Unifi Inc (UFI) 2005 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Unifi, Inc. third quarter earnings conference call. (OPERATOR INSTRUCTIONS) It is now my pleasure to turn the floor over to your host, Mr. Bill Lowe, chief operating officer and CFO of Unifi. Sir, the floor is yours.

Thank you, Matt, and good morning, everyone. This is Bill Lowe speaking. Joining me on the conference call today is Brian Parke, our chairman and CEO for Unifi, and Ron Smith, who has recently taken on the role of treasurer and head of investor relations for Unifi, reporting to me. For those of you who have not met Ron, he's a 10-year veteran of Unifi and has held several key financial and business building positions with the Company. I'm extremely pleased to have Ron in his new role, and I believe you will enjoy working with him as well. In the future, Ron will kick-off our quarterly conference calls here at Unifi and will be speaking with some of you on some follow-up questions.

Before we begin, I need to first advise you that certain statements 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 website at www.unifi.com. The presentation can be accessed by clicking the third quarter conference call link from the homepage. I hope that you'll have the presentation available, as it will make it much easier to track through the information discussed in the call. If you're following along from the presentation on the website, we will begin our comments on slide 3.

Net sales from continuing operations for the current March quarter were $208.3 million. Net sales from continuing operations for the current quarter increased $35.8 million, or 20.8 percent compared to net sales of $172.5 million for the prior year March quarter. As a reminder, net sales volume for the current quarter include sales from the INVISTA polyester manufacturing assets in Kinston, North Carolina, which were acquired in September 2004. Sales excluding Kinston were down approximately 2 percent from the prior year. This is driven by a 17 percent volume decline, driven by our efforts to exit certain commodity products in our polyester division, and a 15 percent pricing increase.

The pre-tax loss from continuing operations of 2.7 million that is reported for the current quarter includes 4.4 million in income generated from the Company's share of income from equity affiliates, primarily Parkdale. Approximately 50 percent of this income is a result of favorable year-end adjustments from Parkdale America, as they are a calendar year-end company and is therefore not part of what we would consider to be an ongoing run rate for future quarters.

The Company reported an operating loss of 2.6 million in the current quarter, a significant improvement over the 41.7 million operating loss incurred in the prior year March quarter, which did include certain charges of 38.7 million related to impairment charges. Backing out the impairment charge and the 10.4 million alliance payments recorded in the prior year March quarter, would mean a comparable operating result for the prior year March quarter would have been a loss of approximately 13.4 million.

SG&A expenses for the current quarter were 11.7 million, or 5.6 percent of sales. Although this compares favorably to SG&A expenses of 12.5 million, or 7.2 percent of sales from the prior year comparable quarter, it is an increase compared to the 4.8 percent reported in December. Included in the SG&A, however, for this quarter were expenses related to Sarbanes-Oxley compliance and the write-off of transactional expenses associated with the potential transaction with Koch Industries in Mexico. We have discontinued discussions regarding this transaction, so we are required to expense these costs that we accumulated during the process.

We are reporting a net after-tax loss from continuing operations of 1.8 million, or 4 cents per share for the current March quarter. Results from continuing operations for the current quarter are improvement over the net loss of 33.6 million, or 65 cents per share reported for the prior year March quarter. Included in our net after-tax loss for the quarter was a $1.3 million extraordinary gain. This gain primarily results from reducing the amount of severance related to Kinston from 10.6 to 7.8 million. So we will be paying out less cash over the next 12 months for this severance expense. In our last quarter, a portion of this negatively affected our operating profit as it was included in our inventory values, but accounting rules require that we report the changes to our opening balance sheet as extraordinary.

On slide 4 you will see results for the first nine months of fiscal 2005. Net sales from continuing operations for the first nine months of fiscal 2005 were $596.9 million, an increase of 94.4 million, or 18.8 percent compared to the net sales of $502.6 for the prior comparable period. Again, these results include the impact of Kinston from October 1 forward.

For the year-to-date, the Company reported a pre-tax loss for continuing operations of 12.5 million, which compares favorably to our pre-tax loss of 66.7 million for the prior year-to-date period. On an operating profit basis, the Company reported an operating loss of 1.9 million for the current year-to-date, compared to a net loss of 49.4 for the prior up-to-date. SG&A expenses for the first nine months of fiscal 2005 were 31.3 million, or 5.2 percent of sales compared to 36.7 million, or 7.3 percent of sales for the first nine months of fiscal 2004.

We continue to see the benefits of many of the consolidation and cost reduction efforts taken over the past year, such as those in Ireland and Kinston in our SG&A as we continue to focus on SG&A as an operational imperative.

A review of our balance sheet can be found on slide 5. We ended the March quarter with 58.2 million in cash on hand, which does include restricted cash of 2.7 million associated with the sale of equipment in Ireland. We set aside this restricted cash against the nonrefundable deposit received on the Ireland property, of which we put a hedge in place on the euro versus the dollar at the time of entering the transaction. Included in our unrestricted cash balance of 55.4 million is approximately 3.5 million from the sale of equipment in Ireland. Unifi remains in an excellent cash position even after paying our 8.1 million in bond interest in February.

Long-term debt changed slightly, driven by changes in the export credit position in our Brazilian operation. As you know, this amount fluctuates each quarter, as you can see reflected on the schedule.

The Company ended the March quarter with net working capital of 208 million. This increase is driven primary by the accounts payable balance as inventories and receivables both decreased. After building up inventories in the December quarter associated with the Kinston acquisition and in Brazil, as we discussed on our last quarterly call with you, the Company reduced inventories to 142.8 million as of the end of the March quarter, or a decrease of 10.5 million over the levels at the end of the December quarter. Some of this reduction, however, did have a negative impact on our earnings, as we sold off aged inventories at a discount. We expect inventories to continue to decrease as we further integrate the Kinston facility, which will result in the generation of additional cash. Additionally, we expect to reduce aged inventories further during the April to June quarter to position us to start the next fiscal year in a healthier position by building cash during the quarter. This will, however, have a negative impact on our results in the quarter, but provide greater flexibility to potentially reposition our balance sheet in a future period.

Turning to slide 6. EBITDA for the quarter was approximately 12.3 million, which is an increase of approximately 1.6 million compared to the prior year March quarter. We previously forecasted 2005 EBITDA of approximately 47 million. Based on our need to adjust inventory over the next couple of months, we are revising our forecast to be more in the range of 45 million.

Slide 7 provides a reconciliation of our EBITDA calculation, which I will not review at this time. We continue to make this available to you, so that you can determine a basis upon which you might calculate EBITDA differently than the Company.

This concludes my remarks on the financial statements. I will now turn the call over to Brian for additional updates no our business. Brian.

Okay, thanks, Bill, and good morning, everybody. First of all, let me update you on the progress with our China joint venture. The current status is that our two management team has now agreed on the terms of the contract for the joint venture. This proposed contract is currently being reviewed by the Sinopec Corporation, of which Yizheng Chemical Fiber Company is a subsidiary. We anticipate approvals from the Sinopec board of directors in mid to late May, at which time Sinopec will provide notice to their shareholders of the transaction. Subsequent to this notice, the business plan and the joint venture agreement will be submitted for regulatory approval, and at present, we're expecting all necessary approvals to enable us to begin operations between middle and late July.

With the anticipation of our joint venture beginning operations in late July, we have appointed Sam Smith as general manager of the joint venture, which will be known as [inaudible], Unifi Fiber Industry Company, Ltd. Sam is a 15-year veteran of Unifi and most recently served as the Company's vice president of domestic operations reporting to Bill Lowe. In his new role as the general manager of the joint venture, Sam will report directly to me. As a consequence, Bill has reorganized his direct reports in both operations and in finance, and Ron Smith's appointment as far as these changes. We have also begun identifying individuals for management appointees within the joint venture, which include director of manufacturing, director of affairs and marketing, and director of internal audit.

Perhaps the most exciting thing, we have begun discussions with potential customers that are now not currently doing business with the joint venture. Needless to say, we're extremely optimistic about reaching the conclusion of our negotiations and look forward to beginning operations sometime in July.

Now, I would like to take a couple of moments to comment on the impact of quota removals on our business. As most of you realize, removal of the remaining textile quotas on January 1, 2005, and the subsequent call for safeguard provisions has caused uncertainty in our global markets. Additionally, recent media coverage of excessive growth rates in specific categories of Chinese imports has led many to assume that all US manufacturing is doomed in a [inaudible]. For our part, we are well aware of the growth of China and, as noted earlier, a key component of our strategy is to participate in this growth through our Chinese joint venture. At the same time, we're still very optimistic about the prospects of the regional market here in the US.

On the macro level, quota removal has not had a significant impact on the amount of consumption supplied by imports. Individual importing countries have taken share from one another, but a total impact of imports on the market is similar to that of prior years. For instance, year-to-date textile of apparel imports increased 13 percent in 2005 year-over-year, as compared to an 11 percent increase in 2004, for example. Similarly, after quota removal, apparel imports from China have increased dramatically in certain categories, such as knit shirts, trousers, underwear, and dresses. However, when you look at greater China's market share of total US apparel consumption, it is only projected to increase from its current 19 percent market share to 24 percent by the end of this year, or by 2006. China's volume increase in 2005 will come through capturing the US market growth, which is 3 to 4 percent, plus taking share from other importers primarily in Asia. The impact on the Americas' regional supply is expected to be minimal, where volume in 2005 is projected to decline by around 2 percent.

Accordingly, we still believe that the US-based production in conjunction with US and regional trading partners is sustainable and a viable supply chain into the foreseeable future. Based on this expectation that the region will continue to account for more than one-third of all US apparel consumption, we continue to focus on growth initiatives here at home as well. These initiatives [inaudible] continued focus on growth with trading partners in the CBI and Andean regions, investment in premier value-added products, and downstream marketing efforts to maintain a relative and competitive product advantages. This is together with a renewal of our focus on other fiber replacement business, such as replacement of acrylic and acetate, where existing operators have exited the market.

We anticipated what we were seeing in the global marketplace when we [inaudible] strategies for China and Asia more than two years ago. And what we are seeing has better expectations. Because of this, we are confident that we have enacted the right strategies to defend our business in the Americas while participating in the domestic growth that has taken place in China and Asia.

Before we move on to questions, I turn the call over to Ron Smith, to provide a brief update on more initiatives in Kinston. Ron has been intimately involved in the transition of the Kinston facility and will continue to support the transition until it's complete. Ron, over to you.

Thanks, Brian. Phase 3 of the integration at Kinston went very well, if not ahead of schedule. As a part of Phase 3, we shut down an additional production line at Kinston, which was completed by March 7. We expect to be down to approximately 275 employees in Kinston by the end of May, which is a reduction of over 400 [inaudible]. We will also continue to focus on the process of rationalizing products made between this facility and our Yadkinville facility, and continue to review and revise the list of unprofitable products and related pricing. We remain on target to reach the steady state that enhances our overall domestic potential during the second quarter of next fiscal year.

This concludes our update for the March quarter. We would like to now open the floor for questions. Matt will take questions.

Thank you. (OPERATOR INSTRUCTIONS) Our first question is coming from Brian Hunt with Wachovia.

Thank you, and a very thorough conference call. Could you explain your bullishness, Bill, and your comments in your press release. I mean, you look at next year in your press release and you say -- I'm not going to quote you exactly, but, really, my question is, do you still think you can get to that low $70 million EBITDA number for fiscal 2006?

We don't have a reason to -- at this point, as we said on the last call -- update that today. We're working today to develop next fiscal year's budget. We will provide -- we'll update the investment community on the next phone call, which will be the very first month of our fiscal year as to whether that number does change. We're in the process of doing that now. But sitting here today, we don't have a reason to update that either up or down at this point.

Okay. And then could you give us an idea of what your aged inventory is, your inventory number? Is it a $10 million figure, 20?

Well, when we started our process, when we actively engaged this, and I know I've mentioned this in our last call -- we had about -- in December we had somewhere around $11 million of aged inventory. It's down to around 5 million today. The issue isn't necessarily just what that amount is. One of the problems we've had in addition to having that balance was, we continued to feed the pipeline. In other words, as we sold off smaller amounts throughout the course of the entire fiscal year, we had inventory that continued to run through the pipeline that kept feeding that basket. So we actually have two, I guess, projects underway. One is to get rid of that and get it down as close to zero as possible by the end of the fiscal year. And the second is to fix the pipeline issue, so that we continually don't feed that and have to continue selling off aged inventory. Both of those are in process, and the way we're doing that is that we've -- I think everyone in the past has talked about, they call it contract orders or some other such term -- and it's not really contract orders, as much as they're specific orders, or made-to-order items for a particular customer that we can only sell to that customer once produced. And we are changing our policy with those customers to move toward -- if it's a specific item that's made specific for them, that there will be a specific point in time that they need to take what they order. And that will help us fix the pipeline. So it's really twofold that we have to do.

It's really driven by a lot of -- the move to a lot of different SKUs and moving more to specialty. And so as we move more to specialty, we have more of that, and we'll make sure that we don't fill the pipeline up with a few pounds -- a few pounds with each customer tends to add up to a big number, and so we're trying to fix the pipeline as well. So we'll get that 5 million out, along with some inventory that's sitting in the 90-day to 180 today, to avoid having it sitting in that basket as we move into the next fiscal year.

A couple other questions. On the raw material front, it looks like oil has kind of stalled out here in the mid-50 range. Is there continuing pressures on raw materials prices going higher, or do you feel like we've seen the most of it being passed through for this cycle.

Well, let me comment first on the impact of oil. I think we mentioned in the past, the primary driver of our raw material price is more of pure economics of supply and demand versus the actual true relationship correlation to oil price. We're not expecting to see any price increases over the next month or two in raw material. There seems to be a lessening of demand in Asia, which has been one of the primary drivers of the increase. So with that lessening demand in Asia, we're looking for a flat to possibly a decrease -- actually, a decrease in raw material, and we'll monitor that as we go forward to see actually what it has moved, but I guess to answer specifically, we're not looking for price increases in the raw material at this point.

And I heard recently one of your competitors tried to pass through a price increase. I think it was during this current month and it failed. Is that a result of what the raw material environment looks like?

I can't speak to what that competitor did. I do know that there was one announced that was pulled back. I don't think it failed; I think whatever they did, they pulled it back and I don't have that -- I can't speak to what actions they took.

Okay. Do you feel like we've seen the bottom on the volume declines? Have you all rationalized to the point where you feel like you've got a product mix that it's attractive?

I think we've said in the past that we expect -- Brian actually mentioned this -- we expect the market to still decline, both in nylon and in polyester to have a slight decline this year, and we have to continue to adjust to that. So, no, I don't think we hit bottom, but I think it's flattened out, but they expect to still see some decline in the marketplace.

And then with regards to your product mix, with volumes down 17 percent, have you shaved off all the commodity product that you wanted to get out of?

Well, we look to each of these product lines and see whether or not it's at least covering its costs. I mean, commodities do have the benefit of absorbing some of that fixed cost in the facility. So I'd say we have done that. Up to this point, it doesn't mean there is potential for [inaudible] product lines that's okay today to come under pressure in the future that we'll have to address. But that's why I say we're monitoring it all the time, monthly, weekly by product line, to see where they fall.

Okay, last two questions and I'll get back in the queue. First, on Ireland . When do you anticipate receiving all the proceeds from those asset sales, and what does that total amount look like? And then, two, do you believe based on the joint venture contract that you have hashed out with Sinopec that those proceeds will cover the funding of that joint venture?

Okay. Let me take that in order of your questions. As we -- I think in our press release that we put out specifically on Ireland, on the land property sale -- let me say it that way -- which was a 20 million, slightly more than 20 million euro amount, as I mentioned on the call here, we have received a nonrefundable deposit up front that's already in the bank. In US. dollar terms it's about 2.7 million, or 2 million euro or so. The closing is expected to occur sometime in late June, at which time we will receive an additional 16 million euro, with a final payment of 2 million, 70,000 euro, I believe, in the September timeframe. And that would conclude the receipts from the property sale there. On the equipment side, it will flow monthly -- as the equipment is being exited from the facility, as the buyer is taking the equipment out of the facility, payments are being made to us at that occurs. That's expected to occur between now through at least mid-summer timeframe. And that's an additional 6 to 7 million there in dollar terms.

All right.

And in answer to your last question, the answer is yes, we expect -- as we said on the last call, we expect to have sufficient funds in Ireland, possibly a slight excess, to cover our China investment.

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

Thank you. Your next question is coming from Dennis Rosenberg with DSR.

Good morning.

Hi, Dennis.

Could you give us some indication as to your exposure to some of the suppliers to the automotive industry that are having some financial difficulties and what you're doing in terms of receivables terms to them. You don't have to mention the names of the companies.

Right. Well, let me first say that our larger customers who are involved in the automotive side, as we speak today are current with their receivables. They are on 30-day terms and are current with us today. We monitor all of our receivables closely including especially our larger customers, especially ones who may have had some newsprint that may have been negative in the past. Our goal is to minimize our risk by making sure they are current with us. So we've not, in any of those customers, we've not set up reserves for those because they're current, as they are and have been at this point. So we're keeping our risk minimized by making sure they're current with us.

Okay. And what's your goal for year-end, fiscal year-end inventory?

It's possible that we could be -- we're working to try to get inventory to drop another $8 to $10 million between now and the end of June. Part of that is Kinston as well. As you recall, as we shut down the two production lines, we built some inventory to allow us to transition the product to customers and also to transition products between Yadkinville and Kinston. So there is inventory at Kinston. We're actually selling more out of Kinston than we're producing today, because we're selling off that inventory between now and -- most of it will be gone between now and June. There could be a little bit that rolls over into July.

That would get your turns up to close to six times in the fourth quarter. Historically, they've been as high as seven plus [inaudible] China; is that a possibility going forward?

Well, we are -- we're not going to stop our work on trying to keep -- get our inventories lower as we move into next fiscal year. Since we're -- and I think fixing that pipeline that I talked about will drive them a little bit lower next year. So we're going to continue to work on that, Dennis.

Okay, great. Thanks.

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

Hi, good morning.

Hi, Josephine.

Sometimes you provide us a more breakdown of the unit volumes from the polyester and nylon side, and possibly by geography. Could you do that?

Well, let me do it just with the two main groups rather than geography. The nylon, when you look at our nylon group, the change there is about a one point -- just slightly lower than 1 percent related to volume increase, and about 8 percent in pricing. So nylon quarter-over-quarter, March quarter of this year versus last quarter, is up a bit, both a little bit of volume and a little bit of pricing. The polyester division, where we've exited those products, overall has about a 6 percent decline, but that's driven by volume decline of about 20 percent with price increase of 14. So I gave you consolidated numbers on our formal comments. Those are the two main divisions. And that's without -- I've extracted from those numbers, Josephine, the impact of sales of POY from Yadkinville and Kinston, which weren't in our numbers previously.

Great. On the geography side, has there been any change since last quarter?

Not of remaining --

Brazil?

Looking at Brazil? Brazil lines are down a little bit. The market has softened a little bit in Brazil, so volumes are a little bit off in Brazil this past quarter and we're working to adjust our production levels to where we see the market at the moment, along with our resale. Brazil did also reduce their inventory and, as you recall on our last phone call, we said that Brazil's inventories were up along with their receivables, and they're down about a million dollars in pounds -- about a million pounds down in Brazil, so we're working to continue to reduce that inventory there is well, resulting from that spike that we saw last December.

Josephine Shea. Great. I've seen newspaper articles about some of your competitors shutting down mills. Is it a fair statement that the number of your competitors has been declining and that perhaps total overall domestic production supply has been declining as well? Is that a fair statement?

Well, you say competitors. If you're referring to mills, I mean, we supply product to mills, and if you're looking -- there was a recent announcement in the newspaper regarding Gilford Mills. That really doesn't -- from Unifi's production standpoint, it really doesn't have an impact. There may be opportunity, actually, in it for us. I can't quantify with that today, but we're always looking for opportunities when things like that occur.

We do have an -- there is an impact in two other areas. There was one of our customers, Ge-Ray did file for bankruptcy. That has had a negative impact on our volumes in nylon. We're expecting to see some of that come back and some of their competitors pick up that business. We don't expect to see that come back until late May, early June. Also, Springs Industries I think announced a shutdown of a couple of their facilities as well, and that will be an impact to us, because they're actually going to be importing products. They're moving from domestic production to importing product there. WestPoint Stevens also had an impact to us as well going forward.

But you can see overall, we've also picked up some other business because of our nylon. At least with this quarter volumes were holding. We're seeing a slowdown a bit in nylon because of what I've just described on a couple of their customers, and a couple of our customers in nylon are currently adjusting their inventories, which causes us to slow our production down a bit as well.

Okay. Could you say something more about the strategy that you laid out? You mentioned the [inaudible] trading partners in a premium business. Can you expand a little bit on that?

I'll let Brian take that. You're talking about our premium value products and our trading partners in the Caribbean based in the Andean region?

Correct.

Yes, Josephine, I think the -- there is a perception out there because of the media reports about cause, for example, that the industry in the US is over. But, in fact, it is quite the opposite. We also have a hard time explaining not only to people like yourselves, but even to our employees about this industry, because it all sounds very negative. But the reality is that nearly 40 percent of the apparel, for example, that's consumed or sold at retail in the US is still made out of the US from US fabric or yarn and produced either in Mexico or [inaudible] in this region for this marketplace. So there is a 35, 40 percent market share that -- in apparel only -- that we're focused on. And the synthetic area, where we play, is a very strong area. So we have found that our strategy of providing our customers with innovation in terms of performance characteristics to fabrics, and so on, is paying off and we continue to gain traction in domestic sales as a result of that by focusing on those added value products. Today most of the customers we deal with are buying into that whole concept of providing their customers, the retailers, with more innovation, better fashion design, just in time supply replenishment, etc. So our activities beyond manufacturing, which include pure product development, downstream sales, where we've got people in the marketplace leading with brands, retailers, sourcing companies, etc., pays off in the sense that we're showing them finished goods that contain value that the retailers and the consumers eventually value. So that's where we're heavily focused.

Bill just mentioned WestPoint and Ge-Ray and Springs Industries. These are industries that were essentially producing commodity product based on [inaudible], supplying into the bottom end, at least [inaudible] price points at retail, and they have found that they have been overtaken by imports of finished goods. We anticipated that a year, two months ago -- two years ago, built into our future, the fact that we would not have that business in two or three years' time, and sure enough, this has happened. Some of them lasted longer than we expected. Springs, for example, I think companies like that, WestPoint, are now importing 40, 50 percent of their finished goods, or bringing them in as fabric and finishing and packaging them in the US. So we've taken down capacity purposely ahead of the game to meet that supply. And so when Springs, for example, decided to shut down, we already had that capacity taken out. So we built that in and we're basically trying to stay ahead of the game and identify those industries that will be here in a year's time, two years' time, etc., and plan accordingly and consolidate. That's what we've done with Kinston in taking out, if you remember -- the Kinston operation had a capacity of close to 400,000 pounds -- 400,000,000 pounds. We've taken out 150,000,000 of pure capacity from that operation, which means that we've had to take out some capacity ourselves in [inaudible] in order to maintain similar levels of merchant sales of the material we make in Kinston.

So, I suppose the reason that we're bullish is that we believe there is still a very strong fabric and garment industry in this region, which is supplying the retailers, and the retailers value that supply. And therefore we are making sure that we take full advantage of that opportunity.

Thank you. I'll get back in queue.

Okay.

Thank you. Your next question is coming from John Smith with CIT Group.

Good morning, Bill and Brian, Ron. How are you this morning? Brian, if you would, please, elaborate just a bit more on your China project. It's going to be a joint venture. You expect to have it in place very, very quickly, but could you elaborate just a little bit on exactly how that's going to work? Is the plant already there, things of that sort.

Yes. As you recall, about a year ago we had an aborted attempt for purchase of an operation in China, and subsequently decided to pursue a Greenfield opportunity, and during the course of that investigation we were approached by a number of players in China who were interested in doing something with us, because the Unifi name carries a lot of weight in terms of reputation for quality and manufacturing excellence, etc., particularly in the production of non-commodity yarn. So, one particular -- one of the companies that employed us was Yizheng Chemical and Fiber Group, which is part of the Sinopec Group, which is obviously -- it's like the Exxon of China. They're a large chemical operation which includes raw materials for polyester, PTA and so on. They have -- they invested in a particular plant on their complex in Echeng, which was designed to produce added value or non-commodity polyester products as we do in the US. That plant was back in the late '90s and contains about 100 textile machines with a turnover currently in the order of 120 million US dollars. They weren't making money or making enough return on that business, and they were looking for partners to come in and help them take it into a different environment. What I mean by that is out of the state-owned enterprise environment and more into the day-to-day private market. So has worked out extremely well. This was exactly the footprint that we needed, and it was up and running and existing, with an existing customer base.

The opportunity is that -- there was a lot of opportunity to take cost out, number one, and the other opportunity is to increase the sales value and spread as a great opportunity for growth. It's also part of the site that has its own power plant, which is a huge issue in China. So essentially what we've got is a running -- up and running, operating plant producing the type of products that we have identified as being the market that we can make a profit in in China, as opposed to the majority of the market, which is commodity.

Our strategy is to focus on those customers in China who are supplying customers who are exporting into either the U.S. market, European or Japanese market, for quality and performance is very important, as well as looking at tying into a market that is growing in China, [inaudible] is growing that are looking for better quality goods.

So the state we are at right now is that we've -- all the hard work is done. We've -- both managements have agreed on terms. We've agreed on how to run the operation, what has to be done, who will do what, and we're now going through the agonizing process of approvals, which are incredible in China. But that's the way it is. We're trying to fast-track that with the help of our partner, who -- Sinopec, as you can imagine, is a huge company and is -- can speak for the government or like the government. So we're doing everything we possibly can, and they are, to try and fast track this through. Despite the fact that we're talking to these people for just over a year, similar companies have spent -- we've heard stories of 2-1/2 to 3 years to get the same thing done. So, if we had known that at the beginning, we probably wouldn't have started, but we've certainly come a long way very quickly and, quite frankly, nothing's over until it's over. You never know and you can't count your chickens on this one, like anything in China or any deal for that matter. But it's coming to a close and we expect in either early to mid-July that something in that timeframe we're targeting for. I hope that answers your question.

Yes, it does, Brian. One slight follow up. Do you expect any of that yarn to be exported into the United States, or do you expect most of it if not all of it will be, say, domestically in the Orient?

Great question. I think that's one that a lot of people ask. This enterprise for us is based on Chinese growth, and it's focused on the Chinese market particularly. Some of it may go into other Asian countries, but the majority of it is for domestic consumption. And one of the reasons is that that's where the market is. I mean, 83 percent of all production of polyester today is in Asia, and 45 percent of that is in China. So that's where the market is, that's where the demand is, and we don't see -- the cost, for example, of exporting from China, or from Asia, for that matter, is quite -- is high. Today, for example, the cost is up to $4,000 for the tailor to ship from the U.S. from China. And then when it gets to the port here, there's a duty of 6 or 7 percent. So by the time you add the shipping and the duty, the price of the yarn coming in here is similar to what we're charging ourselves in this market. So that's why we see very little penetration of yarn imports into this marketplace because of that. So if you look at our competitive position as yarn producers and add to that the cost of delivery, then it's not an economic proposition to even think about it.

Right, right. Thank you very much. That answers the question.

Okay.

Thank you. Your next question is coming from Chris Vachario with ISI Capital.

Good morning.

Good morning, Chris.

Just a couple of questions. You had mentioned something about replacement of acrylic and acetate, and I was just wondering, is that something that could be material to the Company or significant, exactly. If you could just describe that a little more as to what opportunity that is for you.

Well, we've had two [inaudible] in the last few months, one was an acrylic operation and the other was an acetate operation. In case of the acetate, the company was Sudanese, and the acrylic was Falusia (ph), which is part of the Monsanto Group, and those yarns, they're synthetic fibers and they were trying different end uses. Acetate goes a lot into apparel, furnishings and linings, etc., for apparel, and we have been pursuing that business, replacement business for sometime, the last couple of years, trying to convince customers that there is [inaudible] fibers for a variety of reasons. We had made some progress, but the employers have brought many theories to us and we're already transferring some of our business -- some significant business into the home furnishing area, for example, but with replaced acrylic. And we do the same thing with acetate. It's early days yet, but there is an opportunity and we're not going to quantify it right now, because -- for several reasons. But I think by the end of this year we would have significant -- well, significant, I think, business there.

Okay.

There is further opportunity in a restructuring market.

At the end of our calendar year, not our fiscal year.

Okay. Also, I think you mentioned 3.5 million of the cash, 55 million in cash -- of unrestricted cash came from sales of assets in Ireland, but could you just break down a little more for me the total unrestricted cash both -- how much is in the US, how much is in Ireland, how much is in Brazil, and then how much of that total is earmarked for China already.

In the US, I think there is -- in the US it's about 22 million in the US. I believe in Brazil there is about 5 million. The balance sits in Europe either in Ireland itself, or in our Dutch holding company, where we're holding some of this excess cash that Ireland will not need for liquidation. So of the funds that sit in Europe, some of those funds, of course, we paid to continue -- as we liquidate the company, before we receive the proceeds from the land, etc., will be used to pay off our final payables, to pay off final expenses related to closure, such as pension costs for employees and that type of thing. The only piece that's restricted -- and the only reason we call it restricted it is, and that's 2.7 million -- it relates strictly to the -- it corresponds exactly to the amounts of the unfunded -- the nonrefundable deposit we received on the land, because we did enter into a hedge contract . As I mentioned, we wanted to fix the amount of US dollars that were received, not knowing which way the dollar would move. We hedged it at somewhere around 1.31 and change, so that we could assure ourselves of the dollars we are going to receive on that 20 million euro. So that's the only reason we set it aside that way.

Okay. So of the total -- what I'm trying to sort of is back out what you have in total and then how much of that is earmarked for China --

We're earmarking 30 million for China. So anything in addition over 30 million that we end up with in Ireland, ultimately we will probably repatriate it to the US and it will become domestic cash subsequent to that transaction.

Okay. In addition to what you have in the US now.

In addition to what I have today. Any access in Ireland would be repatriate to the US, to be put in the domestic bank account.

Okay. And so you are not anticipating have to dip into your revolver over the next -- the rest of this calendar year?

That's correct.

Okay. Also, on SG&A, could you just quantify how much of the transactional expense write-offs were included in SG&A for the quarter?

Somewhere around -- between $100,000, $150,000 of transactional costs were in there. There's another 400,000 or so that's related to -- 4 to 450, that's related to Sarbanes-Oxley. So a total somewhere around 7 to 750, with additional SG&A related to those two particular items.

Okay. And you may have explained this already, that the remainder of the 1.7 million increase from the prior quarter, how would you account for that?

The remaining 1.7?

Yes, I had about 10 in the second quarter and 11.7 in the third quarter.

We had 11.7 -- we have some additional accruals for some expense. We're also -- we've added -- one of the things that we're doing both in operations and in some of the overhead departments where we need to -- we are focused on the future, long-term future. And one of the things that we've done over time is, as you know, we've reduced a lot of staff. We are filling a couple of positions in the technical side, also in some other key areas and some areas of reorganization of Unifi to handle our Sarbanes-Oxley compliance. And so that has raised our SG&A. We're going to continue to actually add a few additional technical people, about eight people in the technical managerial area in operations over the course of the next six months or so. We expect to try to offset that as we go forward by other reductions. So I do expect to see SG&A drop back down into that -- closer to that 5 percent range that we were saying that we were going to try to maintain, the 4.95 percent range. But we do have a little spike at the moment resulting from that.

Do you expect to get it back down to that range?

I do expect to get it back down to the 5 percent range.

Okay. And my last question, which I think you explained most of this already. Gross profit, again, quarter-over-quarter, was down 9.7551 (ph). I guess the major factor in that was just selling off the old inventory?

Yes.

Was there anything else that was a material factor in that?

That was probably the -- that was probably one of the biggest -- that was the material factor as far as affecting operating profit this quarter. And we will have an impact again this quarter, as I said, and that's one of the reasons we're revising the forecast. It's imperative that we -- it's imperative that we fix the inventory issue that we've had for a while. You all on the phone know as you look at inventory levels, they've been quite high compared to our drop in sales over time. And so we'd like to go move into the next fiscal year being healthier on the balance sheet, both in terms of building cash, more flexible, and change in the working capital balances, both in AR and in inventory. And then fixing, as I said, the chain, the pipeline, so we don't continue to create the problems we've had in the past.

Okay. Thank you very much.

You're welcome.

Thank you. Your next question is coming from John Fairfax (ph) with Stonehill Capital.

Hi, how are you? Two questions. One regarding Parkdale and one regarding CapEx. Just on Parkdale, can you give us a little bit of an update as to how the business is doing and the prospect for distributions?

The business actually is returning. We had talked on the last couple of calls that we expected them to return to a more normal profit level, which they are doing even when you exclude the year-end adjustments that I talked about in my formal remarks. We typically said on this call that our expectations are that we somewhere around a 1-1/2 or slightly more positive contribution to our income statement from them. That's about what I would typically look to see over the next several quarters.

As far as distribution goes, I would expect to see a little bit less this year, only because they have made some acquisitions to change their product mix, and I think I might have mentioned this on one of the prior calls as well, to move into some areas, like some of the cotton T's, that they are able to very competitive on compared to imports. So they're doing very well in their cotton T, T-shirt area, as some other areas have declined. So they've managed to supplement and change their product mix, as we've been doing, to get back more in line with what their past performance has been. But because of using some of the cash to buy those assets, along with they also paid off some debt, one of the notes that they had. So they reduced some debt, which is positive. I would expect to see less of a distribution this year than we had last year. Last year's number for the calendar year between January and December was somewhere around 10 million. I believe it will be -- it could be 5 to 6, in that kind of range. But, again, it's subject to what their needs are, what their capital needs are, and then when the timing would be, it's all predicated on all those things.

Okay. Thank you. And then on capital expenditure, I know you've talked about it in the past, but I guess the Company seems like it's at a $10 to $12 million a year CapEx rate and for the most part has been at that rate for the last couple of years. Obviously, as you look further back in the Company's history, CapEx was a lot higher and even now, depreciation is around $50 million a year. So I guess my question is, what's your kind of CapEx forecast for the next couple of years, and is a $10 to $12 million sustainable? I guess from an outside perspective it seems a little low.

Our operating assumption, at least for the next fiscal year, is somewhere in the $15 million range, slightly more than 15. I can't speak to the following fiscal year in '07 at this point, but our operating assumption at this point is that it will increase to the range of around 15 or so.

Do you have a sense of -- you know, if you had to guess the next five years, average CapEx, what range? Or any other major expenditures planned?

Well, our equipment is running very well. Most of our equipment, for instance, in texturising is not that old. As you know, you look back on our history, as you said, you see a very large capital expenditure back in the late 90s. That was primarily our large texturising facility in polyester. That equipment is currently -- it's current technology. I mean, there is really nothing out there that we're looking to change out that would make sense economically today. And we actually -- as you know, we actually have excess equipment that is idle that we're looking to sell. And if we need additional equipment, we have the heaters running on many of that equipment, so we can, if necessary -- if the product is right to be on that equipment, use that equipment for additional production, if we chose to.

Okay. Thank you very much. I appreciate it.

Thank you.

Our next question is coming from John Discher from Pinnacle.

Good morning, gentleman. Bill, the alliance payment that you mentioned, 10.4 million, which I guess was part of the prior year's quarter needs to be adjusted for. What were the alliance payments year-to-date for both this year and last year that we need to adjust for?

Well, this year we only received an alliance payment in the first quarter of our fiscal year, which was the period July through September, and it was somewhere around 7 million in that first quarter. Typically, to use a gauge, it's averaged in the past, it averaged about 7, 7 to 8. There were some quarters, like this quarter I referred to here, where last year it was 10 -- plus 10 million. We typically [inaudible] 32 to 33 million dollars. In this last quarter it happened to be the 10.3 range.

So that works out to about 8 million per quarter or so.

On average, yes. That's what it averaged in the past. The only payment we've received this fiscal year was in that first quarter, and it was about 7.

But 8 times 3 is 24; that's what you would have received year-to-date last year, roughly.

If we had received it each quarter, we would have received 24; however, we've only received 7.

That was for this year.

For this year. Last year?

Last year.

Fiscal '04?

Yes, right. In other words -- so we can do the comparison -- 10.4 in Q3, what would have been in Q2 and Q1 last year?

I'd have to -- I apologize. I'd have to look back and see, but it's going to be in the range of 32 to 36 million for the full fiscal year.

Okay, all right. Okay, good. And on the Chinese JV, how will that plant, that investment be governed? Will there be a board of directors, a board of trustees?

John, Brian here. The -- it's structured obviously as a joint venture entity. It will have a board of six people, three on the Sinopec side and three on the Unifi side. It's a 50/50 joint venture. We have the -- we have the -- we appoint the general manager, who runs the business, and we appoint the marketing and salesperson, and also the manufacturing and technical person, together with the fourth position we have is the internal auditor. For their part they've got the assistant general manager, they've got a CFO, we've got purchasing and HR, and that essentially runs the joint venture. The board will decide strategy, policy, and the general manager and management will -- working for the board will execute that policy, budget, etc.

Who will the three Unifi representatives be on that Board?

In Unifi's case it will be Sam Smith, who will be the general manager, myself, and another guy, another chap called David Li (ph), who is Taiwanese consultant for Unifi over the last 18 months. He was deeply involved in this transaction and brings a huge value to the relationship in terms of language and culture, so on and so forth. On their part, their board of directors will include the chairman of YCFC, whom we've done the deal with. His name is Mr. Xu, X-u. He's the chairman of YCFC. Also, the other two would be Professor Yang, who will be the assistant general manager, and then his CFO.

Okay. Mr. Li is not a Unifi employee?

One of the -- to Brian's point, besides all the things he mentioned -- one of the things he does bring, first of all, very close ties with Unifi and the command of Mandarin Chinese, which we need to have a close confidant on the board that is fluent and that we know when we're receiving translations back and forth that they're accurate. And that's a huge plus, in addition to his other abilities that Brian already talked about. And although I personally am not going to be board member, I will be present at most board meetings, from a Unifi perspective as well, to assist Brian and the team.

And all of those key people will be onsite at the plant; is that correct?

Yes.

Okay.

Yes. Sam will be moving with his family to China. He, himself, will probably be full-time in China beginning the middle of this month with his family joining him in August.

Okay. And David will be there as well.

David will come in for just -- I mean, I don't want to go into too much detail because I haven't discussed it with him in terms of making it public, but he's a personal friend of the Company, of myself and the Company for the last 20 years. We've done business with him, he's in the industry, he understands, he sends to most of the players in the industry, both in Taiwan and China, and he works -- he's a representative for an American company in Taiwan. It's a family business that he runs. As Bill said, he's someone that's absolutely key for us in a culture like that. We also already hired an ex-employee of Sinopec, who is a translator. And most of the people -- the younger people in this company have English but don't speak it. They certainly read it and understand it very well, so this is one of the big issues we tried to cover is to make sure that we have a strong customer relationship with the people and understand the culture and understand what's going on.

So all the key slots are filled at this point.

Yes.

Okay. And 50/50, you share income 50/50, you share cash flow 50/50, you share the asset base 50/50?

Yes. And we will be, from an accounting -- from a reporting standpoint, since it is 50/50, we will be reporting it as an equity affiliate versus a consolidated subsidiary.

All right. So if at some point this thing is liquidated down the line, you'll split the proceeds 50/50; is that right?

That's correct.

Okay. Everything's 50/50. All right. Is there a disclosure that's going to be coming in terms of an AK filing, or anything like that, once the deal is ink?

Yes, in that time frame that Brian mentioned, the Sinopec board, yes, we will have to do that. Yes.

Right. Okay. Thank you.

Operator, we have time for one more question. We're actually over time at the moment, but we'll take one more question before we close.

Thank you. Your final question is a follow-up coming from Dennis Rosenberg with DSR.

Hi, again. Could you give us a sense as to the difference in margins in evaluated product versus a commodity product, and how quickly you can get to those types of margins in China?

Well, one thing we're reluctant to do, for competitive reasons, is to talk about specific margins. But you know basically that commodities are -- from a commodity standpoint, are running anywhere from -- we say 0 to 5, but many times it's 0 to 2. It's very, very small. And, of course, the further up in the chain of specialty you go, the higher the margins become, because they're more technical, they take more timeframe to develop them, etc. So you're, of course, paid for innovation and technology. But I'm not willing to disclose specific margins on product for competitive purposes.

Could you just give us a range without talking specific product?

You could possibly -- you know, you're talking in a range if you go from 0 in commodities up to the top end of the specialty, the premium value added up to maybe 30 percent.

Okay, great. Thank you.

Operator, that will conclude our call. So, again, I want to thank everyone for participating in our conference call today and we'll look forward to speaking with you again next quarter. Thank you.

Yes, thank you.

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