Unifi Inc (UFI) 2007 Q2 法說會逐字稿

Good morning. My name is Jackie, and I will be your conference operator today. At this time I would like to welcome everyone to the Unifi Inc. second quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question and answer period. (OPERATOR INSTRUCTIONS) It is now my pleasure to turn the floor over to your host, Mr. Ron Smith, Treasurer and head of Investor Relations. Sir, you may begin your conference.

Thanks Jackie, and good morning, everyone. Joining me for the conference call today is Brian Parke, our Chairman and CEO and Bill Lowe, our Chief Operating Officer and CFO. We would like to start first by apologizing for the timeliness of us getting started here caused by the confusion related to our dial in numbers. 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 second quarter conference call link found on our homepage. I hope that you have the presentation available as it will make it easier to track through the information discussed in this call.

Before we begin I need to first advise you that certain statements included herein may be forward-looking statements within the meaning of federal securities law. Management cautions that these statements are based on management's current expectations, estimates and/or projections about the markets in which the company operates. Therefore these statements are not guarantees of future performance and involve certain risks that are difficult to predict. Actual outcomes and results may differ materially from what is expressed, forecasted or implied by these statements. I direct you to the disclosures in our 10-Qs and 10-Ks regarding various sectors that may impact these results. I will now turn the call over to Bill Lowe to review our results for the December quarter.

Thanks Ron, and good morning everyone. As we announced in early December the Company experienced a significant decline in our commodity based partially oriented yarn or POY. We began seeing volumes dropped in September, and these declines continued into October and November. We attribute the majority of these declines to soft demand from the retail sector and reduced orders, as well as certain customers who worked down excessive inventories that were built up during the summer months. As our POY business is on the first-in first-out method for inventory we are also working off higher priced inventory throughout the quarter which had a negative impact on earnings.

The low volumes had the additional effect of lengthening the amount of time that it took to work through the higher priced inventory. However, we see the results of the December quarter as a one quarter event and not a trend. Before I get to the details of the quarter I would like to highlight some of the positive signs and actions that are taking place throughout the company. First, since the startup after the holiday shutdown we are currently running our spinning, texture and POY facilities at expected capacities, which indicates that the inventory adjustments that occurred across the supply chain in the December quarter have been completed. Based upon the information we have today we expect to continue operating at more normal run rates in the following quarters.

The texturing assets acquired from Dillon are also currently running at near or at capacity, and our immediate focus is to begin streamlining product mix within our existing facilities, which we can begin to accomplish now that our systems have been integrated. At this point I would like to give a pat on the back to our transition team, both at Unifi and Dillon who gave up their holidays to complete our system integration. It was their efforts during November and December that made the transition seamless and smooth for our customers and for the company.

After the close of the December quarter the Company borrowed $43 million against our revolver to finance the transactions. The purchase price was $62.6 million after initial adjustments to the final inventory balance. Consolidating capacity in the domestic market remains an effective strategy to create long-term shareholder value, and we are confident that the acquisition of Dillon will result in added value for the company. We will provide financial information reflecting the acquisition a little later during this call.

Second, our conversion margins are expected to improve in the March quarter as we moved the majority of our high-priced inventory in this past December quarter. Our portfolio of premium value added yards also remains strong this fiscal year, which will also help with conversion improvements. We expect the increased demand for our performance yarns to continue throughout the fiscal year as we build off our downstream sales and marketing success with customers such as Wal-Mart, Patagonia, Reebok, Hagar and VF Corporation. We are also announcing that we will begin exiting our joint venture with SANS Fibers, which was formed in September 2000 and has operated under the Unifi-SANS Technical Fibers name. Under the joint venture agreement with SANS, Unifi had a put option that could be exercised this past December. The company has elected to exercise the put option as we believe that the low shrinkage, high tenacity nylon industrial yarn market is not a core business in which to focus our strategic efforts.

Negotiations will begin shortly to determine an agreeable price, and we anticipate the transaction will be complete and funded no later than the first calendar quarter of 2008, which is per the agreement terms. Our expectations are that we will recoup our initial investment and that the company will not report a material gain or loss as a result of this transaction.

Regarding asset sales, the company is currently in negotiations on a couple of properties but we cannot say today that these negotiations will result in a final contract. Regarding our efforts to sell our interest in Parkdale, discussions that had been taking place over the past few months have ceased with the third party, and we do not see the transaction will occur in the near-term. We are still interested in pursuing this direction, however, we are not in active discussions today. As we said before, we do not only that our inability to monetize these assets today will affect our ability to execute our plans over the coming year as we have traditionally received good cash flow in the form of dividends from Parkdale.

With this as a backdrop I would like to begin my comments on the financial statements. If you're following along on the website presentations I will begin my comments on slide three. Net sales for the current December quarter were $156.9 million, which is a decrease of $34.2 million or 17.9% compared to the prior year December quarter. In comparison to the prior year December quarter total volume declined approximately 21.5% on a consolidated basis, which was offset by an improvement in pricing of 3.6%. The company is reporting a pre-tax loss from continuing operations of $16.9 million for the current December quarter which compares to a pre-tax loss of $4.5 million for the prior year December quarter.

As previously mentioned the sharp declines in the POY business coupled with the higher price inventory resulted in a decrease in our conversion costs as a percent of sales in the current quarter compared to last year's December quarter. The lower conversion costs contributed to our gross margin for the December quarter of 1.7% compared to 4.9% for the prior year December. Total gross margin dollars for the current December quarter decreased $6.8 million compared to the prior year.

Results for the current quarter were negatively impacted also by a $2 million non-cash impairment charge used to write off idle assets held in Brazil. We are transferring eight machines from the U.S. at fair market value to Brazil to replace these older machines to upgrade our production facilities there and enable our operations to meet market demands. Our operations in Brazil have met plan in the current quarter, and we continue to see good demand for our product in that region. However, to better serve the needs of the customer base we need to expand our product range over what currently exists in Brazil which the transfer of these assets will allow us to do.

Also impact in the current quarter was a pre-tax loss of $2.9 million from our unconsolidated affiliates, of which $2.1 million is associated with the startup of our joint venture operations in China. On an after-tax basis we are reporting a loss from continuing operations of $16.4 million or $0.32 per share for the current December quarter which compares to an after-tax loss of $3.4 million or $0.06 per share for the prior year December quarter.

The company's after-tax results were negatively impacted by a special $6.7 million income tax charge taken to adjust the valuation allowance associated with the company's deferred tax asset relating to Micell Technologies, which the company no longer believes will generate a tax benefit. Net income for the December quarter including discontinued operations was a net loss of $16.5 million or $0.32 per share for the current December quarter. It compares to a net loss of $3.8 million or $0.07 per share loss for the prior year December.

Although SG&A expenses remained essentially flat quarter-over-quarter at $10.5 million, they increased as a percentage of sales due to the lower volumes in the current quarter. SG&A expenses were 6.6% of sales in the current December quarter compared to 5.5% for the prior year.

Turning to slide four, net sales for the first half of the fiscal year were $326.8 million, which is a decrease of $47.4 million or 12.7% for the prior year first half. On a consolidated basis total volume down 15.7%, on a year-to-date basis, which is offset by a 3% improvement in pricing. Reporting a pre-tax loss from continuing operations of $29.1 million or $0.53 per share compared to a pre-tax loss of $9.4 million or $0.16 per share for the prior year first half. Net income for the current first half of the fiscal year is a net loss of $27.6 million or $0.53 per share compared to a net loss of $6.9 million or $0.13 per share. Gross margin as a percent of sales was 3.6% for the first half of the year compared to 4.7% for the prior year first half.

Now I will turn to the balance sheet, which you can find on slide five. Cash on hand at the end of December was $35.6 million and reflects a decrease of $49.4 million compared to the $85 million cash on hand at the end of the prior year December quarter. However, cash on hand remains essentially unchanged since June of '06 and up slightly from the $29.5 million at the end of September in 2006. Net working capital balances decreased $18.3 million from the end of the September quarter, which includes a $13.5 million bond related reduction in accounts receivable in the current quarter. Although the volume levels were off significantly in the current quarter, the company did not build inventory, which was valued at $115.4 million at the end of the December quarter compared to $115.5 million at the end of September.

Turning now to slide six, we will review the combined financial information with Unifi and Dillon. I do need to point out that the disclosures we make here are not in accordance with the Regulation S-X*, but we believe this information will be useful to you. As a beginning basis we've chosen to use our unaudited December 2006 balance sheet as a starting point. Inventory as a part of the purchase price was $11.6 million and would have increased our inventory to $127 million. We expect that accounts receivable will add approximately another $11 million to our working capital balances. At the company's option, this will increase our availability under our working capital revolver of approximately another additional $14 million.

Based upon appraisals performed we expect to put on our balance sheet approximately $25 million of amortizable intangibles with an average life of 10.4 years and a non amortizable goodwill of approximately 4.4 million. Regarding the bank revolver, we borrowed the $43 million over two periods of time to reduce our interest expense to a rate of approximately 6.6%. Globally the company had approximately $17 million of cash on hand as of yesterday with approximately $7.4 million in the United States. On February second we plan to pay down the revolver between $6 and $8 million with our cash on hand. Equity was issued for the remaining purchase price in the amount of approximately $20.5 million, representing 8.3 million shares.

Looking now at slide seven as a beginning basis, we've also chosen to use our audited June 2006 financials as a starting point. We expect revenue to increase approximately $90 million after taking into account $40 million of sales; previously external sales to Dillon that will now become intercompany sales. On a full rate basis after obtaining the synergies from the transaction we expect the Dillon transaction to add between $18 and $19 million in additional EBITDA to the Unifi base. We are currently in the process of reviewing operations now that our operations are running at the Dillon facility, and we are looking for other ways to further maximize the benefit of this acquisition to bring the entire operations into the black.

Lastly now turning to slide eight, the company reported $3.8 million EBITDA for the December quarter, which is below the $10 to $12 million estimate provided at the end of the September quarter. On December 7th we did announce that the revised EBITDA expectations for the quarter, which we believe would be 50% or less than the previous estimate. And while I did not mention this during my earlier discussion of the financial results, we received notice from one of our energy suppliers late on January 19th that we have been underbilled over the past eight months due to a faulty meter at our Madison facility in the amount of $1.7 million. Since the liability occurred prior to our December quarter we have accrued this into our second quarter, which reduced our EBITDA as well to the $3.8 million previously mentioned.

EBITDA for the first half of the fiscal year is $14.2 million. We expect the next two quarters to look very similar to each other. We expect EBITDA to be in the range of $16 to $17 million for the March quarter and $17 to $18 million in the June quarter. These estimates are inclusive of approximately $3 million of incremental impact in each quarter for the Dillon acquisition. To be clear, these estimates are inclusive of $3 million for the facility acquired from Dillon. We expect the synergies to begin in our fourth fiscal quarter and a full run rate as we move into our first fiscal quarter for the 2008 fiscal year. Therefore in subsequent quarters we will not be breaking out the Dillon facility as it is a part of our polyester segment going forward.

This does conclude my formal remarks on the financial statements, so I would now like to turn the call over to Brian Parke, Chairman and CEO for Unifi who will update you on the status of the company's joint venture in China and recent more developments.

Thanks, Bill, and good morning everybody. As discussed on our conference call in October, we continue to see substantial improvements in our product quality and the development of the sales opportunities with our selected Tier 1 customers. Going forward this will continue to be our focus, and we see, as we see the related momentum build. However, our financial performance this quarter was poor primarily as a result of lower volumes in September and October. These lower volumes were due to the slowdown in the global polyester market, resulting from high raw material prices. In China specifically raw material prices in September were 28% above the comparable prices in May of 2006.

But as (indiscernible) the quarter ended, raw material pricing improved substantially, and volumes were back up to full capacity in November. Accordingly, the financial performance improved, and we continue to see further improvements in December. On the cost side we have taken actions to reduce energy and raw material costs by approximately $1 million annually. And in addition to this we have reduced our workforce by 154 people in December, which will save approximately $900,000 per year. And we are planning on reducing the workforce further by an additional 200 people during the current year 2007.

Although we remain confident in our strategy and the long-term success of the launch of the joint venture, we do anticipate that the JV will continue to generate losses in January and February as we enter the Chinese new year period. But once the market returns to normal levels in early March we expect the operating losses to be substantially reduced and expect to be operating at a breakeven run rate as we finish the June quarter on increased sales of yards to Tier 1 customers and the previously noted cost improvements.

There is still much to be done, but the momentum is building from the market side, and the opportunities we've been working on downstream with companies like ITG, Nike, Wal-Mart, Reebok, etc. are beginning to turn into solid orders. In December we sold 70 tons of added value yarns, and plans are to build this up to over 500 tons per month by April based on our current projections.

Finally, there is no doubt that this operation is starting to move in a positive direction, and we have the foundation laid to build a solid business in the future. Before I open the floor to questions, I would like to turn the call back over to Ron Smith.

Thanks, Brian. There has been a significant expression of interest for the company to host analyst meetings. As a result, we would like to let everyone know that the company is planning on conducting a series of analyst briefings towards the end of February. Parties interested in attending a presentation should contact Rebecca Landas by February 2 at RLandas@Unifi.com. We will set a firm schedule, and the venue is based upon where we have the most participation. We will post the details on our website under the Investor Relations section once the details have been confirmed. This concludes our update for the December quarter. Operator, we would now like to open the floor to questions.

(OPERATOR INSTRUCTIONS) Bryan Hunt, Wachovia Securities.

Bill, could you let us know what volumes and pricing did for polyester and nylon individually for the quarter?

Looking at the polyester division first on a comparing the December quarter '06 to December '05 quarter, volume for the polyester division was down 21.75%, and pricing was up about 2.5%. Nylon volume was down about 19%, and pricing was up 5.5%.

With regards to nylon could you talk about whether decline is coming? Is it a single customer, or is it a specific market that is weakening?

It is really more of, probably more market related from the standpoint if you take -- when you look at say for instance the sock business today it is probably as most of you know on the call here when you -- what people are wearing today -- in the past people were wearing a lot of socks over the calf. Today the trend is the ankle socks, the golf type socks, that type of thing. So there is a lot less volume that is just coming naturally from, while there is probably just as many sox being worn and produced, there is a lot less yarn in that segment. As well as there has been some penetration from imports in the sock business, as well. Hosiery has continued to stay. It has declined, of course, as you know over the past several years fairly dramatically. And apparel in general, of which nylon does sell into has continued to have a slight downward trend as well.

On the polyester side was a majority of the decline in POY, or where did it stem from?

The majority of the decline was in POY. The texturing side was a little soft, but it was not off as much. If I were to kind of break down for you in dollar terms where we missed the forecast, it would probably be on a POY volume side it is probably about $2.5 million of EBITDA missed there related to the FIFO pricing issue. And the lower volume about $2 million from a POY side and another $1 million from the DTY side. Reminding you when I talk about customers there were 2 main customers that took a lot less POY. We probably average with those two customers each of them over one million a week generally, average volume for those two customers during this last quarter was between 300,000 and 400,000 a week. So the majority of it was the impact from the POY business. And some of that was -- one of those customers, by the way was Dillon. In the contract we had a specified inventory level that they needed to be at or no less than that, and they actually were quite a bit higher and they were working down the inventory. Now as you can tell from the adjustment of the purchase price, they overshot the mark and went below it by $2.4 million, and therefore we adjusted the purchase price $2.4 million as an initial adjustment. We're still working through final counts on inventory, and there could be another slight adjustment depending what we find actually on those reviews.

Next question, you stated what your cash was as of yesterday or today. I missed that. Could you give me that number again?

I said cash in the U.S. was about $7.5 million as of yesterday. Now don't forget that during the quarter last November we did also pay our bond interest this quarter and November, as well.

What is your pro forma availability after the acquisition?

We would add another $14 million to that availability, and the availability today -- of course we got less receivables at the end of this quarter, but with the 14 it is probably about $97 million.

All right. Could you talk about what has happened to raw materials in the last 30 to 60 days? I know they are off, and whether you anticipate giving all that back to your customers?

Raw materials last quarter when you -- we had a surcharge we put on in September that ran for about 30 days. We took it off in the middle of October, and raw materials did decline slightly in the fourth quarter. It is expected to be even though there was a change of how the, one of the formulas is done in the U.S. that provides a benefit. The offset is PX has gone up a little bit. So we're expecting this quarter to be slightly flat in this quarter, and we are holding prices where they are at, and we need to recover and get our margins up. So we are with the prices remaining flat, our prices remain pretty much where they are.

And then last question, I will let someone ask, you stated that you were going to pay down debt with excess cash over the short-term and the number was $6 to $8 million. What is your anticipated goal with the free cash flow the company should generate? Is your plan to aggressively reduce the revolver down to zero?

The first thing we want to do is to get the revolver paid off as quickly as we can to allow us to continue to look for other strategies that we can implement. Just as a point when I talked about the revolver of $43 million we actually invested it as I said, in a couple different tranches purposely; knowing that doing it on a daily basis with our cash flows in and out would cost us a higher rate. So February 2 is the date that $15 million of that borrowing comes due, and we intend to pay it down like I said $6 to $8 million. We will continue to do that. We would like to get that revolver down, cleared off as quickly as we can.

Jason Kremer, Caris & Co.

So you guys said that China would be breakeven in June and then profitable thereafter, I assume?

That's our forecast right now, Jason.

And what percentage of the high-cost FIFO inventory have you worked through? Is it pretty much 100%?

We think it is pretty much worked through the system at this point, yes.

Okay, and are you still expecting to get dividends from Parkdale (indiscernible) $5 million or --.

I think we'd say it is still in that range. We will begin having this -- as I think I said on the last call, typically they are a calendar year company. Those discussions usually start to take place sometime during this quarter. We would anticipate doing the same thing. I can't predict what the outcomes will be, but we have not changed our intent or our estimate of that kind of number.

And I guess lastly, do you guys see the warm winter weather affecting your apparel sales?

Probably not because we are producing ahead of the season. We produce for the winter season several months before the actual season itself, so there was a bit of a -- we talked about this last quarter -- there was a bit of a slowdown -- part of that slowdown was, we believe, unconfirmed, but we believe that as the retailers were moving into the Christmas season, as we moved into the Christmas season they were being a little bit cautious as to what they were going to be doing in the spring. Waiting to see what the consumer sentiment was for the selling season during Christmas. And based upon how the retail sales were up in December when they were expected to go down somewhat -- December was a fairly strong month -- it started off fairly slow and I think that could be part of the reason why we're seeing fairly strong pull through on our production today. And as a reminder apparel is about 35% of our businesses in apparel. So it is not certainly not the whole kit 'n' kaboodle.

[Dennis Rosenberg], [DSR Consulting]

Sounds like things are getting a little bit better here. Could you talk about how much is your investment in SANS? What is the investment capital there?

About $14 million.

And on the Dillon yarns, are there any plans to bring any of the POY in-house?

Yes, we are doing that. First of all, the pounds that we were selling to them became internal automatically. And yes, there are plans to bring -- they were purchasing some pounds external to Unifi, and yes, we are looking at -- we're working actually on transitioning those pounds in over this quarter as we speak.

How many pounds does that involve and is it the whole thing you going to bring in internally?

It is probably another 200,000 to 300,000 lbs., probably per week; it is 200,000 lbs., I believe. Probably about 20 million pounds a year in total.

And will that all become internal?

It will become internal, yes.

And is that included in the synergies that you're talking about?

On a full-year run rate basis, yes, it just takes us a while to move those lbs. inside. So yes, in our synergies there if you look at the webcast presentation, you will see we have made a POY sales to the Dillon that really relates to the internal stuff. Most of that is the internal and a little bit of that is from the external sales.

Okay, are you currently buying that yarn from Nanya?

You mean our chip or you are talking about -- it really comes from various suppliers. We buy our chip from Nanya, as you know for Yadkinville and it is various suppliers that Dillon had used previously.

Could you discuss the reasons that you were not able to come to a conclusion on monetizing Parkdale?

No.

All right. You had made a comment on Micell. I missed that. Could you tell me what happened there?

It really wasn't an event that happened. Let's talk about Micell for a second. That is a good question, Dennis. Micell was an investment we have had for quite some time, and quite a while ago that investment was written down for book purposes. And therefore from a tax standpoint that deferred asset that would have been set up as a capital loss on the books was sitting there. Now as you know to take the benefit of a capital loss you have to have capital gains to offset that. That significant capital loss, which was about a $16 million capital loss item, we believe that based upon the assets that we have for sale, that while we can generate some gains we would not have accumulated significant gains to offset that loss. And therefore we set up a valuation allowance in our tax accounts on the basis that we probably could not use that capital loss going forward from a tax point of view. So we didn't take an additional write-off on our books above the line, above the tax line. It was within the tax line as a valuation allowance recognizing that that previously written off loss could probably not be used from a tax point of view.

What is the possibility of any recovery of that written off loss?

I would say the likelihood is very, very low to very close to zero.

Okay.

That we will recover anything from -- and that is back at that time -- and this is before the time I came with the company it was determined at that time that it was proper to write down to a zero value at the time based on their business conditions. And that business has changed direction several times since then. Our ownership has declined as a percentage because the other owners have put in more money over time. We have chosen not to do that into that business.

Michael Salshutz, Lehman Brothers.

A couple questions. Is a Parkdale dividend included in your second half guidance?

It is not. In fact, it is exclusive of any dividends from any equity affiliates.

Okay, that would be incremental.

That would be incremental to (multiple speakers)

Other question in terms of Dillon's numbers do you have a reasonable estimate of what 2006 was since I know you are using 2005 in your pro forma analysis. Is there a big change, you think?

No, we believe it is very similar. We used these numbers as we had of course these are the numbers we worked with through our due diligence process, but indications are that numbers are very similar.

Okay, is there any sense that your customers during this destocking we went through, is there any sense that the customers drew inventory down below normal levels such that you are getting sort of a snap back benefit here, or do you think they are kind of at normal levels?

We think there is some of that going on. I can't give an exact measurement, but our belief is that there is some of that going on.

Any sense -- I guess obviously it's a tough business these days. Is there any sense that (indiscernible) any of your customers' financial difficulties sort of presenting any near-term threats for the loss of business?

That is a good question, and since you asked the question let me specifically mention one customer that did recently file bankruptcy, Malden Mills did file after the first of the calendar year sometime around I believe the 10th of January or so. Our exposure to Malden in total is about 500,000. We did accrue about 100,000 in the December quarter for them. They were current by the way on their receivables with us. There could be, therefore there could be another 400,000 additional bad debt expense in this next third quarter, although a lot of that has to do with what the whole picture looks like for bad debt. So there may not be an incremental charge, but I can't say for sure today.

On our other credit watch list, and I think I mentioned this the past two quarters, there has been a couple customers we've been watching both of which have refinanced their businesses. One is now current, the other we are working on arrangements to satisfy us that they can meet their obligation. We did have a positive impact, actually in the second quarter related to the one customer catching up on his receivables and getting current.

How big an impact was that on the second quarter?

It was pretty close to about $1 million.

Okay, and I guess in terms of is our sales -- what is exposure in terms of what kind of volumes from Malden Mills assuming they don't continue to operate or buy from you? How big a customer is that?

Well, let me just see if I can grab some numbers. Annual volume with them if I just look at our receivables and how they run, annual volume is going to be somewhere in the $5 million kind of number, somewhere 100,000, maybe 100,000 pounds a week type business.

So about $5 million then of annual sales?

About $5 million in annual sales; if I look at the receivables and they are pretty current on 30 days and use on that twelve months. It is somewhere around $5 million.

And is Malden, are they continuing to operate at this point, or are they still deciding?

We understand that there is actual several bidders for the business, and I guess it will depend on how that works out as whether they -- I think the intentions originally were to continue to operate. There are several bidders for the business both strategic we understand, and distressed financial buyers.

[Marianna Kirschner], Nomura Asset Management.

First of all I would like to clarify a few things on the Dillon guidance. If I recall last time the implied guidance for Dillon that you gave suggested about $10 million EBITDA excluding synergies, and now you're guiding to somewhat closer to $12 million. If you could just clarify why that number changed.

First of all, we actually never gave an actual EBITDA number if you recall --

Well it was implied I guess what I was able to calculate.

We provided as you know then we provided EPS numbers, some estimated tax rates and other components, depreciation, etc., to allow you to calculate that. Again those are preliminary numbers. This is -- and then from our point of view we have been working with the 12 million from the beginning. We have not changed that. So if you made a slight change in the -- maybe there was some synergy movements you had, more synergies and less base when you did your calculation, but we have not changed our view. Our view has been with this. We were trying to give you last time a very, a way to get to a range of what it looked like before you saw the pro formas.

Got it. Okay, and Dillon's numbers stayed more or less stable for the last couple of years?

Well, as I said earlier to one of the questions, the '06 numbers look very similar to the '05 numbers. We used these because these are the numbers we worked with and felt confident with on our due diligence process. But we understand that the December '06 numbers are very similar to '05.

And then the guidance that you gave for the next couple of quarters, maybe I missed that. The Q4, does that include any realized synergies?

There is a little in there. Also to move products there is some synergy benefit, certainly. There is also some expense related to some of the changes we need to make operationally. Those expenses in the first six months will offset some of those synergies. So we've given guidance that I said in each quarter they will be about in the range of $3 million each quarter. With the synergies really kicking in once those expenses have been exhausted, with all the synergies kicking in at a full run rate beginning next fiscal year. If you looked at the -- if you added that up what you are going to get of course is only $6 million for six months. That doesn't equal half of 18. The reasons for that is a variety of reasons including the expenses related to some product movement and some other equipment movement.

And could you remind me the cost to implement the synergy?

The cost to implement, there is additional cost of about $1 million, somewhere around $1 million, I believe to implement those as well as additional overhead costs that we're going to experience in the first six months that we won't experience on a full run rate basis.

And then just to clarify, JV losses, they were significantly higher than in prior quarter, and I guess you talked about Chinese venture. So if you were to break out the increase in losses is that primarily due to China, and how did Parkdale did? And perhaps since we only get Parkdale numbers on annual basis so that we can calculate EBITDA, could you tell us what is the run rate in Parkdale in terms of EBITDA?

Yes, well first of all the first half of your question about the losses and equity affiliates, I specifically mentioned the China joint venture of around $2 million, $2.1 million in that number which is $2.8. Parkdale did have not a very good quarter in there, about another 600,000 of that loss. So they are the majority. Those two are the bigger two items. On an annual basis, and I think I have given this number before, an annual basis the cash flow or EBITDA is somewhere in the $30 million type of range.

So that is a bit lower from last year I guess or quite a bit lower since they had a good year last year.

It is lower, and their financial results on the net income line in which we share into that equity affiliate line has reflected that.

But what if the expectations for Parkdale performance since it is a meaningful contributor, not a meaningful but still material contributor to your cash flow generation, what is the expectation for the business trends there?

We haven't changed our view on the cash flow benefit to Unifi, which we've said is typically, if you look historically it is in the 5 to $8 million range for dividends. We expect that they will still be a good cash generator over the foreseeable future and that we would expect to receive cash flow in that same kind of range ourselves.

Okay, and the last thing maybe you can update us on imports of both polyester yarns and apparel, how import has been in Q4 and your recent experience.

It is really two components that we're talking about here; it is yarn and apparel. From a yarn perspective import yarns probably up about 5%, and apparel looks like it is somewhere, smaller up around 2% in that timeframe.

And the China similar (indiscernible).

Excuse me?

Is the trend similar currently? Is it increasing at faster rates, lower rates, is it stable?

It is about that same trend. That is the current year 2006 numbers, so that would be the twelve-month period for 2006. Home textile importations are also up as well, which is also a segment that we are in. It is somewhere to slightly north of 10% last year.

Chris Dechiario, ISI Capital.

Good morning, Bill. Just a couple leftover questions here. I guess the guidance, which I guess net of Dillon is 13 to 14 in the third quarter and 14 to 15 in the fourth quarter, even if I put Parkdale dividend, some expected Parkdale dividend back in there still is somewhat less than I would have predicted it would have been included in your previous 58 to 65 million guidance before all the problems in the first and second quarter and before the acquisition of Dillon. And I was wondering if other than I guess these increases in imports that you just talked about are there any more -- are there any cyclical factors that are going on here or anything more permanent than what seemed to be mostly onetime things that happened in the second quarter that are affecting your results going forward?

Well, we do expect -- we have said that we think that the market will continue to shrink somewhat. That is what we believe that we are -- as I mentioned I didn't put any numbers on it but we are looking at other ways to optimize the Dillon acquisition and to get more synergies out than we've identified today through optimizing our facilities. And believe we will be able to do that but we haven't quantified or set that in motion today. And at the same time we are being a little cautious on what our fourth quarter looks like because we are in January. We see where our volumes are today. So we are being a little cautious on what we see the fourth quarter coming in at. But I don't see anything other than the topics we've talked about here already. I do not see anything systemic differently than what we've already mentioned about imports or changes in the market.

And then you also both in your remarks and in the press release mentioned you will be achieving mix related benefits, as well. And I didn't quite -- I didn't understand your explanation of why or how but I just wanted to know if you could give us a little more color on that.

That is a fair point. That is really related to the sales of the higher priced product in our PVA line. For instance, one of the new products coming on board this spring very heavily is our Repreve product, which is a recycled product, which is the green story, and that is getting very good reviews and pretty heavy demand that we expect to be kicking in here this spring and through the next couple quarters. So demand continues to increase. We continue to get more and more inquiries from more and more customers. More and more end-users, retailers on the downstream side. We are combining that Repreve with some other of our higher valued yarns. We also have new programs that are going into Costco on our Sorbtek line through socks under the Champion brand. We signed Costco because they are looking for a higher quality sock. So we are seeing pretty good demand especially on the new products and seeing reasonable demand on our existing PVA products. And there are several new programs that are coming in together with both our Chinese joint venture retailers, such as Wal-Mart, Costco, and Reebok who are really dual sourcing us both looking to do programs with us in China and looking to do programs with us here in this side of the world, as well.

Also with respect to Parkdale you mentioned roughly an annual EBITDA number, and since CapEx has sort of been all over the place for the last few years, I was wondering what you thought was sort of a normalized CapEx rate for Parkdale.

That is difficult to put one finger on. There is a variety of things that each year you got to look at each year differently. There is different -- they've done some plant consolidations and we did about a year and a half ago, Parkdale upgraded some equipment (technical difficulty) equipment to improve the operations for quality. They are down to about 11 plants today from where they were before. We will be looking at that with them as of course the minority partner during this quarter as we start to look at what the utilization of cash will be versus dividends versus their needs for capital expenditures. So it's really hard for me to put a number on it for 2006 because we haven't had that discussion yet -- sorry, 2007 calendar year. Sorry.

My last question, just is another sort of news item other than Malden Mills bankruptcy, and I don't know if it affects you at all but I just wanted to sort of run it by you anyway that Johnson Controls announced I believe January 7 that they were taking over two automotive interior contracts. I think one was from Collins & Aikman and some other, as they call it financially weak suppliers. And given that the Collins & Aikman business has sort of gone away some -- anyway I wasn't sure if that affected you or not but I wanted to check to see if it, if you expect it d to affect you.

A lot of the C&A business did go to one of our existing customers. The difference is what we are selling yarn to that customer for the purposes of going into those programs C&A had. The difference, though, is that in the past when we had the C&A business we would also package die that so we were receiving an additional value for processing that. Today we are selling natural yarn primarily from a POY to this customer who is vertically integrated who has that program. So we still have sales that relate to that, but it is natural yarn versus dyed yarn.

But the fact that Johnson Controls is taking over some of those contracts is not going to take the business away from your customer, I guess?

No, I don't believe so. In fact to our knowledge they have received the award for that and are actively engaged in producing product for that.

[David Bullock], [3C Capital Management]

Once -- I'm trying to get a handle on the Chinese JV, and I just don't know enough about what goes on over there; would you say the lower expected volumes that you telegraphed in Q1 to the Chinese new year is that recurring, or is there an extraordinary element to it?

No, I think there are three busy holiday periods every year because Chinese new year is normally January. This year it is towards the end of February. Then you got a May Day holiday and then one in October. So those periods are holiday periods when things slow down and demand drops as producers take vacation or cut back on capacity. So it is an expected event, that normal volumes that time will impact the cost, obviously as it does here. So nothing unusual. It is typical cycles.

What do you expect normalized EBITDA contribution will be given the existing base and then what is the potential upside?

EBITDA, if you're looking at it now where we are actually currently running losses, as Brian mentioned, has been running at probably around $1 million a quarter. And so as the business corrects itself and brings on and goes to moves to net income that of course will pick up almost on a dollar for dollar basis. But let me remind you that their EBITDA is not included in our EBITDA. They are an equity affiliate. So we are including our share of their net income or net loss into the equity affiliate line. So as a reminder to everyone, the China joint venture EBITDA is not included in our EBITDA numbers.

What is the potential upside in that business in terms of your EBITDA, reported EBITDA?

We don't report -- we don't report the Chinese EBITDA in our EBITDA numbers, so.

Okay, it is all below that line, okay.

Right, so no matter what their EBITDA does our EBITDA won't change because of China.

I understand. So then if I look at what you telegraphed for March and June 16 to $17 million, with what you expect synergies to be at Parkdale and the onetime expenses that are in there, what would the normalized EBITDA guidance be for March and June?

If you took basically as I mentioned I said we included about $3 million in each quarter for Dillon. So if you subtract $3 million from each of those ranges I gave you, that would be the range we are providing for the base unit by business without the incremental from Dillon.

And is anyone advising you on the asset sales?

Yes.

Okay, thank you.

Operator, we have time for about one more question. We can take one more question if there is one more question in the queue.

Josephine Shea, RBC Capital Markets.

A couple questions. Just be crystal clear on this issue. You are negotiating with SANS the joint venture. Are you expecting cash to receive from them in the area of $14 million or would it be another contribution?

Cash.

Okay.

I'm not saying the number is 14. That was our capital that was invested. So it is going to be in that range, but that includes the -- we own the building there, so as an addition to negotiating a price on the value of the business there is a contractual obligation and a set dollar amount for the building on that transaction. And we would expect -- we said not a material gain or loss on it, so plus or minus the $14 million.

That's fine as long as it is cash, we are happy. New customers, can you say anything about -- I mean you said Nike, Wal-Mart, the customers that you are gaining for the China business, are they completely new? Can you also see a lot of sell-through going forward? So let's say you start at 10 million but you already know that Wal-Mart is doing, let's say $100 million. So there is a potential to gain the additional $90? Are you -- can you say something about the particular type of customer you are focusing on and what the potential sell-through is? And whether you think you stand a chance of winning more business once you're up and running?

Yes, the customers as we call them are downstream customers, people like Wal-Mart are the brands or retailers that we've been working on for the last number of years; we've developed relationships with them and are selling them through direct customers. And over the last number of years they have indicated -- those final customers have indicated they desire to be able to source from Asia and hence the opportunity we have with our China joint venture to supplement for some peers probably the larger part of their programs from Asia. So every single one -- most of the companies we are working with right now in China have come as a result of -- the opportunities have come as a result of discussions here in the U.S., which we then pick up in Asia and work with local mill partners to provide the samples initially and then hopefully build into decent volumes. So we have other customers that we don't have in the U.S., some Japanese customers, European customers. But the majority of the downstream customers we are focused on we already have an existing relationship, which helps to speed things along.

So what percentage of your Unifi sales and business development employees are currently directly or indirectly working on China? And secondly, has there been any change in the sales force in China? Is it growing and what is the expectation there?

First of all, the group that our commercial group who are focused on downstream amount to about by six people. And they are working both sides of the Pacific. In China we started a very small group of salespeople because the sales were there were basically running through distributors, which was more like a distribution system than it was a sales organization. So we had to actually build a sales organization, which we are currently doing. It amounts to about ten people right now, most of them are -- have little experience in sales and marketing. We're training and developing those people as we speak using experienced people. So we have there on that side three people who are focused on this downstream activity along with the people in the U.S. So it is a dual focus, which is coordinated by our commercial management.

But at the moment you're not financially rewarded or there is no -- if the sales lead comes out of the U.S. and China gains on it, is there any reward for that financially? For you in the U.S.?

Financial reward, there comes back through hopefully our profits for the JV 50% of the profits. We also have some fees associated with the specialty yarns that we produce there using our brand name.

Okay.

Obviously that depends on we are in the early stages yet. Seventy tons in December is a modest amount to say the least. When that gets up to 400 or 500 tons a month it is a different story. Depends on what percentage that will be we get a royalty on that; but it's all about the volume. The idea is to pick up some additional profit from that.

And my very last question, the non-cash compensation item in your slides the $600,000, I just wanted to check that is above your operating income line, right?

Yes.

And are there any other non-cash items above that operating income line?

I guess depreciation is going to be above it.

Besides depreciation, sorry.

I mean nothing -- when you're outside the normal depreciation amortization I do not think there is any other non-cash items above that and just as a matter of what that is, we talked about this two quarters ago or whatever. We had a deferred compensation plan that was costing the company a lot of money. We exited that and actually returned cash to the company. And that effectively, that number there is effectively a non-cash charge for the surplus plan here that is substantially less cost than what the old plan used to be to the company. So it was a matter of actually as a cost reduction, from a cost standpoint and also is a non-cash item, as well.

Okay. Thank you very much.

And that does wrap up our call for today. I want to thank everyone for joining us and for your good questions, but I would also like to remind you of Ron's comment about possible analyst meetings. You should e-mail Rebecca Landas and her e-mail address again is RLandas@Unifi.com. And we look forward to seeing any of you there that can make it. We will determine the venues on the basis of where we see the most participation, and we would hope to see you there. And again, thanks for your time. Thanks for your support.

Thank you. This concludes today's Unifi Inc. second quarter earnings conference call. You may now disconnect.