Unifi Inc (UFI) 2004 Q4 法說會逐字稿

Good morning, and welcome to the Unifi Incorporated sponsored fourth quarter earnings conference call. At this time, all participants have been placed on a listen-only mode, and the floor will be open for questions following the presentation.

It is now my pleasure to turn the floor over to your host, Mr. Bill Lowe, Unifi's Chief Operating Officer and CFO. Sir, the floor is yours.

Thank you, [Carrie], and good morning. Joining me on the conference call today is Brian Parke, our Chairman and CEO for Unifi, as well.

Before we begin, I need to first advise you that certain statement included herein may be forward-looking statements within the meaning of federal security laws. Management cautions that these statements are based on management's current expectations, estimates and/or projections about the markets in which the company operates. Therefore, these statements are not guarantees of future performance, and involve certain risks that are difficult to predict. Actual outcomes and results may differ materially from what is expressed, forecasted or implied by these statements. I direct you to the disclosure in our 10-Qs and 10-Ks regarding various factors that may impact these results.

During this call, we will be referencing presentation materials that can be found on our Web site at www.unifi-inc.com. The presentation can be accessed by clicking the fourth quarter conference call link from the home page. I hope that you have the presentation available, as it will make it much easier to track through some of the information that we're going to discuss on this call.

I'll first comment on our fourth quarter fiscal performance, and then turn to the results for the 2004 fiscal year. If you're following along from the Web site presentation, I'll begin my comments on slide three.

Although net sales of 191.7m for the current June quarter are down 7% versus the prior year June quarter, we did see a second straight period of quarter-over-quarter increases and net sales, indicating that volumes and prices have both picked up in the first part of the calendar year. I am also pleased to report that we posted a small operating profit in the quarter, the first operating profit since our June 2003 quarter. We've accomplished this based in part on the reduction of our SG&A expenses, which were 5.6% of sales for the current June quarter compared to 6.8% for the prior year June quarter, and down from 7% for the quarter ended this past December. We expect to continue to rein in our SG&A expenses as we continue into our next fiscal year, realizing the benefits of our efforts earlier in this calendar year.

We are reporting a net after-tax loss of $11m for the current June quarter. The net net income for the current quarter was negatively impacted by a pre-tax charge of 7m, or 12 cents per share, associated primarily with the restructuring of the company's operations base in Altamahaw, North Carolina, that we discussed back in March during our restructuring call. This compares to a net loss of 30.5m, or 57 cents per share for the prior June quarter, and net income for this prior period was also-- also included some restructuring and other charges of 30.8m, or 50 cents per share.

Also included in the results for the current June quarter is a pre-tax benefit, including the cost of sales of 11.4m generated by the company's Manufacturing Alliance now with Koch industries, which was previously DuPont. As announced on July 26thf this month, the Manufacturing Alliance, as well as all related provisions, including arbitration claims between Unifi and Invista, will be terminated after the company's acquisition of the Invista polyester manufacturing assets located in Kinston, North Carolina.

In terms of our fiscal 2004 results, the company reported net sales of 746.5m, or a decrease of 12.1% from fiscal 2003 net sales of 849.1m. The company also reported a net loss of 74.8m, or $1.43 per share, compared to a net loss of 27.2m, or 51 cents per share, for the prior period. Net income for the full 2004 fiscal year was negatively impacted by pre-tax charges of 67.3m, or 96 cents per share, associated with the facility closures and asset impairment charges from the company's broad restructuring announced on March 2nd of this year. The prior fiscal year results also included pre-tax charges for restructuring and arbitration-related charges of 36.1m, or 61 cents per share. Net income for the 2004 fiscal year was also negatively impacted by a pre-tax loss of 7.1m stemming from the company's share of income or losses from its equity affiliates. This pre-tax loss compares to pre-tax income in the prior period of 10.6m.

Turning now to slide four, in terms of our balance sheet, which continues to be a strategic focus for the company, we ended the June quarter with 65.2m in cash on hand, which is an increase of 5.5m over the March quarter. Net working capital, which is also a strategic focus for the company, improved over the previous March quarter as we resolved some of our systems issues, but not all of them, resulting in a small reduction in accounts receivables. We have more work to do in this area, and a portion of this issue in this area is that, in the past, we've given some of our customers longer than customary terms. While these customers are current in their receivables balances, it has negatively affected our working capital on our balance sheet. We are reviewing terms in addition to focusing on past dues. The company ended the June quarter with working capital as a percentage of sales of 22.4%, which compares to 23.6% at the end of the previous March quarter, and 19.8% at the end of the prior year June quarter. We do anticipate continued improvement in net working capital going forward.

Turning to slide five, EBITDA for the quarter was 14.1m, up from the previous quarter and turning in the right direction. As required, we have provided on slide six a reconciliation of EBITDA to pre-tax income. This slide will provide you with the components of our calculation.

That includes my formal remarks on the financial statements, and I'll turn the call to Brian Parke for an update on our China initiatives. Brian?

Thank you, Bill, and good morning.

As we told you some time ago, after we terminated discussions on the Kaiping transaction in April, we returned to China with the idea of establishing a Wholly-Known Foreign Entity, or WOFE, on a Greenfield site. During this exploration for a suitable site, we were approached by several other Chinese companies about Unifi's interest in establishing a joint venture with them for their existing texturing operations. And after looking at these operations, we identified one particular company that looked like a good fit for us, and we have spent considerable time during the last couple of months discussing a joint-- a JV with them.

We're currently working on finalizing the terms of the non-binding letter of intent with this company and, in fact, I'm leaving for China in the morning. And if we finalize-- sign the LOI, , we will let you know the identity and the details of this Chinese company. As you know, there are many issues that have to be worked out and agreed to by the parties before a transaction like this can [inaudible] and, while the Invista deal for Kinston is a very positive thing for this company, it does raise some interesting questions about proceeding with the Chinese transaction at this time.

The company will be employing much of its resources to people and free cash in the near future to integrate the Kinston business should the Invista deal close. The deal should make Unifi a much stronger company in the long-term, and this undoubtedly will be beneficial to our potential Chinese partner in the new JV company. But, the logical question then, based upon these short-term challenges, is how will the China transaction be impacted, and how will we fund any such venture?

As we announced to you this morning, the company has decided to exit its manufacturing operations in Ireland. Our plan for the liquidation of this facility will generate most of the assets, including land that is sold, is expected to create a cash value of somewhere between 20 and $25m. While it will take some months to actually turn these tangible assets to cash, it will also take some months to actually consummate a transaction culminating in a closing of the joint venture in China. We're still working on a spring 2005 deadline, but the actual timing would be predicated on our ability to generate the cash in this time period. And of course, we have to sign an LOI in the next few weeks.

In any event, we're committed to China and developing our business there. We believe we have identified a good, solid partner, and that this is a better course of action than a Greenfield side at this time. However, we will do it in a prudent manner that protects our balance sheet and our liquidity.

Now, I'll turn the call back to Bill for review of the Kinston transaction and some comments on Ireland. Bill?

Thanks, Brian.

I will comment first on Kinston. As you know, we signed an agreement on July 26th to purchase our alliance partner's assets in Kinston, North Carolina. The purchase price, which will be financed by the seller, is approximately 21m. I say approximately because the purchase price is subject to final inventory valuation at the closing date. The seller is taking back a five-year note at the rate of 10%, collateral-wise, by the receivables and inventory of the Kinston facility. Payments are interest-only for the first two years, with amortization of the purchase price and interest the following three. The alliance agreement is terminated with this transaction, including the put and call provision. Moreover, the arbitration claims pending against Unifi are terminated without liability to Unifi.

As we said in the press release, the Kinston facility is under-performing. We expect it will take up to a year to fully realize the benefits of the transaction. Before we entered into this transaction, we had forecast that our fiscal 2005 EBITDA would be approximately 64 to 66m. With Kinston included, assuming a closing date of August 31st, we expect that our EBITDA for the year will decline approximately 18 to 20m from that level to about 44 to 48m. We view fiscal 2005 as a transition year. In the following fiscal year, assuming a static environment and we can fully realize the synergies and rationalization savings that we have projected, we would expect our EBITDA to be about 72 to 75m.

We have also disclosed that we are discussing the purchase of additional assets from Koch. If we close this second transaction, the purchase price we expect to be in a similar range with the same-- and with the same general financing terms, except that it is contemplated that a portion of the purchase price will be paid in cash. Both parties have approached these transactions with the goal of accomplishing them simultaneously. However, for a variety of reasons, we separated Kinston to get it in process moving forward. Unfortunately, we are unable today to disclose the facility location to you of this second transaction under our confidentiality agreement with Koch until they have actually notified the facility. Once we've been given the green light to do that, we will provide notification as to the location that we are currently in discussion for the second transaction.

In addition, once we close the Kinston transaction, again which we anticipate a potential August 31st date, we will provide more detail regarding our transition plans for the facility, its financial results today, and expect that rationalization savings, among other things, that get us at the steady state to which I referred. The numbers we provide today include the impact of both transactions. However, we are just beginning the due diligence process on the second potential transaction, so they are subject to change.

Now, turning to Ireland. A detail on the anticipated closure costs can be found on slide seven on the Web site presentation. Yesterday, we announced the closing of this Ireland facility. As you will recall, we announced in March that we were closing one of the two plants located there. This location has not been profitable for the past few years. Based on the business plan the facility submitted in March, it reflected volumes and prices that will return the remaining facility to a small operating profit during fiscal 2005.

During the past couple months, as we worked through our budgeting process for fiscal 2005, it became apparent that this small operating profit would once again be both and operating loss and a cash loss. This was due in part to some customers sourcing product from other sources after our announcement recording the first plant closure. While we regret the loss of jobs in Letterkenny, we decided to take swift action to avoid the continued negative impact on our consolidated earnings. Some of these charges listed on slide seven may be period expenses and not accrued as restructuring. The amounts reflect our current estimate of these expenses, and are subject to change as we proceed through the closure.

Now, I'll turn the call over to Brian to make some final comments before we take questions. Brian?

Thanks, Bill.

As you know, we've taken many steps throughout the fiscal year to reposition our business in ways that address the changing marketplace and to create a healthy and profit for the company, and I'd like to take a few moments to recap the highlights of what we've done.

First of all, to address the competitive challenge in the textile industry, we announced a broad restructuring of our operations in March that attributed to facility closures, downsizing and other organizational action. This restructuring has led to improvements in our SG&A and is creating efficiencies throughout our operations. We followed this restructuring with the acquisition of the hosiery yarn and texturing assets of Sara Lee Branded Apparel and entered into a long-term agreement to be the hosiery manufacturer's nylon supplier. These actions resulted in an increase in net sales in the nylon division of more than 20%.

Our agreement to purchase the Invista polyester filament manufacturing assets, which we announced earlier this week, will result in a more vertically integrated base of operations for the company in the U.S., and allow us to optimize capacity to fit market needs. And although this acquisition may negatively impact our results for the next six to 12 months, we expect the acquisition to provide positive long-term results as we stabilize our business domestically.

As we discussed earlier, we announced late yesterday that we will close our manufacturing operation in Ireland by the end of October. This is a sad outcome to an operation that performed well over the years but, unfortunately, was unable to withstand the pressure of increased negative imports, reduced prices and disappearing customers. And despite great efforts by the management and staff, the continuing losses and no possibility of getting back to a cash break-even, let alone profit, meant that there was no choice but to close the doors. Going forward, our intent is to continue to service key customers with product from the U.S. and Asia. And finally, as we ramp down the business in an orderly fashion, we will start the process of monetizing the assets there.

This concludes our update for the quarter and our 2004 fiscal year, and we would like now to open the floor to questions. Thank you.

Sir, are you ready for questions?

Operator, yes, we are ready for questions.

Thank you. The floor is now open for questions. If you have a question, please press star, one on your touchtone phone at this time. If at any point your question is answered, you may remove yourself from the queue by pressing the pound key. Questions will be taken in the order they are received. We do ask, while you pose your question, you pick up your handset to provide optimum sound quality. Please hold while we poll for questions.

Our first question comes from [John Beal] of Standard Pacific Capital. Please pose your question.

Good morning, guys. Help me out here, first of all, with understanding the-- you know, this facility that you bought, and then you're terminating what I think was a $30m a year payment. So, are you saying that the net effect is going to be minus roughly 20m EBITDA?

John, that's right. For the first nine to 12 months, the effect of that with-- we expect to begin immediately doing-- implementing some of the rationalization actions that we've determined during due diligence are required, and so there will be an offset during the fiscal year of just some of those payments. It is not the full amount. You know, rationalization, when you start day one, you don't get the-- there's not a Big Bang theory, it will all happen at once. So, that's why the steady-state numbers going forward are an improvement to where we are today at status quo, is that, after 12 months, we believe we'll have them all fully implemented and realizing those changes in the following fiscal year.

OK, fantastic. And just walking through the sort of free cash flow for next year, so it sounds like-- I think you said 48m of EBITDA. And then, how-- I think cap-ex for 2004 was somewhere in the neighborhood of $12m. What do you think it will be for 2005? Any idea?

It will be no greater than that number, maybe slightly less, somewhere between 10 and 12. Any of you-- as a benchmark, if you look at the slide on EBITDA, you'd see that 2004 EBITDA was about 47m. So, what we're really saying is, even after taking in and doing the things we have to do in transitioning the facility, we expect to really be no worse off through that transition year than where we ended up for 2004.

OK. What about the taxes? Do you have to start paying taxes now that your NOLs are exhausted, is that right?

Our NOLs are not exhausted. I would not expect to be a taxpayer of federal tax for our fiscal year. We probably have 10m or so still of NOL.

OK. OK, so you don't expect to pay any taxes in fiscal 2005?

Not at the federal level. I mean, there could be some state taxes paid, but we're not talking a sizable amount.

OK, and then interest will be roughly--.

--Interest is going to be roughly the same. Between our interest payments and our bank fees, they have a revolver, etc., in total between the two of them, it's close to 18m for the year, 17, 18m.

And then, you'll have the additional interest on this $20m?

That's right, interest-only, at a rate of 10%

OK. And then, last question is it sounds like you're moving forward on this China JV, but that it sounds like you're leaving open the possibility that, if your capital requirements and returns in the U.S. with these facilities from Invista are a better use of cash, that you might sort of lean towards that?

Brian's here-- Brian Parke here, John. I think our position is that, moving into this Invista integration, when we can project what should happen or might happen, I think we prefer to get through this period and see where we are at the beginning of the next calendar year, or see where we are throughout January, February, March, how we're executing on the integration and look at our cash position. And meanwhile, we're proceeding with the discussions with our potential partner. And ultimately, we've got to make sure that our balance sheet is capable of moving forward. We make that decision at that point in time.

OK. Thanks very much, guys.

Our next question comes from [Brian Hun] of Wachovia Securities. Please pose your question.

Thank you. Could you address the cash restructuring charges in Q4 as well as what the cash restructuring in '05 might be for the carryover for the March restructuring as well as the Irish facility closing?

Hi, Brian.

Hi, how are you?

Good. The cash component of the restructuring, from what we announced in March, as you recall, was about, in total, 8.2m. Most of that severance-- most of that was severance expense related to our closure in England and the first plant one in Ireland. All of the-- most all of the severance expense in the England shut-down has been paid out, and I think all but probably about 2m of severance has been paid out from the shut-down in Ireland at this point. So, most of that cash has actually moved through our books to date, with maybe 2m remaining on that.

The component-- the second component was, which went through this quarter, is the lease cancellation in Altamahaw. The majority of it, in fact, the charge this quarter was lease cancellation from Altamahaw of about 5m. Most of that cash goes out on the lease payments three to five years out. For instance, the portion of the lease payment that's cash in fiscal '05 was 700,000. I believe it is slightly more than that the second year, and then it increases with a balloon payment in year-- I believe four years out, in 2008, of about $2m. So, most of that is pushed out.

In the current plan for closing Ireland, there are cash components that will certainly take cash redundancy payments or severance payments, will be the majority of that cash cost again. Brian's number of 20 to 35 is after making all necessary payments, paying our vendors-- we're not going to leave any vendors high and dry-- paying our payables off, monetizing the receivables and the assets. So, cash will ebb and flow in Ireland as we make those changes, and we will decrease the cash balance of the company and in Ireland during the closure, and then we'll see it bounce back up as we monetize the physical assets in the plant, and then the largest component of the cash there actually is the land.

The land is very valuable in that part of town. It's a section that we believe will be probably a development kind of thing where residences are moving that direction, and maybe even the one-- the plant site we're currently now exiting may be even bought as a manufacturing site because that building is more compatible with other manufacturing. So, the majority of it is in the land value, about 20m, and Brian's number, maybe 11m or so in intangible assets and production equipment that we actually plan to sell, as well.

That was one of my questions. Is there an active market for used texturing equipment?

Yes, there is, and we will be starting the process very quickly here to look for vendors to take those. There's several vendors who go in and buy fairly significant quantities of the equipment-- this type of equipment.

And could you tell us what the sales volume was from the Letterkenny facility in '04?

In dollar terms, I think it was in a range of around 80m in top line revenue.

OK. And kind of switching gears, you guys have this nice venture with Parkdale, and kind of that didn't contribute a whole lot to the bottom line this year. But, they seem to be sitting on a lot of cash, and the business forecast for the rest of the year, from what I understand, is pretty strong. What's the outlook for potentially getting a dividend out of that business in fiscal '05, or potentially liquidating your stake in that venture?

Let me take the two questions. Regarding the dividends, first of all, we did receive a dividend from them in fiscal '04. I believe that it came in in the month of January of about 1.6m. And so, I would-- while I can't determine how much it would be, I mean, Unifi is always interested in talking to Parkdale about continuing to have a cash dividend each year, and we will be doing the same again this next fiscal year. Their results, as you say, were not very positive. In fact, they've hurt us this year fairly substantially. This quarter, as we had said to you on the last call, we expect them to be fairly neutral or a slight positive, a slight negative, and they came in just a slight negative. And to your point, the projection for the remaining of the calendar year for them is fairly strong. We expect them to rebound back closer to what their normal run rates had been previously, and that's kind the news from Parkdale's side.

All right. And just a couple more questions, then I'll get back in the queue. What do you believe the real opportunity is on net working capital? Is it a 5m, 10m opportunity ex-what's going on in Ireland?

Yes. I think, domestically, we've got-- I'm looking at-- in my mind, I'm viewing a number and kind of holding the operations and the credit people to a number in the range of eight to $10m. Some of it will take a little longer. As we got into this, as I said in my comments, we do have some longer terms that we realize we put ourselves into that we're going to work our way out of, which is-- the good news is a lot of the customers are current on a lot of that. We have some work to do on inventory. We continue to carry inventories at a slightly higher level than we should. So, I think between the inventory and receivables, I do believe there's an eight to $10m potential next fiscal year.

All right. And then, lastly, and again, I'll get back in the queue, based on my understanding of the Kosa [sp]/Invista assets that you all are reviewing, roughly 75% of their customers are in Mexico and the remaining are in the United States and Canada. Based on what you know today, do you overlap with them to a significant degree with those customers, or will those be a new opportunity by expanding your customer base-- transaction, actually?

Can I ask you to-- you're talking about-- which location are you talking about in your question?

Well, I'm talking about the assets that you all are still in negotiation for, the textured assets in-- well--.

--Yes. We have-- well, you can-- I know there's a lot of--.

--I mean, they only have but one other set of assets, the textured--.

--Well, I'm under-- it's a strange situation to be in, where I am not-- we are not allowed today to actually state a location, so it's difficult for me to address that specific question on the call this morning. I was hopeful that we'd be able to. I actually spoke with Koch people this morning. They have not yet spoken with the facility, and I'm not able to address that specific question.

OK, thank you. I'll get back in the queue.

Our next question comes from [David Richards] of Raymond James. Please pose your question.

Hi, thanks, guys. Just a couple things with respect to the Ireland operation. So, all of the assets included there are just going to be on the block at this point?

That is correct.

OK. And I guess the one thought I had is, as you look at the business from here, you said basically it looks like there will be 80m less in the top line. What's the expectation internally? You talked about being at 65 to 66m in EBITDA next year before you took on the Invista assets. How was that-- was that coming from a flat top line or was that coming-- and then improvements in margin, or was that coming with how much on the top line in the U.S. operations?

Top line, if you're referring to the fiscal 2005.

Yes.

Top line will, with the 80m reduction prior to dovetailing in the third-party sales of Kinston, whatever that amount actually turns out to be at the end of the day, would be a decline of the top line because we're taking 80m out. I think, prior to that, we would-- prior to closure, if we looked at the top line, top line would have increased some in fiscal 2005 for a variety of reasons. First is the Sara Lee Branded Apparel transaction, which we previously disclosed and Brian referenced today, adds to the top line. As we said, it represents almost-- over a 20% increase in nylon sales.

In addition, the top line is affected from the standpoint of pricing. Pricing has increased, and we are seeing that-- those prices stick. But we did include in our projections, of course, a projection of the-- of volume decline. The net effect was still a slight increase, but now removing Ireland, which is, I think, might even project to be maybe closer to 70m, not the 80 that I mentioned, we would expect to see the top line be less than 2004 as a result of that.

But, in addition, we've also built in some decline for getting out of some product. We talked about this on our last phone call. We have instituted our project that I talked about last quarter of reviewing all of our product lines, and there is, of course, some of our products that adds to the top line, but takes away at the bottom line, and we are actively engaged today in extracting ourselves from some of that production in a variety of ways, and it will add to the bottom line, but it will take away from the top line a little bit, as well.

OK, great. And then, I may have missed this. I did join the call a couple minutes late. With respect to the China initiative, did you guys talk at all about any kind of dollar investments at this point?

We did not, but I think you can infer from Brian's comments that his scale of cash required from cash that will sort of come out of Ireland, that that would be sufficient to manage the investment.

OK, so you guys are thinking about it in the sense that it would be no more than dollar-for-dollar based on the sale of the assets?

In that range that we provided, yes.

OK, and is there any sense that you would manage your investment in China based on that-- based on what the final selling price is, or is it just that they happen to be pretty close?

It's coincidental at this point.

OK. All right, thanks very much.

Thank you.

Our next question comes from [Ethan Schwartz] with CRT Capital Group. Please pose your question.

Hi, mainly a bunch of follow-up questions. First of all, just to clarify that-- so, the net Irish proceeds, that's after all cash restructuring costs out of Ireland?

Yes.

OK. And then, the EBITDA projections for '05 with Kinston, below EBITDA, are there any other additional cash restructuring or assimilation costs related to Kinston or anything else that you can project for '05?

Yes, there was the-- depending on how the accounting treatment is, there potentially could be some expenses, and I don't want to go into the details since we haven't announced what our plans are. But, there could be some opening balance sheet liabilities that we'd be allow to accrue under the accounting rules related to any actions that we're going to take that might not run through the P&L or show up as EBITDA but would actually be cash. We'll talk about those on our August-- after we close the transaction as we go through our rationalization savings.

OK. Just some clean-up. Can you give us the polyester and the nylon volumes for Q4?

For Q4, they were very-- poly and nylon volumes for Q4 were just up slightly on a volume basis over the March quarter in both cases.

Can you give us an amount, or a broad amount?

From a pound standpoint?

Yes.

Poly was-- you want the increase or just the-- pounds for the June quarter ended June 27th was about 122.6m for poly and 15m for nylon.

OK. And then, on Parkdale, you said they were sort of slightly negative. Did you mean that from an EBITDA basis?

They could-- their number was about 368,000 that ran through our equity affiliate line as a negative.

OK, but is that an EBITDA number or is that-- that's an income number?

No, that's not EBITDA number. That's just our share of their net income. We actually-- for the purposes of calculating EBITDA, if you look at the schedule, we've excluded both minority interest in equity affiliates since it doesn't represent cash.

No, I'm just trying to get a sense of sort of what the run rate EBITDA is at Parkdale.

Oh, their run rate EBITDA? About six-- oh, year-to-date-- now, they're about 6.2m EBITDA.

OK. And then, on the Irish texturing equipment, how many pieces of equipment do they have? How many texturing machines do they have?

There's roughly 56 machines, PTY machines and, of course, there's spinning equipment there, and also polymer equipment and auxiliary equipment throughout.

OK. So, are you-- a lot of the value that you're projecting seems to be for the land, I would assume. And then, just a question on your customer base. How-- can you give us a sense of how large, or what portion of your customer base, some of the major home textile players like West Point and Dan River represent, since they're obviously-- continue to struggle financially?

Will you repeat-- just-- can you repeat that question for me? I'm sorry.

That line dropped out of queue. If you do have a question again, please press star, one.

Our next question comes from [Ted Finch] of Loomis. Please pose your question.

Yes. It took me a while to get on the call, and I apologize I didn't hear your comments on China. But can you just give a quick summary, and then I'll listen to the replay for the full details.

Who are we-- I didn't catch the name.

Oh, this is Ted Finch at Loomis Sales.

Hi, Ted, OK. Yes, Brian Parke here.

At our last conference call, we talked about going back to China with a Wholly-Owned Foreign Enterprise, Greenfield project, and when we announced our-- the cessation of our discussions with the previous player, we announced we're going to go Greenfield. And we were approached by a number of companies in China who wanted to see if we would do a joint venture with them in their existing operations. And we felt that it was worthwhile looking at these operations to see what value they had for us before we went ahead with the Greenfield, and we visited a number of these people. And we came up much more surprised with a sort of perfect solution.

We've talked to that company for the last 2-1/2 months, and we're actually at an end-of-life stage at the moment, and I'm going out tomorrow to China to see if we can conclude that. It's an opportunity that satisfies a lot of the issues that we had a problem with. One was having a ready-made equipment base or infrastructure base that could allow us to produce the added value products that we want to be involved with in China, together with the fact that they had a supply of the raw materials and also have power-- their own power plant.

Power, as you know, is a serious issue in China right now. Some parts of China are as much as 20, 25 percent short of power. So, it satisfied lot of the issues and questions we had. It will allow us to get on the ground with the sort of business plan we have in mind very quickly and in Chinese terms, by the way. It does take time to go through all these approvals, feasibility studies and so on. But, the company in particular I can't mention, but it's a very large company, in fact, well-known company. So, from a partner standpoint, they fit the bill perfectly for us, so we're just hoping that we can move it on.

Right. So, rough-- expectation, just for clarification on all that, might be another month or so?

Yes. I mean, I think, assuming that we get it done, I mean, I think we'll come back to you fairly quickly and announce what we're doing.

Good. Great, thank you.

Thank you.

Operator?

Yes, sir?

I'm just going to answer one quick question that Ethan had. His line got dropped off for some reason. He had asked a question about I think a percentage of our business to a variety of different type of customers, and how I'd answer that question is that about 8% of our business goes to customers in the category he was referring to, which is the sheeting and bedding part of our business. So, rather than specific to a customer, just indicating that, overall, all of those customers in that particular segment is about 8% of our sale.

And if I could add to that, I think that this particular segment is the one segment that's subject to problems with the quotas coming off in 2005. So, that also represents the bottom end of our business, but Bill talked about earlier about either increasing the price or getting out of the business. So, we're assuming that the quota removal will impact that business negatively, and we're taking proactive action here to make sure we're ahead of the game.

Carrie, we're ready for-- do you have another question in queue?

Yes. Our next question comes from [Walter Shankar] of Titan Capital Management. Please pose your question.

Thank you. I'm trying to understand, having spent a couple years, I guess it is at least, discussing the strategic need and the potential enormous opportunities in China and the shifts in the market, how-- excuse me-- how any domestic potential commitment of resources would cause this company at this point, having explained how important Asia is, to delay or not to, at this point in time, move ahead in China. I mean, it just seems that we've spent a couple years now hearing about China as the number one priority almost on a longer-term strategic basis, given the shifts in the market, and so I'm trying to understand what would cause you to buy additional assets in this country, which in turn could cause you to delay moving ahead in China. I mean, it just seems inconsistent with what-- the discussions we've had for the last couple years about the critical nature of Asia.

Well, Walter, I think from-- I totally agree with what you're saying about China. China is our-- strategically, it's the most important-- one of the most important things this company has-- that we're working on, and we're well advanced in that regard, and we continue, over the next number of months, to go through the course that has to be gone through to reach that point of having a-- sign an agreement.

In terms of the-- why would we buy domestic assets in a shrinking market, etc., great question. And the reality of that is that we are largest consumer of POI [sp] in this country, in this hemisphere, in fact, and we are-- we have less than 40% of our own capacity in terms of raw material. So, we're dependent upon-- have been dependent upon DuPont for many years, and the discussions we had with Koch over the last few months led us to believe that their option, if something couldn't be done, was that they would shut down the operation. And should that happen, it would leave us in a very difficult position because the whole market would be short 20, 25%, and that would mean us having to import POI from outside the country.

The logistics of that are unworkable, and taking everything into consideration, the fact that we were in an alliance with DuPont for the last four years, that was coming to an end at the end of next June. We talked with Koch. We came to a very pragmatic solution for both companies, and what we're doing really is consolidating our position in raw materials supply in this market. And I think the numbers that you'll see once we get through this deal will show that, economically, it means it's going to be good for this company. It also removes a lot of the uncertainty to do with the put and call, etc., and the other difficulties we're having legally with DuPont.

So, it clears up a lot of the-- a lot of housekeeping for us, and it allows us to move forward in a way that we have additional capacity, but also additional technology that we can use to enrich our business, to enrich our mix in particular. So, we're stepping into a raw material situation, really. Two-thirds of what DuPont makes or Koch makes today, is-- we're consuming, in any case. So, it's really a strategic move as well as [inaudible].

OK. Again, I understood the Kinston transaction, especially as it eliminated the potential liabilities from the put in the litigation. It's the issue of possibly purchasing additional assets from them, which it-- as opposed to committing that same group of assets to China.

So, you're referring to the second transaction, which has not--?

--Yes, the second transaction.

OK. Well, I think, first of all, we're discussing a second transaction with them. We have not-- we aren't obligated to go continue that, but we have intentions to do that because I think, once we go through that plan, then it might be easier to answer your question. Without us being able to disclose the location and talk about the whys and wherefores, it does make it difficult for us to answer your question or, I think, Brian Hun's question earlier, regarding that situation.

OK.

And we have a variety-- we have to wait for approval, even on the Kinston thing, from an FTC standpoint.

OK. And just my last-- it's a comment, not a question. On the last call, one of the sell-side analysts I think gave you a hard time about a commitment to updating us on China, given the failure-- for good reason-- of the prior potential JV. I would just hope that, this time, we will find out on a reasonably timely basis whether or not we have something. I realize this is not fully in your control.

Right. I think that-- well, Brian addressed that earlier when he said that he leaves tomorrow. He-- we hope that, in the next couple weeks, able to come back and report back that we either do or don't have an LOI that we have signed or are going to sign to move that process forward. It's at that stage where it's at the end-stage of the game to do the LOI, so it is short-term for us to come back to you.

Thank you.

With four remaining questions in the queue, our next question is coming from [Ayelle Papahando] of Osprey Fund. Please pose your question.

Hi. My question is more of a general question on trends. We've seen the cotton price fall dramatically in the last couple months, and wonder what those implications are for your business at all.

Well, cotton prices will affect-- is more of an impact on Parkdale than it is directly to Unifi since we're more tied to, from the nylon and polyester business. So, I don't-- there's-- from a correlation standpoint, the two aren't correlating. The cotton price is affected by different items than what our raw material is affected by.

I was referring to you [inaudible] switching of more cotton into your fabric, or as people switch, because polyester relatively would become pricier.

I mean, what is is, is there's a relationship between the cotton price, obviously, and the consumption of polyester mainly on the staple side, where as cotton prices go up, companies tend to use more polyester staple to take the price down-- the average price down. There's a certain movement there all the time. It flows and ebbs with the price of cotton. But overall, I mean, cotton is not going that much, percentage-wise on an annual basis probably, whereas polyester is growing seven to 8% a year.

Polyester is-- polyester still seems to be the fabric of choice or the yarn of choice.

But is it-- a lot of that is driven by price, with that kind of rising crude prices and, like, the 40% fall in cotton price. Is polyester still cheaper than cotton?

Oh, it is, yes, yes. I mean, obviously, with oil at 42 plus a barrel, that-- there's a lot of pressure on the raw materials polyester. We've taken some price increase this year, which we've passed on, and we-- there's a lot of pressure from the oil company, or from the Kendiga [sp] companies, to pass price on. But, Asia being as big as it is with over-capacity on the intermediate, are not getting the prices passed through that one would expect. I know we don't [inaudible] the price that China the last couple of weeks have started to rise again. But, when you have an over-supply situation on the PTA and [inaudible] side, it tends to dampen the price.

There's still a delta of about 15 cents a pound between polyester-- polymer and cotton. Cotton's about 15 cents a pound more expensive, even at the current prices, than the polymer price.

OK. Is there anybody who publishes that on a weekly basis between polyester and cotton?

Yes, there are many, many companies, PCI and-- if you could call back later on, we can give you the name of-- we can give you several addresses.

OK, great, appreciate it.

I mean, it's information that's readily available.

OK. All right, thanks a lot.

Our next question comes from [John Dysher] of Pinnacle Value Funds. Please pose your question.

Good morning.

Morning.

I guess just a couple of follow-ups. What was the headcount at the end of the year, roughly?

Roughly, it was about where we-- what we stated in our last-- somewhere around four-- roughly around 4,000.

Four thousand, OK. And ignoring the potential second plant that you may or may not acquire from Invista, what would you guess it would be a year from now?

Well, I'm not-- I guess I'm not going to put a number on that from the standpoint, until we're able to close the Kinston facility and actually then put out our plan in front of everyone, including investors, it's premature.

OK, but, I mean, you--.

--There are 775 individuals at Kinston today, and that's the extent of our disclosure on headcount for Kinston.

OK. We'll know more once you close that, OK. The Sara Lee transaction, you said I think it would increase your nylon sales by about 20%.

That's over last year.

Right. Is that an increase of, what, 40m or so?

It approximates between 45 and 50m.

So, that's incremental that you'll see in fiscal '05?

Correct.

And I guess finally, on the cost of parazylene and methanol glycol, what's the-- what are the trends there for those two key raw materials?

Well, for the first six months of the year, the price-- the combined price of both have gone up about 17%, and they peaked in June and have been creeping very, very slowly above that. But, as I said earlier, the price has begun to settle down, and again, this is quite-- it becomes a quiet time. So, September we'll see probably-- we're expecting the price to stay more or less where they are on a supply and demand basis. But, the price of oil obviously could have an impact. But, our position is of the raw materials is that we don't-- as everybody knows, we just don't have the largent to absorb price increases. We're unashamedly passing them on. We have no choice.

OK. So, year-over-year, it's probably, what, up 15% or so?

It's about 16%.

Up 16% year-over-year, OK. And you are successful in passing those prices-- price increases along?

We have been of late. I think the first half of our fiscal year was a more difficult environment than it has been in the last six months, and we have been passing on those raw material price increases in the last half of the fiscal year.

What do you think you'll be able-- and you think you'll be able to continue that in the first half of the new fiscal year?

Well, with things remaining the way-- the same-- with the same, that's very probable that we will. We-- our intentions are to do that.

Right, OK. Thank you.

With three remaining questions in queue, a follow-up question from Brian Hun of Wachovia Securities. Please pose your question.

Thank you. Bill and Brian, just to clarify, sounds like your cash proceeds from Ireland are going to equal just about the Chinese cash investment. Is that roughly correct?

That's roughly correct, yes.

OK. And then, help I guess calm any fears, if you will. The potential acquisition of the other Kosa asset is by no means going to drain your total cash balance of roughly 65m.

That's correct. We-- but, what we anticipate, as we-- as I said, was that the total purchase price will be somewhere in the same general range as the one we disclosed here on Kinston, with a portion of it being paid in cash, and it would be-- if you use the amount of-- that was on Kinston, it will be no more than half of that number in cash. So, to your point, yes, we will not be using a large portion of it as a purchase price.

So-- and then, based on the EBITDA and the cash interest, cap-ex and taxes we ran through earlier, looks like you'll generate free cash flow at fiscal '05, if all this plays out, somewhere in the-- call it-- $15m range.

Yes, off of the 48-- the 44 to 48 you're talking about?

Yes.

That would be correct.

And that's before any working capital benefit. So, based on where we stand at the end of next year, we should have potentially a slightly larger cash balance than you have today.

After--.

--After all these transactions.

Including the sale of Ireland?

Yes.

Yes, including the sale of Ireland, we back-- part of it will depend, Brian, on-- there are some actions that we might choose to take at the Kinston facility that might include some capital expenditure. It will depend on whether or not we determine that those actions are the best way to go about what we need to do, or another action might get us to the same point without spending the capital dollars. So, I'll reserve my comments. Same will-- be the same or greater on the basis of depending on what action plan we decide is best over the next 30 to 40 days.

Excellent. Two other questions. You know, based on earlier caller asking about the size of Ireland and the potential for the loss of that business, I mean, what's your best shot? I mean, is that $70m worth of revenue is going to evaporate, or are we looking at maybe losing half the business, because you said in your press release you're going to continue to service that business out of the U.S. and Asia.

I think we won't know till it settles down and we have a chance to actually go out and talk to some of our customers in that regard. But, keep in mind, too, that, although 70m might come off the top line, the contribution to the bottom line is that their contribution was going to be negative almost to the tune of about $5m, so it does remove a negative at the bottom line, and I think Brian might want to comment a little more on that.

I think I'm going over personally in a couple week's time to-- once the holiday periods are over in Europe, to talk to these customers about continuing supply, and some of these customers are customers we have here in the U.S., and have-- and we have [inaudible]. So, we want to get-- be in a position to continue to supply them from the U.S. or from Europe, and at this point in time, we haven't figured anything into our budgets right now as to what the sales [inaudible] might be. But, I think the next month or so will give us a better idea.

I've assumed in our '05 numbers that Ireland would just-- would drop out from that standpoint, and that if we-- depending on what we end up servicing from here or from other sources, that would be additive.

OK, excellent. Then, my last question, based on the last conference call, the Q3 call, Bill, I believe you had said visibility on the business was the best it has been in several quarters. Given that retail was a little soft last month, what's the visibility on the business today compared to where it was last quarter, and how far out can you see orders at this point?

Well, I think visibility has-- it's improved this calendar year from where we-- go back a little bit further, go back into the last half of the last calendar year, things have certainly improved, visibility-wise, since then. They're probably still not out more than 80 to 90 days, kind of thing. We're hearing up-- we have to look-- we look up the supply chain to see what they're seeing, and I think there's been some more light at the end of the tunnel for them, but it's not more than 90 days.

OK. And I lied, I've got one last question. What's your best guess what's going to happen on January 1 when the WTO kicks in?

Well, from our point, Brian, I think we've seen-- the quotas have been coming off for several years now. A lot of the quotas came off particular categories in 2002. We saw-- we definitely saw a reduction in our business as a result of that.

By the end of the year, the balance will come off, and they're mainly-- the quotas are coming off on areas like the top of the bed segment, the home furnishing, like sheeting fabrics and bedspreads, which represent about 10% of our sales. And we do expect pressure there for domestic producers of those items. Ought to be effective, although in some cases the quotas, believe it or not, have not been totally taken off this year. So, it's very hard to predict, but we're working on the basis that the quota removal will reduce the cost of delivery of goods into this country from Asia and, therefore, it could be as much as 12 to 18% of a reduction.

And that's going to become attractive to purchasers in the U.S., so we've worked on the basis that that's going to happen. Where that margin goes to remains to be seen. I'm sure the consumer will see some of it, but the retailer will probably try and keep as much of it as they can. But, from our point of view, we have identified that as the only part of our business that-- the apparel business, for example, and the home furnishings and socks, etc., seem to have been already affected.

So, we're left with about 10% of our business going into sheeting and fabrics and bedspreads, that type of item, and that's the item again-- they're the items, again, that Bill talked about either getting prices up on or getting out of the business. We've actually built in a reduction in that product category during the next 12 months. So, we're trying to keep ahead of the game and assume the worst.

Excellent. Thank you very much.

Carrie, we have time for-- I don't know how many more questions we have in queue. We have time for maybe one, or two at the most, more questions.

OK. With two remaining questions in queue, our follow-up question next is coming from John Beal of Standard Pacific Capital.

Hey guys, thanks. The-- two questions. The first one is, the 20m EBITDA net loss that you're taking this year from the Kinston acquisition, that seems to be assuming that you're not going to lose any of the third-party customers, which are a third of that facility's sales. Is that right?

It makes an assumption that those are steady-state, but one thing we don't know today, and we won't know till after closing, for anti-trust purposes, is we have had no visibility on what those-- what products those customers take and at what prices those customers take those products at. So, it does assume that it's kind of a static environment for those third-party sales, but we don't know whether those third-party sales are profitable or not profitable, because we don't have visibility, and we're not allowed to have visibility, until after we close.

OK, but those are-- so then, those sales are two competitors of yours?

In some cases that would be correct.

OK. And who else could they-- I mean, is there-- are there other competing suppliers that they could buy from? Like, who are those suppliers, or can't you say?

Yes, because the other two suppliers would be Nanya [sp] in the United States, very large operator, and Universal. And then, from Mexico, Fromacra [sp] or Kosa. So, outside of that, obviously is imports from Asia.

OK. And any sense to what the-- if you-- what's the worst case if you lose all those guys? I mean, it-- is it-- I guess I just don't have--.

--I don't-- I guess-- back to what I said originally, I don't know. If any-- if they don't make money on those customers dropping off the top line [inaudible], so we can't really say that.

OK, fair enough. OK, and the last question, I just want to make sure I understand this. So, the net impact is $20m this year that EBITDA is going to go down, and I realize that's an investment. That's fine. But, is that-- so, are you-- is the-- would the facility have made money if it weren't for the $30m payment that you guys were receiving each year?

Without getting into a specific number, which we will do after we close, the answer would be no.

OK. So, what I'm missing is, if you're losing $30m of payment that was going straight to the EBITDA line by the termination of this alliance agreement, and you're acquiring a facility that's losing money, it seems like you should be down more than 30m. Are you assuming some synergies this year?

Certainly, yes. Yes, absolutely.

OK. So, without synergies, any idea what that number would be?

We'd be happy to disclose that after we close. We're going to-- we will go through that-- we'll walk you through it, as I said on my formal remarks, from where they are today, what actions we believe are necessary to get these numbers reflected, as I've showed you today, and how we get there.

OK. Hey, thanks a lot for taking all the questions.

You're welcome.

Our last question comes from [Rich Stevenson] of Trust Company. Please pose your question.

Yes, just one follow-on question relating to the WTO quota elimination. I was curious to get your view on what you think is going to happen on the back half of this calendar year, and particularly what I'm talking about is I read some articles that imply that China in the past, in the back half of each year, borrows forward from the following year's quotas, and this year won't be able to, and so there could be an anomaly where it appears that China's volumes drop off this calendar year, but then they'll shift back next year.

Well, yes, this is exactly right. That was typically the behavior, and they would borrow for the following year. This year, they can't do that, and so when the quotas are used up, they're used up. But there are still a lot of quotas out there that are unused, and we've seen-- I think some of the pickup we've seen in our domestic business has been the result of domestic companies perhaps hedging their bets a little, like having more coming to this hemisphere. But, apparel imports, in the first five months of the year, have been flat compared to the previous years where they have been increasing by five, 6% a year.

So, there's a-- it's very hard to predict what's going to happen from January, but the major impact that we believe there's going to be will be more in Asia than anywhere else, where there's probably twice the amount of capacity in the cutusal [sp] area to allow for the move-- allow countries to move around different countries to take advantage of quotas. And that, they expect-- typical buyer in the U.S., for example, is suggesting that we cut his number of suppliers from maybe-- by 50%, and that's going to mean that we believe that China's going to pick up a lot of the slack here and become the bigger player in the apparel side.

There's a lot of competition within Asia between the different countries where the only differentiation factor is cost of labor. So, countries like Thailand and Indonesia are going to be affected. Countries like Vietnam and China will benefit.

Right, OK. OK, thanks for your time.

Thank you.

OK, operator. Thank you for handling the calls, and that will conclude the Unifi conference call today. Brian and I wish to thank everyone for being on the call, and for your questions. Thank you.

Thank you very much.

Thank you. This concludes today's teleconference. Please disconnect your lines at this time, and have a wonderful day.