Unifi Inc (UFI) 2005 Q1 法說會逐字稿

Good afternoon and welcome to the Unifi Incorporated first quarter earnings conference. At this time all participants have been placed on a listen-only mode and the floor will be opened for questions following the presentation.

It is now my pleasure to turn the floor over to your host, William Lowe, Chief Operating Officer and CFO. Sir, you may begin.

Thank you, Melissa(ph) and good afternoon, everyone. This is Bill Lowe speaking and joining me on the call this afternoon is Brian Parke, our chairman and CEO for Unifi.

Before we begin I need to first advise you that certain statements included herein will be forward-looking statements within the meaning of federal securities law. 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-K - 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 first quarter conference call linked in the home page. I hope that you will have the presentation available, as it will make it much easier to track through the information discussed in this call.

If you are following along on the presentation on the Web site, I will begin my comments on slide 3. Net sales from continuing operations for the current September quarter were $180.2 million, which is an increase of $16.5 million, a 10.1% compared to net sales of $163.7 million for the prior year's September quarter. While we believe that net sales volume for the current quarter was probably impacted by the elimination of quarter carry-over, we cannot determine its exact impact on volume.

We anticipate seeing some additional impact in our December quarter, however, this may also be offset by volume losses as we continue the process of extricating ourselves from unprofitable products. The current domestic volume is up 4.2 million pounds versus the prior comparable quarter and total pounds were up 8.1 million versus the prior quarter, which is a consolidated volume increase of 7.4% overall.

I am pleased to report that we posted an operating profit from continuing operations of $1 million in the quarter, compared to a $1 million operating loss in the prior year's September quarter. This is our second straight quarter of operating profits and an indication that our underlying business continues to improve as a result of the strategies and proactive measure we have undertaken over the past two fiscal years and specifically over the past nine months.

Over the last 18 months alone we have closed our dyeing facility in Manchester, England, consolidated domestic operations through closure of an air jet texturing plant in North Carolina and will close our remaining European operations by the end of this month.

As a result we've reduced our global workforce by approximately 28%. As you can see on this slide, SG&A expenses were $9.5 million, or 5.3% of sales, compared to $12.4 million, or 7.6% of sales from the prior comparable period. We expect this positive trend in SG&A to continue throughout the fiscal year as we continue to realize the benefits of our restructuring and consolidation efforts. We are reporting a net after-tax loss from continuing operations of $1.3 million, or $0.02 per share for the current September quarter.

Net income for the quarter was negatively impacted by a sharp increase in the cost of our raw materials, which increased 20% in the September quarter alone. Results from continuing operations for the current quarter are an improvement over the net loss of $2.6 million, or $0.05 per share reported for the prior year's September quarter.

Including discontinued operations we are reporting a net after tax loss of $22.6 million, or $0.43 per share, which reflects $21.3 million in charges related to the closure of our facility in Letterkenny, Ireland. I'll address these charges in just a few minutes in detail. This compares to a net loss of $4.6 million, or $0.09 per share for the prior year September quarter.

Included in the results for this current September quarter is pretax income of $1.1 million generated from the company's share of income from equity affiliates. Lower priced inventories and improved futures contracts helped Parkdale America return to normalcy in the current quarter after nine months of very challenging and disappointing results.

Turning now to slide 4, in terms of our balance sheet, we ended the September quarter with $45.7 million in cash on hand, which is a decrease of $19.5 million over the June quarter and I'll address this specifically on slide 8 in a few minutes. The company ended the September quarter with working capital as a percent of sales of 23.7%, which compares to 22.4% at the end of the previous June quarter.

Receivables increased by $3.6 million, or 2.8%, with the vast majority related to increases in receivables in Brazil. As I mentioned in the last call, we had extended terms to some of our customers domestically and although a majority remain current in the receivables balances, it has negatively affected our balance sheet. We are in the process of revising our terms to put them more in line with the same type of terms that we ourselves have with our major suppliers of our raw material which results in days in payables of approximately 44.3 days this quarter.

Debt remains relatively constant at $267 million with net equity impacted primarily by the charges associated with the closure of the facility in Ireland.

Turning to slide 5, EBITDA for the quarter was approximately $14 million, down just slightly from the prior year first quarter at $14.3 million, but this number is in line with our expectations, and as I have said earlier, we accomplished this by weathering a constant increase in raw material prices over the quarter and the calendar year.

We continue to affirm that our fiscal 2005 EBITDA's forecasted to be approximately $47 million, which includes a negative impact of transitioning the Kinston facility over the next nine months. If this does change we will update you accordingly.

Slide 6 provides a reconciliation of our calculation, which I will not review but is available for your perusal and you can determine bases upon which you might calculate EBITDA differently from the company.

Turning to slide 7, we're providing you details of the charges of discontinued operations. If you will recall, we estimated in the prior conference call that charges would be between $20 and $24 million. We have recorded charges to date of $18.5 million associated with the closure of Ireland. Ireland also has an operating loss for the quarter of $2.8 million.

Until the operation is completely liquidated, there will be charges for the operating loss and the associated closure costs that must be taken in the period in which they are incurred and a separate line of our financial statements as discontinued operations.

Turning now to my last slide on the financial section of our call, which is slide number 8, as I discussed earlier, the cash balance declined approximately $19.5 million. As you know, there are many items that affect the change in our cash balance and are detailed in the cash flow statement, however, there are a few items that do not stand out separately that I would like to draw your attention to.

First, working capital changes. The largest single change in the working capital is in our Brazilian operation. This change is self-directed, however. We had entered into a trade program whereby our operation purchases goods and sells them on further without processing. The margin for this is acceptable and worth the added working capital carried. It can be terminated at any time so you could view it as a temporary conversion of some of the cash in Brazil for working capital purposes.

In addition, we've paid, in cash, approximately $7.3 million in various payments for the quarter that were liabilities in the balance sheet. These were the settlement of an old IRS appeals case, a settlement with DuPont that was non-arbitration related and $1 million payment for the Sara Lee assets we discussed previously. $1.6 million remains to be paid on the acquisition of those assets and will be paid out over time.

This concludes my remarks on the financial statements and now I'll turn the call over to Brian to update you on China. Brian?

Thanks, Bill. And good afternoon everybody. First let me start off by saying that we're pleased to bring to a conclusion the NOI stage of a new joint-venture in China. We know quite well that some of you have been very impatient regarding the length of time it has taken for us to get to this point but let me remind you that as I told you on our fourth quarter conference call that we did take some time initially to explore several possible alternatives before we reached the phase of identifying a partner to negotiate this transaction.

We looked at several operations and selected a partner that we thought provided the best avenue for success. We have spent considerable time during the last couple of months discussing such a joint-venture and specific points regarding operating the business after the venture is formed.

Unifi and Sinopec Yizheng Chemical Fibre Company Limited has signed a non-binding letter of intent to form a joint venture to manufacture and market polyester filament yarn through Sinopec Yizheng's facility in Yizheng, which is in the Jiangsu province in China. The joint venture will be owned 50% by Unifi and 50% by Sinopec Yizheng Chemical Company.

This company is under control of Sinopec Corporation, which is an integrated energy and chemical company headquartered in Beijing. Sinopec is the largest petrochemical producer and distributor in China. We have told you before that there are many issues facing companies that wish to enter the Chinese market. Distribution channels, power grid interruptions and raw material sources are some of these issues. Our future partner, Sinopec, has ready access to large quantities of high quality raw materials of POI, fully drawn yarn and drawn textured yarn and also a power plant which they built themselves.

On top of this they have excellent distribution. Repeating what we have told you in the past, that the closed joint venture is focused on the production of high margin specialty yarns for use within China and Asia. China currently imports close to 50% of its needs for specialty yarns and the domestic demand is growing at a rate of over 20% annual.

The premium value-added polyester textured yarn - and this is a product area where Unifi excels, is estimated to be 254,000 metric tons for 2005. Of this total, approximately 120,000 tons will be imported. And just to give you a perspective on relative size, the total U.S. market, including commodity yarns is about 260,000 metric tons today. So as you can see, the value-added market in China is almost as large as the entire market is in the U.S.

Our anticipated marketing approach remains essentially unchanged and we will target three customer groups, first of all, U.S. and European customers that are doing business in China. Secondly Hong Kong based China producers and finally Chinese customers supplying fabrics and finished goods for exports.

Unifi's investment in the proposed joint venture is estimated to be $30 million. Subsequent to the formation of the joint venture it will purchase a certain amount of equipment from Unifi somewhere in the range of $4 - $5 million and future transfers of equipment are subject to expansion plans in the facility.

The current sales from Sinopec's facility are approximately $120 million. We have begun the process of the feasibility study, negotiation of definitive agreements and in developing a business plan with our partner. We remain committed, as we have said in the past to grow this business with our partner to around $500 million in revenue by the year 2010 or over a five year period.

We expect this growth to be fueled by penetrating the premium-added value-added market to which I have already discussed and I took(ph) by participating in the overall growth of polyester consumption in China, which is growing at a rate of over 8%.

Until we complete the definitive agreement we can't tell you whether this will be a consolidated subsidiary under the accounting rules or whether it will be accounted for as an equity affiliate. Our current operating assumption for now is that it will be treated as an equity affiliate.

Additionally, until we complete the business plan and have it approved by the regulatory authorities in China, we are not able to at this time provide further details of the expected results of operations, but we will do so at the appropriate time.

In conclusion, we believe we are well-positioned to move forward with this transaction with a partner that is established in the specialty yarn business and one that provides stability regarding raw materials, and more importantly, power distribution. We further believe that this will be a growth vehicle and launching pad for Unifi in the future as we bring about an added-value to the company and shareholders and our partner.

And lastly, we need to remind you that there are inherent risks associated with bringing the transaction to a closure. At this stage we have executed a letter of intent which, while is quite detailed, is not a binding agreement. Nonetheless, the parties are very excited about it and we will be working diligently to clear the many hurdles that are necessary to close the transaction. We don't plan to provide periodic updates of our progress as we work on our agreements and on obtaining the necessary regulatory approval as this will be counterproductive to the negotiating process.

We will advise you when we have reached a definitive agreement and again we have received all necessary regulatory approvals, although, of course, there can be no assurance that the transaction will be completed. Our timeline remains unchanged with the final government approval possibly coming in the May-July 2005 timeframe.

Before we move on to questions I would like to turn the call back to Bill to provide a brief update on our initiatives in Kinston. Bill?

Thanks, Brian. If you were previously following along on the slide presentation, I am going to begin these comments on slide number 10. To remind you of a few things that we have talked about regarding Kinston previously, Unifi acquired the Kinston facility for approximately $22.5 million. I say approximately because it is subject to final inventory value determination from the physical count that we took at closing.

The transaction was seller financed. It ended all arbitration claims. The $300 million put was eliminated. It provides the company with a more vertically integrated base of operations and it allows the company to reconfigure some tower based spinning assets. It also provides flexibility and control and ensures resources for strategic initiatives.

It also allows for the coordinated rationalization of unprofitable business and reducing commodity sales which provide little or negative margin.

Beginning on the next slide, which is slide 11, I will discuss our plan. In phase I we began the wage rate reductions of 20% effective October 1 and instituted Unifi fringe benefits to conform with textile industry base(ph). We are then reviewing the list of unprofitable products now that it is available to us and we have begun to reduce overhead costs and SG&A related to the buildings.

In phase II we will begin the process of transferring products between Yadkinville and Kinston and also within Kinston between production lines. We will also be exiting non-profitable business and we will shut down Kinston line Y-5 by December 31, 2004.

We are working diligently with our customers to minimize disruption to their operations during this process. In phase III, we will continue to transfer profitable products to the lowest cost equipment and shut down Kinston plant line Y-4 by March 31, 2005 and continue to review and revise the list of unprofitable products and related pricing.

Finally, turning to page 13, we have outlined the financials starting the transition for the Kinston facility and our Yadkinville spinning facility on a combined basis. As a reminder, this is only Kinston and our pre-existing spinning plant, not our texturing businesses or our nylon business units that we are covering on this slide today. These numbers also represent on a - the figures on an annual, annual basis coming and arriving to an annualized number when the transition is complete.

We've told you that Kinston was an underperforming facility when we announced its acquisition. Excluding the impact of the alliance benefits to Unifi, and of course the corresponding amounts paid by Kinston, the combined spinning assets in a normalized, year-to-date would produce a negative EBITDA of approximately $24 million. There are both synergy savings and rationalization savings that we expect to generate to get to the end state of this slide of a positive $30 million EBITDA. We announced this week the timing of the production line closures to our employees, customers and our investors through a press release. I think that you can see that we are serious about taking quick actions to reach these desired results.

Approximately $36 million of rationalization and synergy savings come from exiting business that does not cover full cost, mix enrichment by producing a higher percentage of value-added product, and a significant portion from the closure of lines 4 and 5.

An additional $15 million is expected to result from the improvement and converting costs in the form of raise rate reductions, productivity improvements, and from producing product on the most cost effective production assets. Lastly, about $3 million reduction in SG&A at the facility in Kinston.

We have begun implementing our plan as we described to you evidenced by the first 2 major steps of rate adjustments and announcing the shutting down of 2 lines of production. We will continue executing according to our plan to reach the steady state that we believe enhances our potential in the following fiscal year as we described to you in our last conference call.

It will take approximately four quarters to reach the steady state, which will put us into the second fiscal quarter of next year. This concludes our update for the September quarter and we'd now like to open the floor to questions. Melissa, we are ready to open the floor for questions.

[OPERATOR INSTRUCTIONS]

Your first question is coming from John Beale (ph) with Stanley Pacific.

Hey, guys, on that last slide you showed us, so you're assuming $155 million of synergies from the Kinston acquisition?

Yes. They all (inaudible) through the Kinston facility itself. Many of the changes that occur actually occur in Yadkinville itself. As we have been, as we have been talking the recent last couple of quarters, we have been exiting non-profitable business in Yadkinville on the texturing side, which also affects the spinning.

So how many, I think you said that you're still projecting $48 million of EBITDA for fiscal '05?

That's correct.

How much synergies are in that number? In other words if no synergies come through, what would EBITDA be?

We're projecting that there's between $6 and $8 million of synergies that come through for this fiscal year. So it builds up and most of that comes in the latter half, the very end of the fiscal year.

As you see the shutdowns occurring, we'll have four by December and then of course five by March, you won't pick up the majority of those benefits until the latter half of that last fiscal quarter.

And those are very large changes that take place. The movement of products is going to be starting relatively soon.

OK. Just the last question then, your fiscal year ended 6/04, EBITDA was $50 million. And now if I'm taking out the $38 million a year of alliance payments, that's only $12 million of EBITDA last year. Is that right?

Last year, that last year, that is correct. But if you go back to our call in the last quarter, the projections of EBITDA for the company excluding a Kinston acquisition, if we had not done an acquisition with them, our projections for the fiscal year '05 was $68 million.

OK. So you're going from $12 million in EBITDA without the alliance payment to now $40 some million?

We expect the net impact of the overall change and the change in the, without the alliance and benefiting certain amounts from synergies to drop ours about $21 million from what we would have projected had we not done the transaction.

OK. So it's ...

While that delta doesn't reconcile to that savings number, the fairly, the alliance calculation is fairly complicated. And the entire $35 million in reality doesn't really come out of the total. There is savings, variable savings that were generators of part of that but actually still contended to be generated.

So it's not as cut and dried as taking out one number and adding another.

OK. Thanks very much.

Thank you. Your next question is coming from David Richards (ph) with Raymond James.

Hey, Bill, just a couple of questions for you.

First of all if we could just turn to the Ireland sale and if you could update the status there and also, if you could, just describe a little bit more of the property that is going to be sold now that you're shutting that down.

We'll let Brian take that question.

Yes, the operation ceases production at the end of the month, as Bill said. And it will continue to deliver finished goods through the end of year to finish the inventories.

The property itself is about 75 acres that consist of several buildings on two locations together with another residential property.

The original plant, which was built in '76 has something like 300,000 square feet of usable space. And the newer plant built in the mid 90s has about 200,000 square feet of usable space.

It's on the market, it's being marketed throughout Europe. And we've already got a company working on that. And we're reviewing that on an ongoing basis. At this stage it's, we've had some interest. It's early days yet, we expect in the next 30 days to have some better feel for what the opportunity is on the value.

The machinery that we have there can range anywhere from $5 to $10 million. We probably were thinking more in the $6, $7 million range, depending on what the market is like. But again, they're being advertised the shop around the world right now as we speak.

Our objective is really to try and monetize those assets before the end of our fiscal year, that's our target.

OK. And the number that had been used, I think, was a net kind of 25 to 35.

We're still in that ballpark.

OK. And I guess just as, if we can stay on Ireland for one second longer, in the slide you showed the pension expense. Is that a cash charge?

There is a, of the $9 million amount, about half of that is a cash charge, which will be used to purchase annuities for employees because that's the way the plan is worked there.

The other half is a write off of a plant asset. It's non-cash.

OK. So if I'm looking at it, and this is maybe part of the challenge between slide 7 and 8, if I'm looking at the cash effects of the Ireland discontinued operations in the first quarter. It would seem that it's kind of something close to $16 million between basically writing off inventory and receivables, you're not going to now be able to sell it at the carrying value.

The sell runs half the pension and the operating loss, is that correct?

With the exception that, from a cash perspective, that money has not left the coffers yet.

OK.

The operating loss is pretty much a mostly a cash loss. The severance expense, as Brian said production ends at the end of this month, severance will start to be paid out the following month. And the pension expense relatively quickly as well.

So over the course of the next few months is when we see the cash leaving.

OK. That was more my understanding from previous conversations.

And then if we could just two quick questions, as we look at the, was there an alliance payment made in the first quarter? And if so, what was it?

There was approximately $8.3 million the alliance benefit. Although the cash, which was a good point for you to bring up, that payment from a cash standpoint was actually not received during our fiscal quarter. Since we end our quarter on September Sunday the 26, effectively our last business day is the 24th, on a Friday.

The cash for that alliance benefit of $8.3 million came in on the following Tuesday the 28th. So it is not in our cash balance. Of course that's a timing issue that affected what our cash balance looks like.

OK. Thanks. That explains some of the cash burn then in the first quarter.

Thanks for bringing that up.

OK. And then if I could just touch on one last question I'll get back in queue, revolver fundings and availability today?

We have not used our revolver to date. That's been consistent so far. And if we look at the revolver, I'm going to give you two different numbers because everybody likes to look at it differently.

Based upon our collateralization for the revolver we could in theory borrow up to $93 million of the 100. However, the way our covenants work with the bank, a liquidity based covenant which states that as long as we have 25 million over 30, it doesn't really matter what our ratios are.

Currently if we borrowed more than the $68 million we'd be in violation of our covenants because our EBITDA to debt ratio would be out of whack.

So I usually, I view it as we have $68 million of availability without blowing a covenant.

Got it.

OK?

OK. I'll hop back in.

Thank you. Your next question is coming from Dennis Rosenburg (ph) with Credit Suisse First Boston.

Hi, could you walk through the timeline on China again, please? You mentioned the government's approval is expected sometime around the middle of calendar '05. What transpires between now and then as far as what kind of agreement and what has to happen?

Well, Dennis, the process that we go through here is that first of all having found the other Y(ph), which took some time. But now we're at a stage where a feasibility study has to be prepared for the parenting company, first of all, and also for the government.

And that feasibility is essentially a 10-year business plan. Now you might ask, 10 years is a hell of a long time, especially in this industry. But nevertheless, that's the process they like to walk through.

We expect that will take 2.5, 3 months to finalize that business plan working together but it's a 50/50 joint effort.

That then has to go for approval to the sound effect board and then subsequently to the government.

Coincident with that activity, the other big piece is the negotiations of definitive agreements. We've already, we've already started with a document on that. And there obviously a number of side agreements as well that have to be negotiated over the next few months.

We expect those definitive agreements to be, to take 3 to 4 months as well, all things being equal. So we try to get things - we're trying to get the feasibility study finished early on, early in 2005. And get the OK and the approval on that.

That then has to be has to be connected with the definitive agreements, sign the definitive agreements before it can be passed on to government for approval again. And before that can be done it has obviously got to pass the two different boards of directors, which will obviously take some time. We have to bring it back to our Board at that point for classification.

Meanwhile there's some other issues to be looked after. One is an appraisal. An appraisal has to be done on the assets under Chinese law. That's going to take probably 5 or 6 weeks. But again it's coincident with the other two activities I talked about.

And then once the definitive agreements are signed and it takes 2 to 3 months for the government to sign off on those. The standing question is getting the business license and some other kind of protocols that have got to be gone through. So that's why we're saying somewhere up to July before it might be finished.

Those timeframes could be collapsed. We're not sure. We're trying to take a pragmatic view of how quickly the system works. With a company like Sinopec perhaps it could work faster in some areas and slower in others. So our objective is to get the thing together - to be involved quickly at the end of the drum quickly as a journey center partner. So we're obviously in the hands of a bureaucracy here.

OK. So once the, once all of these steps are completed, is it something that starts up immediately and then at what rate of capacity does it start up?

Well it's, the business is an ongoing business as it is right now. It's, as I said in my earlier statements, about $120 million, U.S. dollar sales. It's got a close to 100 thousand tons of capacity. It's got a PTY testing operation of close to 100 machines. It's got some spinning operations with it. It, the plant was designed for non-commodity yarns in particular. It was designed in the mid 90s and built up over since the mid 90s through 2001 was the last investment.

So it's a new, pretty new facility with equipment and infrastructure that allows it to get right into that business segment that we talked about, the added value, premium added value area.

So our plans will be to move as much added, fully added value branded Unifi product in there quickly.

And again, our business plan will outline that later on.

We're sensitive to being too open with the information at this point, Dennis, because going through a definitive agreement is going to require some sensitive handling in terms of negotiations. We've got to negotiate into an agreement, supply agreements that there is types between energy and raw materials, et cetera, et cetera.

So we don't want to be too specific about the detail of that.

But we will be, the day we walk in there, we will be immediately in an ongoing business that we believe will be accretive.

OK. Thank you.

Thank you. Your next question is coming from Walter Senker (ph) with PA Capital (ph).

Thank you, a couple of further questions partially on China.

First, the $30 million you said you would probably invest, that was net of the 4 to 5 million of equipment you expect to sell or that's before the 4 to 5 million?

Yes, that's the goal under. It's necessary to have a where we've organized the, there's only center of that. It's necessary for us to put in $30 million into the business. They contribute their assets. And then the JAV will buy the equipment from Unifi. So that money that we talk about will be paid by the JAV to Unifi. And any subsequent machine we've got that JAV as we expand the business, assuming that's what JAV requires and are prepared to pay for it will be handled that way.

OK. And you do not put any meaningful money into this until everything is approved by the government and by your joint venture partners, i.e. the middle of next year sometime?

Exactly.

OK.

We're, as we're said on the last call, we're looking at the monetization of our Irish operations to fund this enterprise.

OK, and then just one other area.

The sharp increase in raw material costs, you have already been able to, you hope to be able to raise prices to offset that, or we're still running behind?

We've been raising prices pretty much every month since July1 and maybe a little bit before that.

There's always a little bit of time lag but we are attempting to at a minimum stay at pace with the raw material price increases that our suppliers when they quote "warn us" and give us fair warning ahead of time. We do forewarn our own customers that we've been told that the prices are going up again.

So it's been almost a monthly exercise for us on price increases.

And then I think overall, I think price increases need to be addressed because they have gone up significantly, as we've already heard. And the indications are that they will continue to rise at the same rate.

So it's one of the issues I think that we have had so face with the fact that the industry ourselves and our customers have been squeezed to the point where there's nothing left that we can eat when it comes to taking raw material price increases.

So whether it's our sales or whether it's our fabric producers our garment producers say there's no fat left in the system. So the prices have to go through. And if they are refused and if we can't pass it through, we can't supply it. And I think that's happening right through the supply chain, which is a positive thing.

Good, and just one last question. Any update on the Parkdale litigation, their problem, not yours?

Yes, at this point nothing new has come out at this time that is different from what we had discussed on the last call. When there is something that we hear, when we have our next call, we'll certainly update you. But at this point there's nothing new.

OK. Thank you.

Thank you. Your next question is coming Josephine Shea with Morgan Joseph.

Hi. How much additional sales are you expecting to derive from your Kinston acquisition? I understand the addition of EBITDA but don't know the sales number.

And then secondly what is the exact cash restructuring costs going forward left there?

And then thirdly you were planning perhaps to do a second acquisition and what the metric costs are there?

OK. Regarding third party sales at Kinston, at the time of the acquisition those sales range in the revenue standpoint of 100 to $120 million type of number.

I can't say going forward as we talked about exiting non-profitable business and looking at that business from that standpoint that that number will remain the same as it is the day that we took keys.

We're working on that, we're looking at the non-profitable business, we're working with our customers anyway we can. So that number, I'm sure that number will change but I don't think we can say exactly what it will be, especially using a range going forward.

Regarding cost, severance costs, as we announced the two lines closing and if you saw the press release of approximately 490, 500 positions there. Severance costs would be estimated to be between $9 and $10 million associated with the exit of those two lines to be paid out over time, over the course of 12 months maximum.

And was there a potential second acquisition that you were talking about?

We did mention that there was a possibility of a second acquisition. We have not made a decision whether or not to go forward on that transaction or whether not to. I do believe we said on the last call, we said that, we set that on the side burner as both companies, both in Invista and the Unifi worked very hard to get this closing on Kinston to occur on its timeline. The teams are just now getting back together to discuss where that's at and it will be basically a financial decision. And we aren't there yet.

All right, last question. The cash, is that located all domestically in the U.S. or is some of it abroad?

No, it is split between the U.S. and abroad. There is still a reasonable amount of cash in Ireland today even they are going to be going through a liquidation process and using some of that as a liquidate before they sell their assets. There is about $5 to $6 million of cash in Brazil and another $14 or $15 in Ireland. There's about $24 million in the U.S. out of that total.

And you will have no problems relocating the money back to the U.S.?

We may or may not bring it back to the U.S. to invest it in China. It's not necessary to do that. And if it has a consequence of withholding taxes from that location, we probably, may route it a different way to avoid that.

All right, thank you. I'll get back in queue.

Thanks.

Thank you, your next question is coming from Chris Vachario (ph) with ISI Capital.

Hi, if you don't mind, I'd just like you to go over a little on Kinston again. Just want to make sure I'm absolutely clear on how the numbers work. Is it possible to take us from the $30.6 million pro forma number in the materials on page 13 and how we get from that from not having the $38 million payment to Unifi and then the extra $5 million in EBITDA on that, you were saying, once everything gets done, it will be a higher $5 million EBITDA. How do we make up for ...?

Well, it would take me, actually, if I wanted to walk it through, I'd probably spend an hour on the phone with everyone. But everyone, unfortunately, the way it works, as I mentioned earlier, you cannot just look at what was the benefit that came into Unifi. The net, really, effect that you extract from a normalized year would have been about $25 million.

But that's why, what we've done for you here, and this is maybe a better way to approach it. What we've done for you on this slide by giving you a negative $24.383 million, that's called normalized year. That has taken the Kinston facility and our Yadkinville Spinning, which is where the alliance payment came into, it looks at those two locations, those two facilities which are very integrated in this process as to what they would look like if there was not an alliance as a starting point.

And I think that's a better way to look at it because quite frankly the alliance calculation and the way the benefits run through and are netted is a very complicated and convoluted circle of calculations. And so we've tried to eliminate that confusion by simply giving you a starting point, we've done that for you by looking at both the locations integrated as to what they would look like if there had not been an alliance from the beginning. And that's the starting point.

OK, and the bottom line is then four year guidance for after fiscal 2005 in the steady state ceteris peribus scenario, you're still comfortable with $72 to $75 million that you mentioned in the last conference call?

Yeah, for the following period, absolutely.

OK, relating to China, do you know if there will be any restrictions on getting your cash, the cash flow out of China once it's operating?

You can, first of all, there is the ability to distribute earnings and profit out of China. The question will be a timing of when you would do that depending on what rates you might be expanding the operations. So that cash might be used for expansion versus payments back.

But it will all be predicated on what is going on with expansion, whether using some leverage off of the expansion from the existing asset because we don't expect it to start off with that much leverage except for working capital. So, it's all going to be, that's up in the air as to in what year that would occur.

Right, that's going to be - choice of the JV's choice ...

It would be the JV's board's choice and you can distribute earnings and profits out of China.

Right, so you have the ability to do that if you want.

That's correct.

OK, just some minor things, Parkdale, what was their nine month EBITDA, you had given us the six months in the last conference call?

I don't think I gave you the Parkdale EBITDA number. I think we gave you a, what the impact of their earnings were on our earnings for that period. Their impact in this quarter was slightly less than a million positive. Of that 1.117 equity affiliate number, they are the lion's share of that. They're just slightly less than, about almost $800,000 of the $1.1. I don't believe I've given out an EBITDA number before.

OK, but how about in terms of dividends received from Parkdale?

OK, dividends, we certainly have talked about. We did receive, we said in the past calendar year, we received a dividend in January, about $1.5 million and we did receive a dividend actually after this fiscal quarter within the last 10 days of about $8.5 million.

Great, yeah, that's basically, I just wanted to clarify again on something else you mentioned before. It sounded like, I think you said you were attempting to pass along all the price increases and obviously there's some time delay and you also mentioned that if you can't pass along, you're basically going to be getting out of the product suite where you're not able to pass along.

So should I assume from that, that you have been able to pass along all of the price increases, given a time delay, so far for the first nine months of this year?

I think the answer is not. We have in fact, there has been some business that we've lost from price increases, but quite frankly, it's (inaudible) that we talk about you in the last couple quarters about our plans for exiting non-profitable business.

And so it's falling right in line with our expectations. We expect volumes to sell off a little further in this next quarter, directly resulting from our price increases on certain product to keep us whole, where someone might resource us from some other direction. But again, it's according to our plan and it all dovetails in with our plans, our spending plans and at Kinston as well.

Right, so for those of you, you were expecting to keep, you've been able to pass them along. It's just there are some that are getting out.

Yeah, that's right. The volume, as we said about volume, volume was up this quarter. I think we were a little surprised that we kept more of the volume this quarter than what we expected based upon some price increases. But I think it's just a timing issue. I think we'll see a little more volume fall-off resulting from those price increases this next quarter.

But again, most of that is product that, if we don't get that product, we wouldn't be making it, contributing negative margins and we've been talking about exiting that business over the last six months.

Right, OK, thank you.

Thank you, your next question is coming from Justin Stack (ph) of Bank of New York.

Hi Bill, it's actually Michael Rowe (ph).

OK, hi Michael.

OK, hi Michael, I want to clarify one thing and I'd hate to beat a dead horse on Kinston but you mentioned you got a payment after the quarter ended from the alliance. Are you actually accruing it for the quarter then?

Yes.

OK, can you tell me what the accrual was for the quarter? Is that different than the actual cash payment?

The accrual was somewhere slightly less than the cash payment but not materially, maybe a $1 million, $1.5 million.

So around $7 million.

Yeah, that would be a good number to use.

OK, so going forward obviously, that number is gone, for the December quarter. You will not have that accrual any longer.

We will not have that accrual, that is correct.

And because the first quarter you will not be able to get all your cost savings, you will probably have a $6 million hit if I take your 24 divided by 4, is that correct?

We will have a hit whether it will be a 6 or some number slightly different. But yes, there will be a negative impact to the next quarter from Kinston.

All right, so it's 6 or hopefully a little less, you get a little cost savings going. Or it might even be more?

I don't think it would be more, but hopefully, I won't say it will be less either but we're, it's a matter of when these things roll in because as the hotline, we have made some changes on day one. We'll see some benefit from that, but they also have price increases and lag in their inability to pass along as well. So they have the same factors that we're facing one step up in the chain as well.

OK, then you mentioned you think in the June quarter we might see about $7 million for that quarter? That number, is that relative to the negative 28? The 7, the 7, I'm trying to figure out what that is, does that negate the negative 6, so you kind of get the break even in the June quarter on this acquisition?

I think for the nine months, we have to get slightly positive for the fiscal year.

Does that exclude the Invista payments or is that just ...?

Those are out of the calculations.

OK.

So certainly exclude the calculations for that.

OK, great, thank you. Two more questions for you. One, so on China, make sure I understand, you are basically buying half of this existing plant?

That's correct, yes.

And, you said it did $120 in revenue for say, the last 12 months or so?

Yes.

Are current EBITDA margins of a nature close to yours or definitely profitable?

Well, again, I really don't think we don't need to get into that for confidentiality reasons we have with the company concerned. And they..

They are a public company and this is a part of a public company and so we are not really able to at this moment pull those numbers out to give them to you.

I think it's important, from our point of view, it's satisfactory from our standpoint, we believe that we'll be paying a reasonable price for a business that has given us a good return on our investment over time. It's got all the ingredients necessary that we were looking for. And the fact is a refined process. Despite the delays in everything else, I think we've ended up with an excellent partner with a great upside.

OK, then last question is, if you look at your cash flow statement, it looks like the cash in the quarter was really solely from discontinued ops. (off mic) relative to what your chart says on your slideshow?

Yeah, unfortunately that's a bit of an illusion. I hate to use that word but the way accounting for discontinued operations works is that we have to remove the, effectively, the difference between, particularly move the fixed assets and accumulated depreciation off of the individual line items.

And, clearly, if you see a line there called change in assets and liability, excluding effective acquisitions and foreign currency adjustment ...

Yeah

It happens to be a negative $8.3 million. But in that number is a positive number in excess of $20 million that more or less offsets that number. And this number down below really represents the charts we've been talking about with some other adjustments flowing through it. So, it really has netted, unfortunately, and that's why I pulled the separate cash flow major items effecting cash flow on a separate slide.

Because the cash flow statement itself, the way accounting works for discontinued operations, it tends to mislead you a bit on what the impact of our cash flow was for the charges. As I said, there really weren't any, other than the operating loss, there really weren't any cash charges in this quarter for discontinued ops.

I don't quite understand, but basically the essence is you've got some journal entry behind the scenes transferring it out of that over here into the operating cash flow.

That's right.

All right, thank you.

Thank you, your next question is coming from Orrin Shake (ph) with First Boston.

Hi, just a few questions. On working capital, I was under the impression that your accounts payable were artificially lower at the end of the fourth quarter I guess for one of your vendor systems issues. I would have thought that the payables balance would have been somewhat higher here in the first. Can you maybe just talk to that for a little and also do you see any more room to source cash out of working capital for the balance of the year?

I'll talk you about payables and I'll talk about working capital in total. The payable, back to your first comment, payables was somewhat inflated due to the vendor issue on some software in the prior fiscal year. And we're down a couple days from where we were the last quarter.

We have in fact changed terms where possible on our payables side. But however, most of our raw material which is the majority of our purchases from a percentage standpoint, it's heavily weighted to raw materials, are all on 30 day terms. This is with the large bars of our raw materials.

And now even with Kinston, if you go back even one step further in the chain on the raw material which is the chemical, it's still a 30 day period. Where the possibility is, we do believe there is a great possibility to move some dollars off the balance sheet, from working capital into cash is more on the receivables and inventory side.

Our average days in receivables is an excess of 60. It has primarily to do more with terms than it does with late payments. Although there is a percentage about 20% that's past due according to terms. And all of that is not extremely past due, most of it in fact falls in the one to 15 day category.

And we are, as I mentioned, we are in the process of going to be changing our terms to get receivable terms more in line with our payable terms that we're forced into.

OK, just one more question on SG&A, obviously down prematurely here in the quarter. Do you see additional room there or have you kind of sourced the lion's share?

There's a little more room, working on a couple other areas of consolidation within the SG&A area that we hope to give us a few more dollars out of. So we're constantly reviewing all areas of SG&A. And I'm going to go back, make one comment further on working capital. One thing that also has built working capital up in total is that the Sara Lee transaction, we have built an inventory there on that in nylon.

That the sales dollars, we talked about the increase in sales dollars for nylon from Sara Lee, but until you reach a 12 month period, your calculations are a bit skewed percentage wise because you have only three months or two month sales in the top number, but you've built the inventory on the other side.

So there's a bit of inventory build from Sara Lee that's effecting our overall working capital but there are still a lot of places to make reduction in other areas of inventory.

And then just one more actually. Am I understanding you correctly then that there is roughly $15 million that is not reflected in the current cash balance that arrived post the quarter end?

The two questions that I was asked, that would be approximately correct. We did receive a dividend from Parkdale post closing and we did receive the alliance benefit payment post closing.

OK, thank you.

Thank you, your next question is coming from John Beale with Standard Pacific.

Hey, thanks guys. So, I think you said the current quarter is going to be the toughest one right because the $8 million payment stuff, you won't have any synergies, is that right?

Yeah, the first two quarters we are really in that situation and we're in the middle of shutting down the first line. We're starting to see the benefit of that in the third fiscal quarter. But certainly this first fiscal quarter will be the toughest. The second fiscal quarter when we have it in for the first time.

OK, so it's kind of going to be a V shaped sort of recovery. Will, just doing some quick math, it looks like we might be talking about something in like the $5 million EBITDA range for the next quarter?

I'm not going to, I'll let you guys make your own calculations and forecasts for that, based on the comments you've heard today.

OK, I just wanted to make sure because obviously you've got $5 million a quarter in interest payments and $2 or $3 million in CapEx, so, the synergy is kind of a free cash flow negative thing.

Well it certainly and I think this was also in the last call, we're not trying to dance around the issue, this is, when you take, when you think you're starting with an EBITDA of 68 and you end up at 47, you are going to use some cash over the transition period.

Yeah.

Before we get back to the steady state. So it is going to use some cash, that is clear.

OK, thanks very much guys.

Thank you.

Thank you, your next ...

Go ahead.

I'm sorry, your next question is coming from Josephine Shea with Morgan Joseph.

Hi, thank you for taking my next question. I understand that on the continuing side of business you won some new business. There's higher volume. Is that correct and can you sort of expand where you've seen new sales and what's the outlook on maybe, perhaps new customers?

Well, it's been more on the POI, both on the POI side and consumer texturing. We've been, I guess I'd say, exiting some of that non-profitable business. So I think we're seeing more of it on the POI side. I can't really talk about specific customers, but in general the volumes are just steadily stayed constant, we really work in June. And the order book stayed fairly strong for the whole quarter.

Can you give review of the pricing both on info then outlook for the coming quarter?

Well there wasn't, pricing did have an impact on the total revenue from a pricing standpoint, but it was the smaller piece. Volume probably represented the lion's share of the increase in volumes with the total (inaudible) in pounds now.

About half of that actually was in Brazil. Brazil had a very large increase in volume in the month of September. That may have been a little bit due to some price increases that they had coming in on line during the month of October. So there could be some buying ahead going on there. And the balance of 4 million pounds was domestically in the U.S. So it was probably, even from a domestic side, the pounds probably contributed more to it than price because of our lag on some other pricing.

And going forward, what do you see in the price arena, in crude oil forces higher, do you have anything to say on that?

I think Brian mentioned earlier, we expect the trend to continue. And we can't forecast oil price any better than you can. We continue to (inaudible) as much as we can going forward as to where we think it's going. And we think 2005 is going to be similar to 2004 at this point. But we monitor virtually every day as to where things are headed so we can try to be ahead of the curve a little bit.

Lastly, do you expect working capital to be a source or a use of cash in the coming quarter?

I'm hopeful that it's a source of cash. It will depend on how fast we can terms changed. Hopefully at worst it will be a push and then we'll see a benefit in the following quarter. But there is definitely opportunity in both receivables and inventory to be a source of cash over the next six months. Let me use a six month time frame rather than the next 90 days. Sixty days, we'll have 60 days left in this quarter.

Thanks.

Thank you, your next question is coming from David Richards with Raymond James.

Just a couple quick follow ups. First of all, as regards the restructuring costs you talked about in the Kinston asset, is that just on severance? I know that we're talking about some line take down. I didn't know if there was some additional cost there. And I guess, really along the same lines, there was some talk in the U.K about a $12 million kind of CapEx number at Kinston this year. I didn't know how the line take downs would affect that number.

Yeah, well, first of all, I mentioned the severance number, there won't be any additional cost associated with taking the lines down, the material, there won't be any asset write offs for instance associated with the non-cash. And, just lost my train of thought. Your second ...

On the CapEx, just where that's going to be?

Right, we did mention in the 10-K that we expect it could possibly be up to $10 or $12 million. That's predicated on a couple strategic initiatives that we might take or not take. So what we've given you is I would say a number that's our highest possible CapEx.

We have yet to determine what total level we'll spend there. We'll be able to refine that probably by the time we talk to you next quarter and if we did incur that capital charge, it would be towards the end of the fiscal year.

OK, and then one just quick point on the cost to goods sold line and just understanding, as I look at cost to goods up at 11 and raw materials up 20, suggests that raw materials kind of are comprising a little over half of your cost of goods.

Is that an accurate statement or is there perhaps something else going on in terms of maybe a lag on actually seeing raw materials flow fully through the income statement?

Where are you looking at that?

I'm just basically taking the year-over-year comparison. And I don't know if that's the right way to think about it, but if raw materials were up roughly 20%, I'm just looking at what the change in cost of goods was just on an absolute basis and trying to net out some of the sales numbers. I don't know if I've got that right.

Well, I think that just trying to take the raw data makes it difficult because you can imagine there is more than two or three moving parts.

Of course.

In the business. So you have a combination of mix, you have a combination of, since this is a consolidated number, there are areas where we have actually some lower raw materials that we might have had last September because of some contracts entered into last year. So it is a mix of combination, mix of goods and mix of contractual terms that might have been negotiated some time in the past that are taking effect now.

OK, so I guess as I look at this, this is really what it comes down to is, have you seen the full impact of what's already happened. I know we can't forecast but what's already happened on the raw materials side, has that flown through the income statement largely or I just didn't know if there's anything in the inventory number that may surprise us in the next quarter or two.

I think from the way pricing has continued to rise on a fairly consistent basis, certainly what costs are absorbed to date, new increases are in the inventory numbers. And since we expect it to be relatively consistent, I would say there wouldn't be any big surprises looking at us on an inventory level.

OK.

And the raw material prices are expected to rise in October, November and December, but they rose in July, August and September.

Sure.

So I think we'll continue to see that consistent application.

All right, great, thanks.

Thank you, as a reminder ...

Operator, how many more questions do we have in queue?

We're actually showing no further questions.

OK, thank you. Then operator, if we don't have any further questions, I think we might want to wrap up the call. Brian and I both thank you for attending our conference call today. We hopefully supplied you with information that you've been looking for on a variety of topics this afternoon. And again, thanks for your time and patience and we'll talk to you in a few months in the next earnings call.

And if anybody has any further questions, feel free to call Bill.

All right, thank you and have a good day.

Thank you for your participation, this does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day.