Unifi Inc (UFI) 2005 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Unifi, Inc. quarter earnings conference call. [OPERATOR INSTRUCTIONS] It is now my pleasure to introduce Mr. Ron Smith, Treasurer and Head of Investor Relations. Sir, you may begin.

Thanks, Allison, and good morning, everyone. Joining me today is Brian Parke, our Chairman and CEO, and Bill Lowe, the Chief Operating Officer and CFO.

Before we begin, I need to first advise you that certain statements included herein may be forward-looking within the meaning of federal securities law. Management cautions that these statements are based on management's current expectations, estimates, and are projections about the markets in which we operate. 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 those various factors.

During this is call, we'll be referencing presentation materials that can be found on our website, www.unifi.com. The presentation can be accessed by clicking on the fourth quarter conference call link from our home page. I hope that you have the presentation available, as it will make it much easier to track through the information discussed in this call. At this time, I'll turn the call over to Bill Lowe to begin our formal remarks on the quarter and full-year financial results.

Thanks, Ron, and good morning, everyone. I'll comment first on our fourth quarter performance, and then turn the results over to the results of our 2005 fiscal year. For you who are following along the presentation on the website, we'll begin comments on slide 3.

Net sales from continued operations for the current June quarter were $203.2 million, and net sales from continuing operations for the current quarter increased $28.4 million, or 16.2% compared to net sales of $174.8 million for the prior year June quarter. As a reminder, net sales volume for the current quarter include sales from the INVISTA polyester manufacturing assets that we purchased in Kinston, North Carolina, which were acquired last September in 2004.

The pretax loss from continuing operations of $21.9 million that is reported for the current quarter includes the $8.2 million pretax charge that was a result of the write-off of receivables associated with the Chapter 11 bankruptcy filing by Collins and Aikman in May. Results for the current June quarter were also negatively impacted by a reduction in gross margin of approximately $3.9 million associated with the sell-off of aged inventory that took place throughout the quarter at discounted pricing. Gross margins in our Nylon division were also negatively impacted by approximately $1.7 million from a temporary slowdown in business as one of our major customers closed down for a period of time to adjust and reduce inventories.

As a reminder, the prior June quarter included a pretax benefit included in the cost of sales of approximately $11.4 million, which was generated by the Company's manufacturing alliance with DuPont at that time.

On slide 4, you will see the results for our 2005 fiscal year, which largely finished as we expected with the exception of those items I just covered on my discussion for the quarter. Net sales from continued operations for the current fiscal quarter were $799.5 million, an increase of 131.6, or 19.7% over the prior year. We are reporting a pretax loss from continuing operations of $34.9 million or $0.40 per share for the 2005 fiscal year. Results from continuing operations for the current fiscal year are an improvement over the pretax loss of $70 million or $0.86 per share reported for the prior fiscal year.

Again, it's important to note that the results for the prior year fiscal year included a pretax benefit in our cost of sales of $38.3 million, which was generated by the company's manufacturing alliance, which I just referenced, with DuPont. Results for the current fiscal year include $6.8 million in pretax income generated from the share of equity affiliates, which is a net positive swing of about $13.9 million when compared to a pretax loss of $7.1 million reported in the 2004 fiscal year. Including discontinued operations, we are reporting a net loss of $41.2 million, or $0.79 per share, which is an improvement over the net loss of $69.8 million or $1.34 per share for the prior fiscal year.

SG&A expenses for 2005 fiscal year were $43.2 million or 5.4% of sales compared to 46.3, or 6.9% for the prior comparable period. With the benefits of many of the consolidation efforts and cost reduction efforts taken over the past year taking hold, we have set a target and will hold a range of 4.9% to 5% of our SG&A for fiscal 2006.

On our balance sheet, which can be found on the next slide, it's the strongest it has been entering a new fiscal year in a long time, thanks to significant improvements made in the current June quarter, which I'll now highlight. And I believe this is -- this is the main story for the quarter.

We increased cash on hand by $50.2 million, ending the June quarter with $105.6 million in cash compared to $55.4 million in cash on hand reported at the end of the March quarter. There's also approximately another $2.5 million that was in restricted cash that is freed up after the end of the quarter from our pay-down of the Kinston note, which I'll refer to in a minute. This cash balance excludes the proceeds from our sales of company's land and buildings located in Ireland, which did close June 30th, which is after our fiscal year end.

Thus, to go to the close of the June quarter, the Company did utilize $24.4 million of our cash to pay off the Kinston note that, as you recall, was a five-year note with 10% interest rate. That note has been paid in full as of this date, and the Company plans to use this excess cash over and above the operating requirements either for strategic investments or debt reduction through public or private purchases in the the future.

We reduced inventories from $142.8 million at the end of March quarter to 110.8 at the end of the current quarter, a reduction of $32 million. Although selling some of our aged inventory at a discount negatively impacted our gross margin in the current quarter by the $3.9 million I previously referenced, we believe this was an up important move to make as we enter our next fiscal year. We also reduced our receivables balance by $14.2 million during the quarter, excluding the impact of the C&A write-off.

And as we have previously discussed with you, we have put in place procedures and new customer policies to avoid significant inventory buildup in the future, and maintain our working capital at the levels that we believe are appropriate for our sales levels today compared to the past.

Turning to slide 6, EBITDA for the quarter excluding the impact of C&A was $5.3 million, which is a decrease of approximately $10 million compared to the prior year June quarter. As I stated earlier, we were negatively impacted by our goal to reduce inventory that we've talked about in the last couple of earnings calls by about $3.9 million, and customer slowdown in our Nylon division by about 1.7.

Given the strength of the our balance sheet and the positive trend in our working capital, we believe that the Company is well-positioned going into our 2006 fiscal year. Given this, we are forecasting EBITDA to be in the range of $60 to $65 million, or on an EPS basis, from $0.01per share to $0.06 per share in 2006. Previously we did forecast a higher range of $68 - $70 million. The majority of this difference can be attributed to the softening of the polyester market in our Brazilian operation.

Slide 7 provides a reconciliation of our EBITDA calculation, which I will not review with you 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.

Turning briefly to our Chinese joint venture. Our business license has been issue and opening ceremonies are scheduled for next Wednesday. Our forecast for the first three years of this joint venture is as follows: In year one, sales of approximately 140 million, and break even at the net income line, which we have previously mentioned on the past couple of phone calls. In year two, sales in the range of 200 million, and approximately 5 million in net income. Year three, 300 million approximately in sales and 15 million in net income. Also, please remember that our share of this business is 50% as you digest these numbers.

This concludes our update for the June quarter and our 2005 fiscal year. We would like to open the floor to questions. Operator?

Thank you. [OPERATOR INSTRUCTIONS] Our first question coming from Dennis Rosenberg with CSR Consultants. Please go ahead.

Good morning. Could you talk about -- you mentioned that the cash might be used for strategic investments. What specifically are you thinking about there?

Dennis, that's a broad -- that's a broad statement from the standpoint that, as you know, in the -- just recently in the past, we did the Kinston acquisition. While management today doesn't have something on its plate, we reserve, I guess, the right to use the cash both either for debt reduction, as we said, or if there is an opportunity that presents itself to the Company, we'll be looking at that, as well. There's nothing specific that I would talk about today.

All right. And on the China one, those projections, could you talk about, you know, what kind of gross margin assumptions are you using for year two, year three?

As we've not done in the past, we're providing these macro forecasts to you, and are not looking to provide detailed margin numbers from a competitive standpoint, and just an internal forecasting standpoint.

All righty. And this year, roughly break even to a small profit, how is that going to progress through the year by quarter, roughly?

I can take that, Dennis. First, I mean there is the -- we get on the ground in China running the business next week. We've had people there for the last two months. Sam Smith, who originally looked after our domestic operations, our domestic business, has been there. He's heading up our effort there.

And basically the job the last two months is to identify exactly what had to be done in the next -- in the first hundred days, or thereabouts, to establish our position in the market as a first-class supplier. And, you know, our approach is that, you know, for the first three months, we're going to be focused on getting the machinery and equipment, the processes and people in a position to produce a product that we can stand behind, that we can stand behind and call a Unifi-quality product.

And at the same time, we've been working the marketplace with our sales group, talking to our downstream existing customers, and potentially new customers, validating the belief we have that there's a -- the -- that a supplier -- a domestic supplier of high-end yarns in China will offer development and technical assistance without the hassle that current companies have with import licenses, duties, et cetera, has a strong opportunity, a big opportunity to be successful.

So we're working on two fronts. One is on developing the customer base to accept a new domestic supplier of that quality, and secondly to get the operations into a condition where they can perform to the standard we require. That's going to take, say, three months, and as we go through the next six months, it's difficult to forecast precisely what the outcome will be, because we have an existing book of business which is losing money to begin with, and we've got to turn that back into positive very quickly. We've got plans to do that.

So by the end of the -- by the end of the fiscal year, as Bill said, our plan is to, at the very worst, be at a break-even for the business. And during the same year, develop our plans going forward as to what we're going to focus on, where we see the opportunities, whether it's value yarns, whether its in dyeing or twisting, or in POI, or whatever. As we -- as we develop our customer base we'll understand better what the needs are.

We can define more precisely what that would be, but our intention is, as we outlined in previous conference calls, is to grow this business to 500 -- $450 to $500 million in the next five years. That's still our plan, that's still the joint venture's common goal. That's something we've got to work on, and we'll brief you on a quarterly basis on our progress in that regard

Okay. Just one final question. You get a pretty good jump in margin between the second year and the third year. From the third to the fifth year, do you look for much more increases in margin there?

On a margin basis, that's probably not a significant increase in margin, maybe even flat, but substantially more sales. There's a little more investment that goes in, from a depreciation expense, in four and five as well to get to that level, but from a gross margin standpoint it would be relatively flat in the three to five year period.

Okay. Thank you.

Thank you. Our next question coming from [Jason Crummer] with Harris and Company. Please go ahead.

Hi. I just had a couple of questions. Could you tell me the impact of imports on the domestic market share this quarter and the year?

The -- if you compare -- if you look at -- if you look at imports from a year over year basis, I think that question probably comes up because China, of course, a lot of the press was that China hit the market with a lot of goods and certainly in the first quarter more than the second calendar quarter.

From a total impact, though, because China did take share from a lot of other countries, as they didn't tranship the way they were previously, total imports increased 10% in 2005 year-over-year, compared to an 11% increase in 2004. So the bottom line of that story is the total imports, even in the first quarter, if you isolate the first quarter, year-over-year, really increased about the same as it did the prior year, even though China was a bigger share of that import base. Does that answer your question, Jason?

Yeah, yeah. That's kind of what I was getting at. Also, could you give me the near and long-term effect of the [inaudible] re-evaluation for you guys?

Well, of course it was a fairly minor re-evaluation as everyone knows. It probably doesn't make a significant difference to us in the short or long-term if it stays at that level. It -- because raw -- I think raw materials are based in U.S. dollars, it has some impact of making actually raw materials a little cheaper for the Chinese producers going forward, although again not significant, but it makes goods coming out and coming to this country a little more expensive, but it's not such a significant change that it will have a material impact. Brian, if you have anything to amplify on that comment?

No, I think you've got it exactly right. 2% is not a significant move, and with the cost benefit they have already, it's not going to move the needle significantly.

If the benefit continues to appreciate, then you guys gain traction here? Yeah, certainly fit gets to to the point I think lot of the people in your business think it's going to go, then we'll start to see an impact when it gets to that point. If it does in fact ever change by that 20% kind of factor that people are looking for that could certainly -- you could certainly measure it at that point, most likely. Okay. And then lastly, could you give me some -- the Q4 volume and price increases, or decreases for Polyester and Nylon?

Sure. If you -- would you would you like it without the POI business, trying to take Kinston out of the mix?

Sure.

Since this was not in the previous year's quarter. If you take consolidated without the spinning business, our volumes were overall down about 23%. And again, please remember that we exited about 50 million pounds of business last year, which represents pretty close to 20%, 18 to 20% of our volumes as we exited the commodity business. So that is not indicative of what the market did, but it is what we did from a volume standpoint by exiting a lot of those commodity pounds. From a pricing standpoint, pricing was up 17.7%, for a net change of about 5.8% decline, when you combine the decline in volume versus the increase in price.

Okay. And can you break that out in Polyester versus Nylon, or not?

Sure, if you give me just one second. Let me get the year-to-date numbers. On a nylon base, year-to-date, year-over-year, volume was actually up about 5.9%, and I'll remind you that volume is up because of the Sara Lee transaction that we consummated and began pretty close to the middle of the first quarter, in our last fiscal year, and pricing was up about 6.1%, for a total of about 12. That was the Nylon business, and in Polyester, again without the spinning business included in it. Separately, it was down -- sorry. Year-to-date, poly, no spinning, was down approximately 14% in volume, and pricing was up approximately 11%, for a net decline of about 2.5%, 2.6%.

All right. Thank you very much.

Your welcome.

Thank you. Our next question is coming from David Richards with Raymond James and Associates. Please go ahead.

Thanks. Just a couple of things. First of all, I missed the revised guidance for fiscal '06. Would you just review that quickly?

Yeah, revised guidance for fiscal '06 was an EBITDA of 60 to 65 million, which would translate to approximately $0.01 per share to $0.06 per share profit.

Okay. Great. And just so that I understand where we're coming from in the -- in this most recent quarter, the right way to look at it is to look at gross margin going forward, you know, how relative to the 5.1 million this quarter. Is that just -- were there some things that were one time because of the inventory away from just the 3.9 million?

Well, there was a 3.9 million, you've got the -- if you take the whole fiscal year, you had -- let's address that, you're trying to compare it to '06. Let me take the quarter first.

We had 3.9 million for the inventory adjustments. I said it was approximately 1.7 million, resulting from the shutdown for a considerable period of time of a major customer adjusted for inventories. The combination of those two somewhere around $5.7 to $6 million, then that -- were one time items, so when you add back that with the C&A add-back, the EBITDA then for the quarter would have been somewhere around $11 million, which would have been very right-on the forecast that we had provided to the investors on the last phone call.

We thought it was important. We have been saying for a couple of quarters that we thought we had a lot of working capital in our balance sheet that belonged in the bank, and we felt it extremely important to clear out inventory and get our procedures in place -- as we've been talking about -- to avoid that occurring in the future. So we can start the next fiscal year very healthy, and we're very pleased with the results, to be able to, in a very short period of time, in 90 days, to add $50 million to the balance sheet, excluding the land and buildings sale in Ireland.

On a fiscal year basis, some anomalies in there, if you look at the provision for bad debts. Normally we -- in the past would expect to have normal accruals and customers, we would have about a $2 million, $2 to $2.5 million bad debt expense, and this year was 13 million and change, so there's a substantial delta in the bad debt expense. And then of course from fiscal year to fiscal year on a projection basis, one of the big changes, of course, is the Kinston acquisition, where we expect to be running full steady state this next fiscal year, and it will contribute according to what we had planned it would contribute as we looked at it to make an acquisition compared to what it contributed in the nine month ended that it was a part of our group last fiscal year.

Okay. Just so -- and just getting back to a couple of other items, you talked about the asset sale in Ireland?

Yes.

You said that has closed. Can you give us sort of a proceeds number there? And I think previously you said that money would all be going to China. Is that still the case?

The cash that's available from all the proceeds from Ireland, 30 million of those proceeds will go to China. We actually -- I think we had alluded to this on the last phone call, have done somewhat better than we had originally anticipated, and we will probably bring back from Europe 15 million of that cash to have it reside in the U.S.

So the total transaction there generated -- the transaction was a 20 million euro transaction, which we did receive all of the proceeds of 20 million euro, and we had already received 2 million euro before this quarter as a deposit, and we received the balance of about 18 million euro at the closing. We had -- we picked up a little bit on a forward contract. We actually put 15 million of that on a forward at 130 euro to the dollar.

That worked out well.

Worked out well -- every once in a while, you get lucky. So that worked out well, and those proceeds came in on June 30th. With those proceeds, if you took a snapshot of our cash on June 30, with those proceeds, cash would be approximately 133 million.

Okay. I guess that leads to the next question, which is -- you know, you talked about, you know, basically having excess cash being used for investment, or buy-backs. What is the run rate balance of cash that you think you need? Is it 30, is it 50? Where would you target a run-rate cash balance for the business.

On a global basis, that number is probably around 30, 30 to 35 million, probably. That would allow us to operate the business and not use our revolver, let's say that. We have revolver availability, but at 30 to 35 million, on a global basis, we could run the business and not use our revolver on a -- anytime during the year.

Okay. So going forward, it sounds like there will at least be some thought to bond buyback, based on -- you know, based on these numbers?

That's right. Either, as I said, management is considering several areas, including debt reduction, any strategic investments, as I said, that we -- you know, that we might identify that would be appropriate. So we're always continuing to evaluate opportunities, and if there's something that seems like the better move to make, we'll be looking at that.

Got it. And then just going back to the issue of inventory. At this point, I'm calculating a days inventory, just based on the last quarter of kind of 50, 51 days. I don't know if that's how you think about it or not, but is that -- is there more to be done with inventory? Do you think you're finished with this project? What's your comfort level with where you stand today?

I feel very good about where we stand today, but I think there is a lit bit -- and when I say a little bit, I'm talking maybe a couple of million more that we can probably move out, or move down. It's not necessarily aged inventory, but we're working to move it down just a little bit more.

The inventory turns is one of the things I look at, where kind of those factors are. Inventory turns really have increased overall from 7 to almost 11 times, and that's a big improvement for us. So it's a little more -- there's a little more to come out of working capital this next fiscal year, but it's not a sizable number. Maybe in total, it's a $4 million kind of number at some point over the fiscal year, but it's certainly not sizable like this. I think getting down to around 18% working capital to sales for this type of business is a pretty decent number.

And then just one final item on the cash flow side. CapEx in the quarter?

CapEx in the quarter was approximately $2.5 million.

Okay. All right. Thanks very much. I'll get back in queue.

You're welcome

Thank you. Our next question is coming from [Andy Horowitz] with Old School Partners. Please go ahead.

Good morning. I just wanted to clarify. After the sale of the land and buildings, that will get your cash to 133, is that correct?

Correct.

Okay. And --

Let me just remind everyone on the call that we have post-closing paid used $24.4 million, or $24.5 million dollars to pay down the Kinston note post balance sheet. So today -- on June 30th, we had 133. Post June 30th we used 24.5 million to pay down the Kinston note.

So about 108, 109 million roughly.

And 30 million of that, of course, is set aside for China.

Are you going to pay off any more debt, or there's no point to it to right now?

Well, we've said that we're reserving the right to have that possibility of buying back debt either at -- through private purchases or public, or using it for cash for strategic investments.

Okay. Now one on the inventory levels, I want to just -- obviously on the receivables and inventories, you're getting it down. These are all the good signs that we want to see, and having China as sort of a growth platform. I wanted to understand, how much lower can inventories go? Do you have an inventory turn expectation or goal that you're trying to achieve here? If you could comment on that?

Yeah, I think inventory, as I just recently said that, there is probably another couple of million dollars in inventory that we're looking for, 2.5 maybe, and then a couple of million more maybe in receivables, sometime throughout the next fiscal year. It probably won't come all at once. And from an inventory turn basis, this change has moved us from an abysmal 7 to about 11 turns. And so we're going to in in that kind of range, 11 to 12 turns. We've instituted policies to make sure -- both with our customers and internally -- to assure that we won't build inventory the way we have in the past, and have inventory that ends up being more than six months old that has to be sold off at a discount.

Now, wouldn't the fact that the inventory levels -- now that it has happened in the last quarter this year. So on a go-forward basis, what I didn't understand is, I would have thought that the cash flow number on a go-forward basis next year would actually be potentially higher if we can assume that you'll do 11 turns next year. Am I wrong for assuming that?

You know, well, first of all, cash flow should be better next -- First of all, we expect to have a higher EBITDA next year.

I'm thinking even better than that, given the fact that you have all of these inventory that you're not going to have. This is a serious inventory reduction that you guys have done.

It is. But you know, one thing, when we looked at the forecast, and when we built the forecast, we know the markets that we're in, and there is -- you know, we've built some decline in the market that comes with this business. At the same time, we built in some initiatives for growing into new areas that we're not in today. And so I think the turns will help us, but I think, you know, it has been mitigated through some other circumstances, as well.

I think the free cash flow, when you look at the 60 to 65 million, we had said in the past that we expected this next year to have about 15 million of Cap Ex, and so I think we'll get -- you know, from a free cash flow standpoint, 60 to 65 million, minus the 15, minus the interest of about 20, you know, you're looking at around 30 million free cash flow type of number.

Okay. Okay. Fair enough. Are there any other assets for sale that we're not aware of?

We have kind a number of assets for sale. Nothing that will move the needle like we just did with inventory, but as we've made some of these changes and freed up a warehouse, or manufacturing facilities, all of those are up for sale. We have, in fact, in this last quarter closed on a small sale that generated maybe 400,000 of cash as part of our cash balance.

We also have some used equipment that we have with a broker to sell some excess equipment. At the end of the day, though, you know, it's maybe -- there may be value-wise there could be, you know, a 15-plus million dollar value there, but I would not expect to see that -- all of that, first of all, being able to be sold. There's a little bit of glut in the market for equipment. And it would happen over time.

So I wouldn't put it in my -- for your -- forecast for this year from a cash standpoint that Unifi would be able to sell all of its excess equipment and its excess buildings and land. Certainly we will consummate some transactions, but it won't be major.

Okay. Beautiful. Great job, by the way, in just reshaping the whole company at this point.

Thank you.

Thank you. Our next question is coming from Bryan Hunt with Wachovia Securities. Please go ahead.

Thank you. Good morning. Deep queue this morning. I was wondering if you could, you know, kind of give us some context of what's going on in Brazil, and maybe with the polyester market in general that would cause you to reign in your estimate the way you did.

We've enjoyed decent business in Brazil over the last few years, and it has been a growth market for polyester during that period of time. The dynamic of marketing is that basically you got about on the synthetic side perhaps as much as 60%, 55 to 60% of the polyester is imported so we're competing against imports, and that's one factor where the stronger real has impacted that business for domestic producers.

The other bigger, more bigger factor has been the price of cotton, where the price of cotton has been such in the last three to four months, maybe longer, is at a point where it's attractive for the domestic fabric producers and garment producers to use cotton rather than polyester, or at least less synthetics and more cotton. And that has impacted the prices and the demand for polyester. So we've seen a decline the last number of months they were forecasting that to the end of this calendar year because most of the designers have already designed cotton into their spring programs.

Okay. And -- I'm sorry.

We're continuing to -- obviously we're concentrating on doing the usual things, take out costs, and trying to do better about our business elsewhere. But the cotton factor is the big issue, given the fact that Brazil is a producer of cotton, and they had a very good crop.

Last year's crop of cotton, Bryan, was huge across the world. It seemed like every place that grows cotton in the world had perfect weather conditions, so cotton prices have been extremely low over the last 12months.

And if you look at Brazil on a stand-alone, you still expect it to be profitable from a cash flow perspective?

Yes, it's just going to contribute larger than we expected, based on the things Brian just enumerated.

And with regard to, you know, like domestic polyester market. I know raw material prices dropped pretty significantly within the last three months in China. Is that what is pressuring your -- I guess your domestic outlook for the rest of your polyester business?

Well, of course when you look at China, China's prices are lower than our prices, to start with, but, yes, our prices have dropped somewhat over the last number of months, and it's driven by the consumption of China. They have slowed down production to adjust for inventories, and the threat of the safeguards, and the ultimate imposition of some safeguards has slowed production there, which then in turn causes less consumption of raw materials and caused a slight decline in the raw material price.

We are actually forecasting that it will start to rise from its point today over the course of the summer, and in September, pretty much a little bit every month, maybe $0.02 to $0.03 a pound going forward, so we see this as a temporary downturn in prices, with it coming back up as China starts to ramp back up. And certainly we are -- you know, we're always in pricing negotiations with our customers all the time.

Okay. And are those the two biggest, I would say, you know, deltas in the change in the forecast from the 70 to the 60 to 65?

Three quarters of it probably is Brazil, and then we just forecast -- you know, being -- knowing where the market has been going overall in the last couple of years, we forecasted a slight decline in the market.

Okay. Looking at, you know, dividends from Parkdale America, what's your best guesstimate for, you know, fiscal '06? I mean no one has really built that into their cash flow forecast, I assume, at this point.

Well, let's do it more in the way of historical, and then what they're looking like today. As you know, our amount received in the last calendar year, actually in our last fiscal year, was about 9.5 million. It's possible that that number could be a little bit less than that in this next fiscal year, and I say that because they've -- I think I mentioned this on one of the past calls -- they have been actively doing some of the things we have with changing their products mix, and by doing that, they made an acquisition where they used some cash. They've also paid off some of their debt and repositioned their balance sheet, and so there may be less cash available for the same size distribution. But, you know, generally, you know, somewhere in that $5 to $8 million range would not be out of whack.

Okay. And, you know, forgive the recap on your cash balance. If I were to just take your cash balance at the end of the quarter, and I'm going to include restricted cash, and kind of walk through it.

So you have about 108 start with.

Yeah, 108. If I were to add in the excess proceeds from Ireland, that would be another 10?

Well, the excess proceeds from Ireland are the extra funds -- we'll get use confused if we do it this way, because of of the cash is already sitting in Europe, sitting in our Dutch accounts, so we'll have a double count.

All right. Of the 108, how much of that was the deposit received from the Ireland assets?

Two million euro, at whatever exchange right you want to use, 2.2?

That's just a very tall number.

Right.

In the scheme of things.

Yeah, but we had also sold, as you recall, over the last six months, we sold the equipment that was inside those facilities, and received those funds as well, and that's probably about $8 to $9 million.

Okay. So what's left to receive from Ireland, maybe go about it that way?

Let's start with the 133.

All right, what does 133 include?

That includes everything. So there's nothing more to be received on proceeds from Ireland. If you start with 133 as a base, at June 30th, there is nothing more to be received. So if you start with 133, and now take out -- if you want to get to kind of the day after, more or less, and take out 20 -- call it 25 million -- for the payoff of the Kinston note, you're back down to about 108. That's total global cash.

Gotcha.

30 million of that's going to be used for China, so now you're at 78.

Gotcha.

Okay?

Thank you for -- thank you very much.

You're welcome.

And -- all right. And so of that 78, looking at, you know, what you said earlier of 30 to 35 million to run the business, maybe there's 40 million or so to look at debt reduction and/or other strategic activities?

Well, that's probably a little bit high at the beginning to the fiscal year, because some of that cash that's in Brazil needs to run the Brazilian operation, and there is some cash sitting still in Ireland to wind it down of about 12.

Gotcha.

You know, so that gives you a little bit less. You know, we're going to generate cash throughout the fiscal year, as well. But if you just took it as a snapshot of today, maybe that number in excess is more like a 30 million number, if you just took a snapshot today.

Okay. Thank you very much. I'll get back in the queue.

Thank you. Our next question is coming from [Pamela Wilson] with W.L. Ross. Please go ahead.

Yes. A couple of questions. How does the 17.7% price increases compare with your raw material costs in the quarter? And on the EBITDA of 60 to 65 million, could you tell us how much of that comes from Brazil, and how much is restricted in terms of cash flows, how much comes up to the parent?

Well, we have not provided in the past specific numbers for our allocations, and we don't plan to do that today. We have not in the past couple of years moved any cash from Brazil to the U.S. We do typically though disclose how much cash resides outside the U.S. and where. There is about $11 million of cash sitting in, excuse me, about 14 million of cash sitting in Brazil.

If we determine that there's a portion of that that would be excess, we would look to bring it back. Although as you know, it's more difficult to bring back cash from Brazil. It takes maybe six months of work to bring it back through their banking system. And it probably takes -- it probably takes, to run that business realistically, with -- in their market, there's longer terms on both sides of the equation. And so they probably do truly need somewhere in the 8 to $8 million kind of range to run the business there.

So there is probably a little excess today, but as we look to see what that market is doing, we'll have to make a determination whether or not there is truly any excess to bring back.

And how much of the 60 million is sort of Brazilian versus U.S.-generated?

As I said, we haven't broken that out the past, and we don't report those as segments, and we are not going to break that out today.

What does the improvement -- you're in the sort of 44 million run rate on a quarterly basis annualized. Is improvement coming from INVISTA?

Certainly. There is a sizable increase coming from the Kinston, the combination of the Kinston facility with our spinning facility in Yadkinville -- very close to a $14 or $15 million improvement over what was contributed in fiscal year 2005.

And the raw material costs increased versus pricing?

Raw material probably dropped about 5%, but that comparison I was giving you was price increase compared year over year. And if you go back a year, we started raising prices in May of 2004, because we were so far behind the curve compared to what raw material prices had done to that date. And so when you compare to the prior year and the prior quarter, the price increase of much larger than where the raw materials had gone is really indicative of what we had done to address past raw material price increases that took us to this point.

So, yes, we have a substantial price increase amount that's also based across the board, but also it is a matter of product mix. As I said earlier, we exited a tremendous amount of commodity business that carried a very low margin, and raised prices on commodities to at least break even. So it's -- it wouldn't be appropriate to compare that price increase against what raw material did just in the last quarter, because it increased dramatically over the past year, and that's what our price increases really had addressed.

Okay. And are there any limits, restrictions, relating to buying back debt?

No, we don't have any issues with buying back debt. We don't have any balance on our revolver today, and there isn't a restriction, as well. And the China joint venture, how do you see that producing cash flow? We do expect it to generate cash flow. We said on earlier calls that the investor group should not expect us to bring back any cash during the expansion phase. We're going to use the cash generator from that business along with those assets to leverage up the business to meet our expansion needs for the numbers that we've talked about in years one, two, three, including years four and five as well.

EBITDA numbers, to give you an example what EBITDA looks like, to give you some measurement, but again, we're not planning to bring that cash back, would be by year three an EBITDA number of approximately $30 to $32 million. Again, our share is 50%. But again, go back one step further. I believe I mentioned on previous calls is, someone asked "Can you bring cash out of China?" The answer is yes, but you can bring it out to the extent of earnings and profits. And of course EBITDA is not earnings and profits. So that's how cash would come out, our share, but again, we plan to leave it in along with our partner to allow us to leverage the business to meet our expansion plans.

When you say leverage the business, is the there going to be debt on that structure?

The joint venture itself, not Unifi. The joint venture itself will use its assets and its business to borrow for expansion, and it will reside on the joint venture's books in China, not on Unifi's balance sheet.

So initially there will be no debt, it will be for expansion?

Yeah, the initial debt, there will some a little bit just for working capital, maybe $10 million, but other than that, it comes to the starting gate debt-free, except for working capital. So we have the ability -- we have room to leverage that business, because its basically coming in in the door debt-free. Does that answer your question?

Yes, thank you.

Thank you. Our next question is coming from [Patrick Lin] with [EPJ Capital]. Please go ahead.

All my questions have been answered. Thank you.

Thank you. Our next question is coming from [Ben Cerrito] with Imperial Capital. Go ahead.

Hi, how are you. Is there any possibility that funds will be recouped from Collins and Aikman? And if so, in what time period?

You know, that would be very difficult to say. I think the situation that they're in, I mean, you certainly have access to a lot of the same information we do, they're burning through a lot of cash still today. Their financing was pulled back. They're borrowing money from their customers. It's a difficult situation. And the reason that we took the write-off is because we believe that at this point that the entire debt will be non-recoverable.

Gotcha. Thank you.

Thank you. Our next question is coming from John Deysher with Pinnacle Value Funds.

Good morning.

Good morning.

Nice quarter.

Thank you.

Just a couple of follow-up questions on China. When does the 30 million that you're committing there actually go out the door?

A portion of it, about 50% of it, goes out the door about seven days after next -- seven days from our business license date, so probably the first of the following week, 15 million goes out the door, and the balance of the 15 million goes out in about two month or 600 days.

Okay. So it will all hit your first quarter?

Yes.

Okay.

Yeah.

How many machines are in the China JV right now?

We have 98 machines.

98 machines. Okay. And that's sufficient to get you to the 140 million of sales you expect in the first year?

Yeah, that includes four extra machines. We've got space for 15 machines in the existing buildings where we can put in machines, and, you know, so the plans are the first year to include four new machines in that first year.

Okay. To get to the 200 million in year two, will that require how many additional machines?

Well, it's basically a doubling of the capacity, just in rough terms.

Okay. You're sales are going to increase by 50%. Will you need 50% more machines?

That's roughly a rule of thumb, yes.

So you'll need 50% more machines?

Yeah, I hesitate on that one, because it all depends on the product mix, the types of yarns we're going to supply, and that will evolve over the next six to nine months as we truly validate the needs in the market, and where we can make the most return on our business.

Okay, no, I'm just trying to get an idea of the scale-ability of this. Okay. And you don't anticipate financing those additional machines at the Unifi level, that will be self-financed at the JV level?

Yes.

Okay. What about with the working capital requirements, the inventory and receivable?

It will be the JV there -- we're working with local banks there, and the local banks will provide working capital loans, or revolvers if you will, to handle working capital.

And as we make that leap to year three of 300 million, is it the same situation, you don't anticipate taking anything from Unifi parent?

Correct.

Okay. Are any of those loans at the JV level, do they have recourse to the parent?

No.

They will not?

No, we're not looking to have a parental guarantee, if that's what you're looking for.

Right. Even to the 300 million in sales level.

That's the current plan.

That's the plan. Okay. The total Cap Ex, I think you said, was 15 million budgeted for '06. Is any of that China?

No.

Okay. So it's all non-China.

All -- yes, non-China.

Got it. And the depreciation amortization for '06 is estimated where right now?

About $48 million.

Good. And then just a couple of other things. Are you going to segment out the China results going forward?

We'll talk separately about China, and then of course because its an equity affiliate of significance, just as we do with Parkdale today on an annual basis, we'll provide their financial statements in our Form 10-K.

Okay.

So it's not a segment, it's an equity affiliate, so we'll talk about it separately, but it won't be a segment disclosure or separate part of the business.

Okay. Put if you give us a number, say, at the end of the efficient, income or loss from affiliates, will you be able to break it out for us in terms of the Chinese contribution?

We will.

You will. Good. And then finally, there was one missing board member, think you said on the previous call, there was a six-person board, and there was a missing board member. I think it was going to be the JV Chief Financial Officer. Has that slot been filled?

You are talking about the China or the JV now?

Yeah.

Yeah, there are three directors on each side, and those positions have been filled right now. All of the senior management poses have have been filled.

Who is the JV Chief Financial Officer?

His last name is Wong. He's a local Chinese. If you were to go back to our original set-up for the JV, there are certain positions they appoint and certain positions we appoint.

We had the sales and marketing, we had the manufacturing head, which is Sam Smith who we talked about who has been over there for a few months. They had the CFO position and the Chairman's position, and we had the internal auditor position. So we have -- that's not a board position, but an appointment position. We have oversight over the financial function by the internal audit role, and their person is the CFO.

At the board level, the Unify representatives are still Smith, Parke, and Lye?

Yes.

Very good. Thank you.

Thank you. [OPERATOR INSTRUCTIONS] Our next question is coming from Bryan Hunt with Wachovia Securities. Please go ahead.

Bill, looking at this most recent quarter, and we add back your gross margin impacts of what happened on the Nylon side from your large customer, and then on the inventory, aged inventory, that the company sold off, could you -- when you add that back, it gets us to about $11 million of EBITDA, and you look at the annual numbers you're forecasting, let's just say on the lower end we're looking at $15 million per quarter. Should we expect the run rate to build throughout the year, or --

Yeah, if you think about -- you know, there's a couple of things that happened in the first six months of our fiscal year, a little bit in each quarter. In the first quarter, which we're now in, there's a shutdown period for many of our customers across the business from anywhere from a week to two weeks around the July 4th date. And then of course, similar to the automotive businesses, there's about a week to two week shutdown in December as well.

So both quarters have some short months, so typically you find that the first half of our fiscal year is not as strong as the latter half of our fiscal year. So it will -- to your point, it will build. It will not be a flat 15 million a quarter if you use the 60 million number. It will build throughout the fiscal year, and be more heavily weighted towards the last two quarters. You can look back the history of the company, whether the company was doing what it was doing back in the late '90s, or whether it's two or three years ago, that pattern has held through fairly consistently.

And are you all seeing this year versus last year longer shutdowns around the July 4th period versus a year ago?

No, I think July was consistent. The only difference this clear was in May, when the -- when this one particular customer took some time out that was not scheduled, but the July shutdown was pretty much as expected.

I take it that customer is back ordering in normal patterns?

Yes.

Okay. And then -- could you talk about -- you guys did haven't mention anything about CAFTA and it has been very topical --

You are aware it passed this morning by two votes.

That's great news. And included in that was the new yarn-forward agreement, where textiles and apparel coming in have to be made to get the duty-free obligation --

I think one of the big changes was it expanded beyond apparel. I mean, prior to the CAFTA agreement passing, the current agreement that we were operating under only included apparel. The CAFTA agreement expanded into all of the other areas -- upholstery, tile, sheeting, et cetera. So that was one of the biggest changes from CAFTA.

I think by having it in place, it will help to protect that market. You know, the majority -- we've talked about this in the past -- the majority of certainly apparel is imported into the United States from somewhere. 93% is imported from somewhere, and around 20% of it is coming out of that region. So certainly having that agreement passed will help protect that. We ship around 7% of our -- which is not a big number, but around 7% of our -- 9% of our production goes to the CBI, and then NAFTA and CBI combined is about 14%.

You guys look at this as a nice positive, I would assume?

We certainly say it as a positive. We were in favorite of CAFTA passing, and can come out and stand for CAFTA in the last six months with the administration. So, yes, we're happy to see it pass the morning, albeit a small margin, a passing is passing, and we think its good for the region and good for the business.

And and then lastly, maybe you could talk about your segments in this most recent quarter relative to a year ago. Where are you seeing weakness -- we know what happened to Nylon on the polyester side with regards to -- and strengths as well, with regards to whether it's home upholstery, apparel. Where are we seeing some positive and negative movement?

From a positive standpoint, there's been some changes in the marketplace that we're working on penetrating. There's been some changes where people have gotten out of business in the acrylic area, and so while we haven't brought a lot of this replacement business home yet, we're working actively to grow in the areas like that, that we can replace that with polyester.

The same with acetate, looking to expand in that area. So there are opportunities, even in the market, that everyone perceives to have declined somewhat, and may decline somewhat this year. There are opportunities for us in areas that we've not yet participated largely. There's still certainly pressure on our lower-end products from a pricing standpoint. And we fight that battle every day, and we continue to monitor it so we aren't producing product that won't contribute.

So that's how we're looking at the polyester business. And the nylon business has been soft for different reasons than polyester, but we -- we're also looking at what actions we can take in nylon to make it more competitive. We operate several facilities in nylon, we're looking at the best ways to operate the most efficiently in nylon going forward.

Operator, we have time for about one more question. If there are any more. Allison?

Thank you. Thank you. Our next question is coming from [Mary Ann Manzalillo] from Stanfield. Please go ahead.

Yeah, hi Bill. I was wondering if you could provide a rough bridge maybe of the EBITDA for fiscal 2005 of about 40 million to the 60 you're expecting in '06. I think you mentioned before about 14 - 15 million maybe from the integration of the Kinston facility. The rest is higher volumes, better pricing?

I'll just give you major components. You have one of the big ones,'s, the 14 to 15 for the spinning group. Another one, let's not forget that of course bad debts are a part of that, so even without the -- if you start with the base 30 of width, there was $11 million of extraordinary bad debts that affected EBITDA on a comparative basis. And so there's another 4 million on top of C&A, and of course the inventory reductions we just talked about of 4 million will not occur again.

One of the other areas that we see as a big opportunity that we are looking to reduce our cost is freight and warehousing. We spend quite a bit of money on freight and warehousing, and we're looking to reduce that cost another 5 -- maybe another $5 million. And the other side that's built in from not just from a cost side, but from a profitability standpoint, it goes back to our comments about product mix, we are working on a number of profitable growth initiatives. I've mentioned two of them, acetate and acrylic replacement.

There are many others that we're doing that across our sales group that is being led and mentored by the executive team, and we have built those into our plans as well. And they are profitable growth plans, so it's going after business that either we're not in, or we're in it but we believe there's our ability to take more market share at appropriate pricing that provides a better bottom line to us as we go forward from a mix standpoint.

So net-net do you think volumes will be up or down in fiscal 2006?

I think volumes for -- put aside -- you know, you look at -- when you -- look at our just sales dollars, because it includes Kinston, excluding that impact, we've actually forecast volumes to be down slightly. Even though EBITDA is way up, so it's a combination of mix, which gives us a better margin, and these other items I've already mentioned.

And then capacity-wise, are you at a good level, or do you need to close more facilities to accommodate the lower volumes.

We're always looking for that and monitoring that, and when appropriate, we would take necessary steps to continue to do that, and I think I've mentioned that the way the business is set up today, any actions we would take would probably come at a fairly minimal cost to do so.

Okay. Great. Thank you very much.

Thank you. Our next question -- Our last question is coming from [William Martindale] with Conestoga. Please go ahead.

Good morning, gentlemen. Nice improvement on the shrinking the balance sheet. My question is related to some of the efforts you've put forth with larger end retailers like Wal-Mart and what have you. Is there any color you can add to that to help us understand how that business is going?

Well, I I think It's going very well. In fact, I'll point the entire group to the investor presentation on the website that's out there. There is a slide in that presentation that shows the progress we are making overall in our premium value-added business. It shows it growing from a revenue standpoint today of somewhere around 40 to 44, up to 70 by the end of 2007.

And, of course, that does -- that is our higher margin products, it's our premium value-added that has specific characteristics in the end product. So it's growing nicely. We continue to work with a variety of brands and retailers to get new business every day, and the group is making very good progress. And we're focusing on that very heavily.

Thank you.

Thank you. At this time, I would like to turn the floor back over to you for any further or closing remarks.

Operator, that's it for us. We would like to thank you guys for participating in our call, and look forward to talking to you again in October.

Thank you.

Thank you. This does conclude today's teleconference.