifi Inc (UFI) 2002 Q4 法說會逐字稿

Good evening, ladies and gentlemen, and welcome to the Unifi fourth quarter and year-end results earnings conference call. At this time all participants have been placed on a listen-only mode and the floor will be open for your questions and comments following the presentation.

I would now like to turn the floor over to your host, Billy Moore. Sir, the floor is years.

Thank you, Neal.

Good afternoon. Thank you for joining me for Unifi's fiscal it 2002 fourth quarter conference call. As you know, certain statements included herein are forward looking statements within the meaning of federal Securities laws. Management cautions that forward looking statements are not guarantees and that actual results could differ materially from those expressed or implied in the forward looking statements.

The company reported a net loss for the quarter ended June 30th, 2002 of $1.6 million or 3 cents per share, which includes a pretax loss of $7.4 million or 8 cents per share from the sale and writedown to net realizable value of excess real estate. Absent the noncash loss from the disposal and writedown of this excess real estate, the company would have reported net income for the June quarter of $3 million or 5 cents per share. These results are an improvement over the net loss before Alliance plant closing costs and nonrecurring charges of 4 cents per share for the prior year June quarter.

We are extremely pleased with our June quarter over March quarter performance. We showed significant gains in sales volume, revenue and gross margin, as well as the performance of our foreign operations during the quarter. These will be discussed in more detail in just a minute. We continued our progress in strengthening the financial position of the company and ended the June quarter with bank debt and total funded debt of 23 million and 283.5 million respectively. Our bank debt and total funded debt are now at their lowest level since September of 1997. The company also end the June quarter with 19.1 million of cash on hand. The ability to drive down corporate debt and the improved long-term financial flexibility has been a total company-wide effort and is best illustrated by the improvements made in managing inventories. Since initiating the strategic focus on maximizing free cash flow in September of 2000, the company has reduced consolidated inventories by 169 from - 169.5 million as of September 2000 to 111.8 million as of June 2002, exclusive of the effects of businesses sold during the period. This reduction 57.7 million during the period can be attributed, in part, to our structural focus on autonomous business units and our progress in upgrading our business systems to web base technology which allow us to speed the plan process and improve forecast and accuracy.

For fiscal year 2002 the company reported a net loss of 43.9 million or 82 cents per share, which approximates a net loss of 44.7 million or 83 cents per share for the prior fiscal year. As previously disclosed in prior 10(q) filings, in the current quarter the company completed its test for the impairment of good will as required by FASB statement number 142. As a result, the company incurred a noncash pretax charge of 46.3 million, offset by an 8.4 million tax benefit for a net charge of 37.9 million or 71 cents per share in the current fiscal year to writeoff good will associated with the company's nylon business segment. Absent the cumulative effect of the impairment of good will and the net loss on sale of writedown of assets, the net loss was 9 cents per share for fiscal 2002. This is a significant improvement over the net loss before Alliance plant closing costs and nonrecurring charges of 18 cents per share for the prior fiscal year.

With this as an overview I would like to move forward with some specifics for the June quarter and the fiscal year.

Net sales for the quarter were 256.5 million which approximates 257.6 million in net sales for the prior year June quarter. Sales volume in the June quarter increased 22.4 percent versus the March quarter. Our June quarter sales increased $43 million from the March quarter and our gross margins increased to 8.6 percent in the June quarter, compared to 6.9 percent in the March quarter. The gross margin improvement is largely due to the effect of unit volume on our predominantly fixed cost operating base. Our commitment to customer service, product innovation, marketing, and globalization are all playing key roles in driving these sales in gross margin gains.

Net sales for fiscal 2002 were 914.7 million which is a 19.1 percent decrease from 2001 net sales of 1.1 billion. The decrease in year over year net sales a reflection of the reduced demand by textile and apparel manufacturers resulting from the uncertain economy and reduced consumer spending during the period. On an extremely positive note, our efforts to balance our resorees to ongoing levels of demand and our success in reducing the cost structure of our business allowed the company to improve its pretax profitability before nonrecurring items by $1 million in fiscal 2002 over 2001. This was achieved despite the drop in sales of 206.4 million - $216.4 million during the year. We now have a solid business model in place that will provide the foundation for future growth and profitability for the company.

The current quarter in the fiscal year contained 14 and 53 weeks respectively compared to 13 and 52 in the prior year. We are very pleased with the overall performance of our foreign operations. Equity affiliates and alliances during the quarter. Our texturing operations in Brazil and Europe were profitable for the June quarter as well as our dying operations in the United Kingdom. Brazil was also profitable for the full fiscal year which indicates how far we've come with this facility in just a few short years. Continuous process improvements to improve the quality and efficiencies and expanded customer base and the introduction of value added products have all contributed to our success in Brazil. Unified dyed yarns broke even for the year which again is a result of the significant process improvements made in that facility. Unifi textured yarns Europe, our Irish operation, finished the fiscal year with a loss, which can be looked at as a positive, given the extremely competitive nature of the industry existing in Europe today. From fiscal 2001 to fiscal 2002, our Irish operations improved their financial performance by $5.8 million. As anticipated, the majority of our equity affiliates performed extremely well, contributing $2.9 million of pretax profit for the quarter. Cargill America, our spun cotton partnership, was a major contributor as its operations ran at or close to full capacity for the quarter. Our manufacturing alliance with Dupont generated a $33.8 million benefit in Unifi in fiscal 2002 and 10.1 million in the fourth quarter alone.

While the arbitration is proceeding and is not expected to be concluded until late in the December quarter, both companies continue to work together to maximize the positive benefits of the alliance. Although it is too early in the process to predict our outcome, it is possible that the decision rendered by the arbitrators could be material to the results of Unifi's results of operations and cash flows.

A little bit on the outlook for the future. As we enter fiscal 2003, our primary focus will continue to be on the strengthening of our balance sheet while looking for growth opportunities. We are also focused on the following key initiatives designed to improve near term profitability and provide the foundation for future expansion. Throughout 2002 and continuing into fiscal 2003, Unifi has placed a high priority on selecting and retaining the industry's best talent. Our commitment to training and development is designed to build a leadership team and work force that can compete on a global scale. Unifi not only will have the highest quality products in the world; we will also have the highest quality work force. By focusing on customers and empowering employees to think independently, we have removed structural issues that may have limited our growth potential. Our U.S. operations now have mandate to improve customer satisfaction and earnings. These operations are now operated from a central location near the respective manufacturing operations to improve communications and expedite decision making. And have been successful in regaining lost business, maintaining current programs, and expanding our relationships with our customer base.

Managing information creates competitive advantages and cost, speed and service. And Unifi will continue to enhance this industry leading e-business programs to maximize these advantages. Better utilization of web based technology enables us to plan our entire supply chain digitally which improves customer service levels and forecasting accuracy. We will continue to expand the number of customers utilizing fiber serve, our electronic customer interface, to improve customer satisfaction and service levels. We will also continue our aggressive product innovation and marketing initiatives. From an industry perspective, Unifi has broken the procession that we are simply a commodity supplier, and we are now regularly fielding customer inquiries about our new products. We will also continue our commitment to sig sigma as a key tool to increase productivity, customer satisfaction and employee engagement. The annual impact of sig sigma projects to date exceeds $1 million and savings of $2 million during the next fiscal year.

Lastly, we will continue our globalization efforts to ensure that we have a presence everywhere in the world that our customers choose to do business.

We have seen some initial success and position of Unifi as important supply link in sourcing garment packages from the Caribbean basin. And the opening of our Hong Kong this earlier this year will enhance our relationships with Asian sourcing companies. Our recent agreements with TungTex Thailand [phonetic] will provide the company with a cost-effective and competitive entry point into Asia, the largest textured polyester region of the world. Unifi made significant progress on each of these initiatives in fiscal 2002 and continued progress in fiscal 2003 will provide new sales and profit opportunities for Unifi in the years ahead.

At this time we feel it is prudent to provide guidance for the upcoming quarter only. Given current economic conditions, unpredictable consumer demand and the continued volatility of our industry. We expect per share performance in the September 2003 quarter absent nonrecurring items to be at or slightly better than break even. Thank you for your time. I'd now like to open the floor to any questions. 00:12:30

Thank you, sir.

Ladies and gentlemen, the floor is now open for questions and comments. If you do have a question or comment, please press the numbers 1 followed by 4 on your key pad. If your question has already been answered and you would like to remove yourself from the queue, please press the pound key. Please note, questions will be taken in the order in which they are received. And we do ask that while you pose your question, please pick up the handset to provide optimum sound quality.

[Pause.]

Our first question of the evening comes from Michael Novak of Frontier Capital. Your line is live, sir.

Hello, Billy.

Hi, Mark. How are you doing today?

Hanging in there. It's been a rough market.

No doubt.

So, question for you. In the mid to late '90s you used to have SG and A as a percentage of revenue at 3 percent or better. Despite a lot of cost cutting and taking costs out of the system, you know, it's up north of -

Running about five and a half percentnd to date.

What does it take to get it back down near to 3? Is that reasonable? I understand you need volumes, but are we at the point now we should start to see some leverage in the SG and A line?

You know, our focus since about September 2000, when we were setting $500 million of debt and saw declining business since that period has declined about 24 percent in unit volumes, our initial focus was to stabilize the business. We had to drive down debt and we did everything we could do to free up cash to pay down debt. At the enof the quarter, our net debt was at 2.9 million. We think we have stabilized the financials. We think our business is stabilized and the point you're making is a good one. We need now to find a way to continue to grow the business. The SG and A levels we have as an absolute dollar basis are projected to go down a couple percent next year on a total dollar basis. But to get it back to that level you're talking B of A round 3 to three-and-a-half percent, we've got to have a sales increase to get it to that level. And that's our next target, how do we get there.

Okay. And that you've got sort of a manageable position in the balance sheet and good shape, what's the use - what do you expect to use your cash flow for?

We haven't committed at this point anything with that cash. There are several options we have, and we'll look at those - the options as they arise after we get our debt totally paid off, which we think is going to be somewhere between the September and December quarter. The options are, you know, first of all you can repurchase bonds which is an option. They're trading probably around 82 cents on the dollar. You could repurchase stock in the market which today is trading at around 7.70 in the market, and then you can look at growth opportunities. And quite frankly my personal preference would be to look at growth opportunities today. So we're looking at some opportunities of how to grow the business in and I'd much rather use the cash - I think we can get a better return out one of the two options. If we can find the right attractive opportunities.

If you believe that cash flow yield, you know, the company's business given your E and A it's been a break even level, 10 percent cash flow yield -

That's correct.

So if you buy back the stock, you know, it's risk free after tax 10 percent. I mean that's pretty darn good.

Michael, I don't disagree request your math. Historically Unifi has been a major repurchase of our stock. We've had significant repurchase programs in for up until really September of 2000 as far as focusing on cash. It is something we will revisit and the board will have the final say as to which direction we take with this. But they will look at all the options as well.

And then one last quick question if I may. How is the decline of the dollar impacting you?

We haven't seen a major improvement from the decline of the dollar, but you would think, just on general business terms, it would slow down the imports of goods coming into the U.S., which really haven't been a major fact for us as far as fiber coming in. There is a good bit of fabric and apparel coming in. It may help slow that some, but it should also help us export on a more competitive basis.

Okay. The first quarter would you expect it to be down sequential first quarter from the fourth quarter?

Sequential? We reported a nickel share profit operationally this quarter. The guidance we've given is at or slightly better than break even. At this point in time I don't care to go any further with that with that one.

Thank you.

Thanks. Appreciate it, Michael.

Thank you. Our next question comes from Tom Lewis with C.L. King Associates. Your line is live.

Yeah. Hi, Billy.

Good afternoon, Tom.

Are how old are your quotes? The first question [Quotes], the 90 days ago we were a little nervous about raw materials, and I was wondering how raw material conversion played out for you this quarter and kind of where you see that over the next [Inaudible]

Yeah, raw material during the first quarter are really pretty benign during the fourth quarter. We didn't see a lot of movement in it either up or down really the big issue for us is not necessarily what the raw materials are doing here, but more what they're doing in Asia. They dropped the raw material prices in Asia rose significantly during the March quarter. They came back down a little bit during the June quarter and assuming they stay where they are we think they're in a level which give us pretty much equal playing field with the Asian manufacturers on a raw material basis. Again, theirs is just like ours, it's supply demand driven and right now they're trading in a range pretty comparable to where we are on a raw material base.

Okay. But so on this sequential margin improvement, you're saying that raw material conversion wouldn't have been much of a factor?

It was not.

Okay.

The only other thing, Tom I would adds to that is our benefits from the Dupont alliance because we were running the alliance closer to full during the June quarter was also a contributor over what we've benefited in the March quarter.

Okay. As far as this cash, ongoing cash generation, was there much during the quarter that was shall we say nonoperational? You cite a sale of real estate in the possibility of getting a little money out of Parkdale. Any of that in there that contributed to getting your debt down to 2 [inaudible]?

No, there's not. The losses that we're taking on the write down of the property, there's excess real estate that we've now put out on the market for sale and we wrote it down to what we thought we could reels eyes it.

It was not a sale?

It's not a sale. It's not a significant amount of money that came in during the quarter from the sale of those assets. A major one is supposed to close - we have an offer on one of them. It should close in the September quarter. But, again, it's less than a million dollar.

Okay.

The other side of the coin is to the extent we dispose of the properties, we will also have the opportunity to take a tax deduction and recover effectively 40 cents on the dollar for that tax loss.

Okay. Your U.K. operation turning profitable there, is that based on getting the business - getting the sales up, or just slashing the cost structure down?

It's a combination of two things. First of all, it's heavily volume driven just like all the rest of our businesses are. But they've also been able to improve the quality of the product and improve the end use markets they're selling into by making a better product. So it's a combination of doing more, selling more, and selling more value added products.

So I mean it strikes me as a business that you have to convince your customers that it's not the same old operation, and that took a little longer than you expected, but it sounds like you're getting there.

Yeah. One of the things, Tom, that I'm glad you asked the question because it gives me an opportunity to talk about the manufacturing side of our business.

I truly believe that in the textile industry our manufacturing group is as good or better than anybody else in the industry. I mean, the Brazilian operation is a great example. When we took that business over in 1999 they were running 28 percent second quality goods on brand-new equipment. We've been running the business for two years and we're running less than 2 percent second quality. They were losing $2.8 million a month, we're making a profit. And again, the big reasons are, you know, focus on quality manufacturing, making first quality products you can sell in the market at a premium price. And the same things happened in our U.K. operation die oust. We've upgrade the manufacturing processes and it's showing on the bottom line.

Okay. That's the entree for my last question with respect to the TungTex venture, can you tell us a little bit about what we can expect from that over the next six to nine months and would I be correct in understanding that the first step is sending a couple of [inaudible] guys over to Thailand live in Thailand and help get the quality?

That's exactly right. Really if you look at the TungTex agreement, Tom, it falls into three parts. First of all, Unifi will assist TungTex in refining its texture and yarn production processes to improve the quality and efficiency level. So we will actually help them improve the quality by sending the team over there and just basically showing them how to run products better.

We will also provide ongoing operations management in Thailand, which is the second phase. And we'll assist TungTex in expanding its variety of textured yarns to serve a broader customer base. One of the things TungTex's product is going to now is heavily apparel base. We think there is a lot of opportunities to upgrade the quality of their product to move into industrial areas such as furniture upholstery as well as automotive. and although we'll maintain separate sales forces, there's an opportunity for both of us to work together to expand sales into Asia. So we think over the next five years we'll receive about, I'm going to say about $5 million in technology and licensing fees, which they will cover all our out of pocket costs and then on top of that we have the right to work with them to sell products within Asia and other parts of the world.

Okay. So in addition to getting licensing fees over the next five years, just so I understand this, some of these yarns that you've been developing over the last two years find their way into Asian markets by way of the what they have in place over [inaudible]?

That's right. One of the things we're hoping to be able to do is upgrade the quality of their production to the point where we can put a Unifi branded name on the box. And then we would share in the ability to make sales into Asia upped the Unifi name.

Okay. So that would be kind of a joint sale arrangement for that particular [inaudible]?

It's a sharing arrangement for that particular revenue. It's more of a royalty arrangement.

Okay, all right. I'll let somebody else jump in. Thanks.

Thanks, Tom.

Thank you, Mr. Lewis. Our next question comes from Brian Hunt with Wachovia Securities. Your line is live, sir.

Good afternoon, Brian.

Hey Billy. Wachovia, thank you.

First of all, Billy, it seems as though the last three years of the fourth quarter has company toured some odd expenses and I was wondering if you could explain the 10 and a half million dollars other expense line and what's in there. In that explanation maybe back into what your EBITDA was for the fourth quarter.

Yes. Most of that other income expense, 7.4 million of that is the loss taken on the write down of real property held for sale. the majority of the rest of it is bad debt expense which we accrue approximately 500,000 each month for throughout the fiscal year. That's the majority of what's included in that line item.

So, I mean, for my benefit, I guess to add back to the $7.4 million -

Is truly noncash.

It is truly noncash.

The bad debt expense I would tell you is noncash as well. We charge it off as an increase in a reserve and then to the extent we have specific bad debts, we writeoff the bad debts against that. We basically charge just if you want to follow that account for the full year, we wrote off took a reserve of approximately $500,000 per month forbad debts. Our specific write-offs for the year were approximately $3.2 million.

That's much better than the last two years which was around 8 ; is that correct?

If you back out one specific transaction which took place two years ago which was effectively a noncredit decision, it was more of a business decision or strategic decision as opposed to credit, which was the Glendale write^off which was $13 million, bad debts probably averaged million and a half 2 million per year for each of the last five years.

Very good. My other question pertained to really a maintenance eye tell. But what was capex for the year as well as CNA for the year?

Sure. Capex for the full fiscal year was 10.$4 million.

Does that include your investments in your affiliates?

No, it does not. That's a specific line item on our cash flow statement and it's called investment and affiliates. Majority of that is our Sans [phonetic] investment this year and it's $11.2 million. Depreciation amortization for the year was $78.3 million.

Okay. And your availability at the end of the year?

$93 million.

You answered a lot of my questions about [Inaudible]. I was wondering, you mentioned in your press release that you're looking and also you mentioned in your statements you would be able to provide some of your historical customers that may have switched sourcing over to Asia with textured yarn. Have you with your new sales office in Hong Kong or your relationship so far with TungTex struck up conversations along those natures and actually generated sale in Asia?

Yes, we have. We have actually recently just picked up some new dyed yarn business in Asia. They came specifically from our relationship with our Hong Kong office.

Are you shipping that out of -

Out of the U.S. to Asia.

Congratulations.

Again, a lot of it has to do with the quality of the product. If you make a first quality product and it's going into a value added end product, then there is a place for Unifi product long term.

Next, and you somewhat hinted at it with your overall comments, could you comment maybe on the tempo of business in some of the major categories that you're selling to domestically? Is and really my question pertains to we've seen from the furniture upholstery companies come out rating guidance [inaudible] as well as we had a major [inaudible] to date. [inaudible] along those lines, if you can comment on the tempo of business overall.

I can talk about the tempo of business. I really can't get into the business segments because I haven't had those conversations with our sales force in the last three or four weeks just because we've been busy trying to wrap up the audit and get the financials put to bed.

But our tempo of business is we've moved through the last, starting with January going forward, other than maybe a couple million pounds here and there, every month of that six-month period saw an increase in sales. There was a couple months where it might have been down a small amount, but if you put them all on a four-week month basis and looked at it that way, almost every month of that six-month period we saw a slight increase in sales.

It has July shown that same -

I have not seen numbers for the month of July yet. Keep in mind the first week of July we were shut which was an historical shut week and I haven't looked at the numbers since they've come back up.

All right. And two more questions pertaining to really cash flows. First of all, I imagine you're done investing in Sans. And what might your capex be? And if there is any further investments in affiliates be for the current fiscal year?

The investments in affiliates going forward, there's no major plan capex. We think most of those investments are - we've spent all we need to spend on that. There are some opportunities maybe to generate some cash out of those, equity affiliates, hopefully we can get a distribution out of Parkdale or our of our Naleet [phonetic] joint venture which should help free up some cash. As far as capex is concerned, our budget for next year is 18 and a half million dollars.

All right. And then really two more questions [inaudible]. Second, considering you are took the last week off and it looks like you brought inventory down [inaudible] technology capabilities to bring capital down, if we were to continue on at this current sales pace, call it, if you back out the extra week out of the fourth quarter somewhere in the $240 million range on a quarterly basis, are you going to have to take capex up at all - I mean, excuse me, working capital up at all?

My expectation is that there is still some ability to take down our inventories. Obviously if sales continue to trend upwards your receivables should rise a little bit. But we're not looking for a major increase in working capital as we move through fiscal 2003.

And then lastly you alluded to [inaudible] excess cash flow that could grow the business if the opportunity presented itself [inaudible] buying back stock or buying back bonds in the market. By the way, your stock did close up significantly. It was a 9, 10.

Was it? The last I looked at the market was at 3:00 o'clock.

Really, makes it a little bit more sensitive to buy back. Would you if the opportunity presented itself, actually borrow under your revolver to make an acquisition or significant investment to grow the business?

You know, we have today, we talked about the availability under our bank arrangement, again it would depend on the specific opportunity that existed, and to the extent the right opportunity existed that's why we have the capacity available. So yeah, we would take a look at. It.

Okay. Thank you. I'll let someone else.

Thanks.

Thank you, Mr. Hunt. Our next question comes from Dennis Rosenbach from Credit Suisse First Boston. Your line is live, sir.

Hi, Billy.

Hi, Dennis. Good afternoon.

Could you walk through the first quarter assumptions in terms of your sales expectations and margin expectations and contributions [inaudible]?

I really don't have that in front of me. I would be glad to try to do that off line to get that to you, Dennis, but I don't have it in front of me.

Okay. The Dupont alliance, can we analyze 10 million fourth quarter savings for next year so we would be looking at 40 million versus the 33 million?

Yeah. A lot of that - first of all, the $10 million that we got in the fourth quarter, the alliance was facility was running close to full. Assuming they continue to run full, you should get comparable results for next year.

The 10 million run rate?

That's correct. Again, that's everything is volume driven in our business and that's making the assumption that you're running full. I would tell you that the start of the July quarter and the only reason I know that is we were driving down inventories and we were shut for part of the week. My expectation is you would not see that benefit in the September quarter but as you've already got one week where we didn't take a lot of fiber from the alliance. So the September quarter would be short of that. But that's some opportunities obviously if we continue to grow our business and get back running like bewe were, the alliance would fill back up. And then you could look at that $10 million run rate on a quarterly basis.

Okay. Ireland, is there an exit strategy there? You had some improvement this year, but it continues to be a very competitive market. It doesn't sound like it's ever going to be a major profit contributor, so what's the strategy?

A lot of things are happening in Asia - I mean in Europe. There's a lot to be said, if you continue to produce first quality products and you kind of wait out some of the business, we're seeing some of our competitors in Europe shut their facilities which has given us some opportunities to grow our business. Our projection for next year is that we will throw off approximately 4.$6 million of free cash from our Irish operation, and we've looked at other opportunities and we think there is a long-term opportunity in Europe from running our Irish operation. So our plans right now are not to look at doing anything other than trying to improve that business.

Okay.

But your question is a good one, and every month we look at every business. We have to make certain that it's headed in the right direction and it's not basically draining cash off the business.

Okay. The TungTex, could you give us a little bit more color as to how it sounds like it's not revenue sharing. You would be getting a royalty on lost sales relating to TungTex?

It would be - first of all, there's technology fees and licensing fees from using our technology.

Right. That party got, but it was the last part that was not clear.

To the extent we help them make a new product or upgrade a product, to make it better than it was before, to increase the sales price, we would be entitled to share through a royalty arrangement the fee - a percentage of the revenues that are generated off that business. and it varies by product and by end use category.

Okay. Will you ever end up with direct sales -

We would have the right under this agreement for Unifi to take product and have direct sales within Asia of those products.

Okay. And at what point in time does that happen and what would the cost of that product be relative to your cost of manufacturing?

That would happen at the point in time that Unifi felt comfortable that the quality of the TungTex product justified putting the Unifi name on the box. And I can't tell you when that would take place, but when that happened it would give us the opportunity to sell in Asia out of that Thailand facility under the Unifi label. the cost - one of the reasons we were very interested in TungTex and Thailand is several reasons. First of all, they have an extremely cost competitive structure. If you look at their cost structure it's competitive as the rest of Asia. So we think we would be in a very low cost - TungTex is ISO 9,002, and ISO 14,001 approved. So obviously we're working with a company that is focused on quality. So we think we would have a very cost competitive quality product that we could distribute, and as soon as we get there plants to a point where we're satisfied with the product capability, we would start something under the Unifi name as well.

Great. Thank you.

Sure. Thanks, Dennis.

Our next question of the evening comes interest ran gentleman sing of David J grown. Your line is live.

Hey Billy how you do?

High ram.

The TungTex agreement you spoke before about I think you're working on Asia, it's one of several or is this sort of a biggie?

You know, TungTex just kind of put in perspective for you, they do around $200 million of sales they have about 450 million of assets. They have the capacity to produce about 90,000 metric tons of POI, about 15,000 metric tons of flat yarn, and about 30,000 metric tons of textured polyester. So they're a relatively good size player in Asia. Their call structure is extremely cost competitive in Asia. TungTex also has other companies that do business outside of Thailand. They have a large presence in China and maybe the largest player in China. So we think this is an opportunity first to get in working with TungTex, and maybe expand our relationship over the long term to other parts of Asia. It doesn't preclude us from doing other transactions with other parties in Asia, either.

And I was latching onto the commentary relating into the other income expense line, but I was more interested for the year. So I'm trying to understand, I'm trying to reconcile with what you were saying for the year. Could you sort of do that for me? There are some 74 is the real estate.

Seventy-four is a loss on real estate.

You've got six bad debt right down there, bad debt?

That's correct. You also have a gain on the sale of other assets that took place during the year of another $6 million.

Okay.

Okay. The net loss on the assets held for sale or sold during the period was $1.7 million. There's about 6 million of bad debt and the rest of it are just little odds and ends.

Okay. And then last year there was a 16 million there. Can you go through that for me?

Last year 16 million?

Yes.

A major piece of that was probably the Glendale write^off of a bad debt. That was one specific customer that filed for bankruptcy that Unifi had been involved with in an extend and extended significant amount of credit to that did not payoff in the long run.

Uh-huh. Okay. And then the language in the release surrounding the Dupont alliance, is that new language to your disclosure?

It's pretty similar maybe. Disclosure I think we made at the end of the last quarter we quantified it based on Dupont's claim which was around $15 million, okay, as an annual potential worst case. Clearly that would be material to Unifi's financial statement.

Yes. That would be like a onetime settlement, the 15 and you continue on with the agreement?

What we would expect is that somewhere between November and December of 2002, the arbitration will be concluded and the arbitrator will rule and he will rule on some technical points within the agreement.

Right.

Whatever that arbitrator says, Unifi and Dupont will both comply with, and whatever he rules at that point we will move forward with our alliance, operating under his ruling.

Yes.

There is no intent on either party to conclude it because if we recognize $38 million of benefit, so has Dupont.

Yes.

The substantial benefit to both of us.

Right. Now, is there a chance that the ruling falls out that Unifi gets paid or no?

There are claims going both ways. It's too early to tell how the arbitrators will rule on that.

Yeah, okay.

What we've tried to do is tried to present disclosures that let people know what we know and to give you kind of what we think a worst case scenario is and worst case is that the result could be material to our financials.

Right. And then sort of just directionally, do you have any data points that lead you directionally or you're not - [Inaudible]

Within the arbitration?

Yes.

The arbitration has just entered the discovery phase. Both parties are now starting to look at documents. There's been no depositions held within the arbitration, so really it's too early to get a feel for where both sides are within the arbitration.

Okay. All right. Thank you.

Sure.

Our next question comes as a follow-up from Michael nor back. Your line is live, sir.

Billy, just a couple follow-up questions.

Sure, Michael.

You wrote down the land by 7.4 million. How much do you hope to sell it for?

It surrounds $750,000. It's real estate. It's land and buildings.

You hope to sell it for net amount of $7 50,000?

Yes. Used real estate, old plants that were built a long time ago, do not have much market value today in the apparel industry.

Clearly.

I share your concern about the difference between what this asset was purchased for. It was actually purchased about 20 years ago, and what it can be sold for today.

When you look at your other assets on the balance sheet, I mean do you think we're to the point now we're done with write downs?

I'm not aware - right now we have no other assets held for sale of any consequence. There is effectively no more good will on the books other than a small amount for the polyester business. The nylon business has completely written off all good will. Assuming the business stays stable where it is today, we do anticipate any write-offs of good will or assets in the fiscal 20 03 year.

So got it all done ?

Yes.

Okay. Next question, when I go through your numbers and I try to apply the effective tax rate which looks like it's 57.9 percent -

Uh-huh. It's hard to do because of the affect of the foreign operations. Now, to the extent we have losses in foreign operations to which you have no tax benefit, such as if you had a loss in Ireland, we don't project a future taxable income in Ireland that you would book a deferred tax benefit for. You have a loss with no tax benefit, which skews the rate.

So 3 million is the God number for net income excluding that charge?

Yes.

Okay.

An effect I am rate for the U.S. is 37 and a half percent.

Okay and that's what we should use for next year?

That's what I would use for domestic rate [for a]. A blended rate is probably not going to be too much more than 40 percent. We're still anticipating some small losses in some of our foreign operations.

Okay. And then the business is accelerating every month this year. Clearly you shut down the plants for early part a week in July to work off inventories. But do you that every year. Is there any reason to believe that that acceleration is not going to continue?

There is nothing that I have seen today to indicate to me that there is a major slow down in the market coming. I really can't predict the future. The guidance we try to give is we try to give conservative guidance. But there's nothing in my crystal ball that tells me that there is a slow down coming in the business going forward. Now, obviously in the September quarter our European operations shut down for the entire month of August. It's hard to tell what business is going to be like just before that or right after if comes back. It's just like ours. And when we shut down for the 4th of July week, if our customers have good business some of them run during the week of the 4th. If business is poor they take a couple extra week. And I really haven't had a chance to sit and look at the July's operating results or what the expectation is for Europe in the month of August.

Okay. And then -

Yeah. I will tell you this. We will not be happy here until we are in a profit position, and that's our goal. It's not just to generate cash and pay down debt. We expect to be profitable long term.

Long term -

We would expect to be profitable in fiscal 2003. That's our expectation.

Okay. And you know, when you look a couple of years out, I mean this business used to sport a very healthy operating margin. You know, clearly the environment's changed and garment manufacturing has moved offshore in the U.S. but, you know, assuming that you're not materially successful with your efforts to buildup Asia, what sort of operating margin can the business as it stands today support?

That's a tough question. I mean clearly it can support what we already have. I really don't know how to answer that question without having some feel for where volumes are going to head in the future. Clearly our ability to run our plants efficiently, you have to have the volumes. And absent the volumes, you've got two choices when you can consolidate plants and that's not what we're trying to do. That's not our intent. So I really don't know how to answer your question until we get a little further out in the future and see where volumes are heading and where business is headed.

Okay. You had also mentioned the opportunity to get some cash out of your affiliates this year. Could you sort of expand on that?

Yes. We have an Israeli joint venture -

That's in the Malique [phonetic]?

Malique joint venture. There is an ability to bring back tax-free some money that's been generated, profits that have been generated. We can repay the loans out of that business and bring back approximately $3 million of cash.

You also mentioned another distribution from parks daily. Could it be as big as the first one?

It could be. Parkdale has performed extremely well in the June quarter. We would anticipate it continued to perform well.

How much was it last time, 40 million?

We had 49 and a half million dollars in February of 2001, but you have to keep in mind we had not gotten a significant amount of cash for couple of years, and that was kind of a catch up in that distribution.

It could be another 50 million?

I wouldn't want to give a number because quite frankly we do not control that partnership. We're 34 percent owner in Parkdale America. Parkdale mills owns the other 66 and they control when cash is distributed. I have absolutely no ability to control when that cash is distributed. They're generating significant cash and we would hope that at some point they would deem it appropriate to distribute cash both to Unifi as well as the other partner, Parkdale mills, but it's not within my control.

Okay. Thank you.

Thanks, Michael.

We have another follow-up question coming from Brian Hunt. Your line is live.

Two questions from the [inaudible]. First of all, in Brazil and I know you're moving several texturing lines down there. When will those lines be installed and running? [Texturing]

My guess is they'd be running by the end of October.

Okay. The next question is based on sounds like the significant [Inaudible] pools of cash at Parkdale America and the haven't of the business, what is your opinion of Parkdale's' tied to supply the remainder [inaudible]?

That discussion has not been held. We are extremely pleased with the way the management of Parkdale runs that business. We believe they are one of the best operators in the business and they are well positioned to do extremely well long term. And there have been no conversations to date between Unifi and Parkdale regarding the potential purchase by Parkdale mills of Unifi's remaining interest.

What's your book value of that asset?

Approximately $150 million.

Okay. Thanks, Billy.

Okay. Thanks.

Our next question comes from Tom Kiddel [phonetic] with American Financial. Your line is live.

Bill, how are you doing.

Hi, Tom.

Perhaps I'm asking this another way and I don't mean to be repetitive, but.

No problem.

I've worked with you a few times in perhaps your top 10 customers, that type of thing. And it seems like the news flows generally not so much positive, but way better than the negative that was in the past nine months or so. But thinking along this lines of your top ten, is there any, you know, weird thing that you can see happening in terms of another bankruptcy or I don't follow the textile industry per se is there anything you're hearing from your customers are things a little better for them, a little more healthy?

I think if you look at our top ten customers, their businesses are all pretty stable, including our top ten customers are two companies that filed bankruptcy. Neither one of them have borrowed any money under their dip financing and we think they're well position today come out of bankruptcy truly as a much stronger financial company since much of their debt would have been eliminated. So I'm not - I don't foresee any major issues with our customer base going forward. I think most of their businesses are better than they've been in the March quarter and so we're we're anticipating continued improvement in that area.

Okay. And secondly, I've heard some various questions around the edges, but I guess if you know just off the top of your head what your free cash flow for year was? Was it that 80 to 90 or 60 to 80 million?

Free cash flow is right around $60 million for 2002.

Thank you. Good quarter.

Thank you.

Once again, ladies and gentlemen, if you do have a question or comment, please press numbers 1 followed by 4 on your key pad.

[Pause.]

Our next question comes in as a follow-up from Michael Novak. Your line is live.

Hi hey Billy.

Hi Michael.

When I look back at the P and L, last year you had 10 percent margins in the first gross margins in the first quarter despite you know, only running at a revenue rate of 223 million. Were why were the margins like ten, the year before the first quarter had very strong gross margins? Is there any reason for that?

You're looking back at the first quarter of 2001 and -

Fiscal 2002 and fiscal 2001.

Yeah, the only thing I would tell you is is that historically in that September quarter, our dyed business is usually pretty good. Our dyed business has a little bit higher gross margins just because of the criticality of end use. I'm sore, our dyed business may have affected that gross margin. I'd have to specifically go back and look at those calculations, but that just be kind of an answer off the top of my head.

Should your dyed business be strong this year? We would expect it to be relatively good.

And then can you comment a little bit on pricing in general [Inaudible]?

Price is relatively stable. It's difficult to pass along price increases in this market, but we also don't have a lot of customers seeking price decreases. So right now it's relatively stable across all fronts.

Okay. And then my last question is in the first half of this year, SG and A was 11.6 and 11.$5 million in the first and second quarters. And the back half of the year it jumped up to $14 million in both quarters. Why was that and you did say that you thought SG and A dollars would be down a couple percentage points sequentially.

Part of that charge in SG and A is the forgiveness of the loan for our CEO that took place in the third quarter.

Oh, yeah.

In the fourth quarter, a major part of the increase cost is legal fees or -

Dupont?

Arbitration.

So the run rate of the core business is still probably around 11 and a half to $12 million?

I can give you - around 12 and a quarter, probably a good run rate.

Okay. Thank you.

Sure.

Mr. Moore?

Yes.

It appears we have no further audio questions at this time.

Thank you, Neal.

Again, we thank you for your participation and look forward to a more profitable first quarter conference call. Thank you very much.

Thank you, sir.

Ladies and gentlemen, we do thank you for your participation in today's audio teleconference. You may disconnect your lines at this time, and 00:59:08 have a pleasant evening.