Unifi Inc (UFI) 2007 Q3 法說會逐字稿

Good morning, ladies and gentlemen. My name is Nia. And I'll be your conference operator today. At this time, I would like to welcome everyone to the Unifi third quarter earnings conference call.

[OPERATOR INSTRUCTIONS]

Thank you. It is now my pleasure to turn this call over to your host, Bill Lowe, Chief Operating Officer and CFO of Unifi. Sir, you may begin your conference.

Thanks, Nia.

And good morning, everyone. This is Bill Lowe speaking, Chief Operating Officer and CFO for Unifi. Joining me for the conference call today is Bryan Parke, our Chairman and CEO, and Ron Smith, our treasurer and head of our investor relations. Ron's a bit under the weather today so I'm going to be doing the introduction.

During this call, we will referencing presentation materials that can be found on our website at www.unifi.com. The presentation can be accessed by clicking the Third Quarter Conference Call link on the homepage. I hope that you'll have the presentation available, as it'll make it much 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 security laws. Management cautions that these statements are based on management's current expectations, estimates and/or projections about the markets in which the company operates. Therefore, these statements are not guarantees of future performance and involve certain risks that are difficult to predict. Actual outcomes and results may differ materially from what is expressed, forecasted or implied by these statements. I direct you to the disclosure in our 10-Qs and 10-Ks regarding various factors that may impact these results.

I'll begin my formal remarks with some comments on the quarter before reviewing the financial results. As expected, the company experienced a significant rebound in sales volume in the current March quarter as the supply worked down its inventory last quarter.

Before reviewing the details, as I said, I'm going to highlight some of these positive results that we saw in the March quarter compared to December. Our conversion as a percent of sales improved in the current quarter and our gross margin increased from 1.7% in the December quarter to 7.5% in the current March quarter. The improvement was a result of increased volume and the ability to move through the majority of our high-priced inventory from the December quarter.

Demand for our premium-value-added yarns remains very strong due, in part, to the successful launch of Repreve of our 100% recycled yarn. Launched this year, projections for Repreve exceed 5 million pounds for calendar 2007. We anticipate that total PVA volume for fiscal 2007 will be approximately 20% greater than our fiscal 2006 volume and that Repreve will be our top selling premium yarn. Bryan will discuss our technical efforts a little later during our formal remarks.

Although these are positive signs that we are operating at more normal run rates, we announced earlier today that we will be moving all of our production from our recently acquired facility in Dillon, South Carolina, to our facility in Yadkinville, North Carolina, which has both the footprint and the equipment to accommodate the volume projected for the Dillon plant. Maximizing our facility utilization rates will better enable us to lower our manufacturing costs. And due to automation, Yadkinville is the most cost effective facility to consolidate our volume.

We anticipate that cash closure costs for the Dillon, including severance and equipment moves will be approximately $2.1 million in cash costs and that we will realize annual savings of approximately $5 million. The breakdown of the $2.1 million is approximately $1 million in severance that will be accrued on the opening balance sheet under purchasing accounting. And $1.1 million in equipment moves that would impact our financial results in the quarter we spend the money.

This closure is in line with our strategic objectives of taking excess capacity out of the market to lower our manufacturing costs. We expect to complete this transition by July 31, with no interruption of service to our customers.

Offsetting these positives in the quarter were pre-tax impairment charges totaling $12.9 million, associated with the write-down of certain plants and equipment. The company will consolidate all its dyed yarn operations in its faculty in Reidsville, North Carolina, which will result in the idling of our dye house facility in Mayodan, North Carolina.

The decision to close this facility was in response to overall lower dyed yarn volumes resulting from the loss of the Collins and Aikman business, and was made prior to learning of the bankruptcy filings of one of our major dyed-yarn customers, which I'll get to in a moment.

The company simultaneously reviewed three nylon facilities located in Madison, North Carolina, which have been classified as held for sale for one-year period. We will continue to actively market these facilities, but we recorded a pre-tax impairment charge related to a reassessment and appraisal of these facilities. In addition, idle equipment that was held for sale at the Madison facilities has been written down to its scrape value, resulting in an additional impairment charge.

Finally, Joan Fabrics Corporation filed a voluntary petition on April 10 to reorganize under Chapter 11. Unifi had net receivables of approximately $4.8 million owed to it by Joan, and has taken a non-cash pre-tax bad debt charge of approximately $2.8 million during the current quarter, which along with the $2 million of previous pre-tax charges incurred will fully reserve these receivables.

The company also wrote down approximately $700,000 of inventory related to prior purchase commitments made by Joan Fabrics. These charges will not have a cash impact in this quarter and have been added back to the company's reconciliation of earnings to EBITDA. The company recently agreed to the conditions under which it will continue to do business with Joan Fabrics.

With this as a quick backdrop, I'll begin my comments on the financial statements. If you're following along on the website, we'll begin our comments on slide 3.

Net sales for the current March quarter were $178.2 million, which is a decrease of $3.2 million, or 1.8% compared to the prior year March quarter. In comparison to the prior year March quarter, total volume declined 4.7% on a consolidated basis. It was offset by an improvement in pricing of $2.9%.

Although we were pleased with the volume improvement in the current March quarter compared to December, we were somewhat disappointed that the volume mix was not as rich as anticipated. A significant portion of the returning volume was commodity related rather than our differentiated specialty yarns. And we are working to address the mix concerns in the coming quarters. However, we do not see a substantial change in the mix between commodity and differentiated product in this upcoming fiscal fourth quarter.

The company is reporting a pre-tax loss for continuing operations of $16 million for the current March quarter, which compares to a pre-tax loss of $1.1 million for the prior year March quarter. Included in pre-tax income are the impairment charges of $12.9 million to write down certain facilities and equipment, as I previously discussed, as well as non-cash charges associated with the Joan Fabrics bankruptcy of $3.5 million, for a total of $16.4 million. Also included in pre-tax income is a $1.7 million gain from the sale of our T-3 texturing facility located in Yadkinville, North Carolina.

On an after-tax basis, we're reporting a loss of continuing operations of $13.9 million, or $0.23 per share, for the current March quarter, which compares to an after-tax loss of $1.3 million, or $0.03 per share, for the prior year March quarter.

Net income for the March quarter, including discontinued operations was a net loss of $13.2 million, of $0.22 per share, for the current March quarter, which compares to a net loss of $2.1 million, or $0.04 per share loss, for the prior year March quarter. As previously mentioned, gross margin for the current quarter was 7.5%, which is a slight increase over the 7.2% reported for the prior year March quarter.

Raw materials remained flat during the March quarter, as anticipated. However, our suppliers have begun increasing raw material prices in April, which is earlier than expected. We anticipate further increase as we enter the summer driving season, as consumer demand for gasoline increases, and producers divert xylene to the gasoline supply chain versus the polyester supply chain.

We're anticipating a gap between the U.S. and Asian raw material prices to be in the $0.09 to $0.10 per-pound range over the summer, which is lower than the high of $0.16 per pound that we experienced last year. But it's still higher than usual. As a result of the increases, the company did issue a price increase effective May 1. And we will likely issue another price increase June 1.

SG&A expenses for the current March quarter were $11.2 million, or [6.3%] of sales, which is an increase from the 5.6% for the prior year March quarter. Included in the current quarter's SG&A expenses is $1.1 million in expenses related to the amortization of intangibles associated with the Dillon acquisition. Absent these expenses, SG&A for the current March quarter would be 5.7% of sales, which is flat to the prior year March quarter.

Subsequent to the close of the March quarter, the company did receive a $5.8 million dividend payment from its equity affiliate partner Parkdale America. And this dividend will be reported in the company's fiscal fourth quarter, and was not reported in the current March quarter results.

Turning to slide 4, net sales for the first nine months of the fiscal year were $505 million, which is a decrease of $50.6 million, or 9.1% from the prior year period. On a consolidated basis, total volume is down 12.1% on a year-to-date basis, which is offset by a 3% improvement in pricing.

Reporting a pre-tax law from continuing operations of $45 million, or $0.82 per share, for the first nine months of fiscal 2007, compared to a pre-tax loss of $10.6 million, or $0.20 per share, for the prior year period.

Net income for the nine months of the fiscal year is a net loss of $40.8 million, or $0.75 per share, compared to a net loss of $9 million, or $0.17 per share, for the prior year. Gross margin as a percent of sales was 5% for the first nine months of the fiscal year compared to 5.6% for the prior year period.

Now we'll turn to the balance sheet, which you can find on slide 5. Cash on hand, at the end of the March quarter was $26.8 million, which reflects a decrease of $8.8 million compared to the $35.6 million cash on hand at the end of December. In addition to cash on hand, the company had approximately $54 million available on its revolver.

The company has $240 million in long-term debt, which includes $40 million of borrowing on our revolver. The company used $7 million cash on hand to pay down the revolver in early February but, subsequently, borrowed back $4 million to fund the working capital increase associated with the Dillon acquisition.

Net working capital balances increased $36.2 million from the end of December, which includes a $13.7 million increased inventory of which $13.2 million was a result of the Dillon acquisition. The company's accounts receivable balance increased $22 million in the current quarter, which is a result of increased volumes and the addition of approximately $9 million to $11 million in receivables resulting from the Dillon acquisition.

Turning to slide 6, the company reported $15.8 million in EBITDA for the March quarter, which is inclusive of the impact of the Dillon acquisition, and $3.5 million in customer bankruptcy charges, which were added back. EBITDA for the current quarter is slightly below the low end of forecasted range of $16 million.

We expect EBITDA to be in the range of $15 to $16 million for the June quarter, as we expect our current mix to continue. Including the dividend we received from Parkdale of $5.8 million, our EBITDA would then be forecasted to be between $21 million and $22 million, including that dividend. This forecast does not include the expense of moving the Dillon equipment. These moves may occur in both the current quarter, which would end in June, and our first fiscal quarter beginning in July.

That concludes my remarks on the financial statements. And I would now like to turn the call over to Bryan Parks, chairman and CEO for Unifi.

Thanks, Bill, and good morning, everybody. First, I would like to give you an update on China joint venture and then speak to the increasing importance of our premium valued yarns on our business. As I indicated in our last conference call, we continue to make progress in our China operation are now in a position where the efforts put into the business over the last 20 months are starting to show fruit.

We're now finally supplying top-end customers who need yarns that are careful of going into critical end uses for export to global brands and retailers. These yarns can demand a premium of as much as 10% higher than the market price. These customers are in the circular knitting market where we've been developing new customers over the last year and where we've identified a gap in the market for high performance yarn. This is Unifi's sweet spot.

There is not such an established opportunity in the weaving yarn markets of China, especially in the home furnishings area where we already considered to be the at upper end of the available quality range.

As we mentioned previously, our strategy to develop a profitable business in China is built on four platforms. Firstly, we developed the higher quality commodity yarns for which the market is prepared to pay a premium. Secondly, we are developing business in more specialized and consequently higher value-added areas, such as dye packs and highly oriented yarns. Thirdly, with the support of our downstream marketing group in the United States, we have introduced a number of branded products into the China market. The first group of such projects that have been licensed to [UP] by UFI are Sorbtek, reflexx, mynx and A.M.Y. Final platform implements cost-reduction programs across the entire organization. Progress in all of these four areas has been made. And we still project to break even in June, July of this year.

Turning now to our technical efforts in the U.S., in recent years, our domestic commodity business has been under constant pressure as programs continue to move out of this region toward this same period of premier premium value-added or PVA products that continue to grow, helping us to remain competitive. Due to the success of this initiative, we continue to invest in the development of new products for this future growth.

The company's 100% recycled yarn, Repreve, has generated a significant interest globally with both customers and media. Earlier adopters include companiess like Polartec, [LLC] Valdese Weavers.

Our downstream team is working directly with companies like Patagonia, REI, Columbia Sportswear, Perry Ellis, Nike, [Steelkist], Design Techs on current programs. For calendar year 2007, projections are to exceed 5 million pounds. For this fiscal year ending in June, projections are approximately 3 million to 4 million pounds.

We're expecting demand for our Repreve product to at least double each fiscal year for the next two years, for a total of 16 million pounds. And we're expanding our ability to manufacture Repreve to meet this expected demand.

Additionally, other key PVA products for us include Sorbtek, our moisture management yarn, reflex, our family of comfort and performance spread yarns, aio, which is our all-in-one technology where we combine multiple functions in one single yarn. Sales of these products and other PVA products have continued to grow. And our projected growth of our branded in this fiscal year is 20%, representing approximately 17 million pounds.

Our commercial operations team has created development partnerships with brands and new partners around the world who understand the need to differentiate themselves in a competitive market. These partners share the desire to be industry leaders and to be the first to market with new innovative fabrics.

Now, with our joint venture in China, we've been able to establish our global supply chain of these PVA projects, enabling us to work closer with these global brands, which include Reebok, Wal-mart, Essex, [A&S], Costco, Champion, Wrangler and Nordstroms.

In summary, our strategic PVA global efforts are proving successful. As mentioned earlier, the growth of PVA products this current fiscal year is tracking at 20%. And we're targeting a 25% growth rate during the next fiscal year of our domestic business. We have several development initiatives in various stages of commercialization in China. And we expect a number of these to start contributing toward the next fiscal year. This concludes our update for the March quarter.

Operator, we would now like to open the floor to questions.

[OPERATOR INSTRUCTIONS]

Your first question is coming from Bryan Hunt of Wachovia.

Thank you. I was wondering if you talk about the Dillon facility closure. Back when the deal was originally done, it was expected to be a credo of the, in our estimate, of what EBITDA would be after the synergies was in the $17 million range. Should we assume the additional $5 million of savings from the plant closure is additive to that -- those original synergies?

Bryan, I would say it's additive, but with one caveat, that the one thing that it helps us do is, as we've said on a couple of calls now, is the projection for the market is still to shrink somewhat during this year and somewhat, again, next year. So there will be some decline and it helps to offset. But if you just looked at it from a Dillon acquisition standpoint, yes, it certainly is additive to that. But from an overall company perspective, it will help us offset some of that decline that is projected, that the industry gurus are projecting for the market, that it'll shrink somewhat.

Okay. And can you tell us what the gurus are saying about the industry decline for next year?

They're still looking at about an 8% decline for next year. We'll have -- and, of course, as you know, in our July call, we'll have, at that time, have our '08 numbers available that will be provided to our investors. So we'll have all that wrapped together at that time.

All right. Could you comment whether or not -- I had heard that there was a shortage of spandex during the quarter, or at least the market has tightened significantly. Did that impact you at all during the period? And have you been able to raise prices in reaction to those shortages?

We have not had a problem with obtaining the spandex that we need for our production levels at this point. So we have raised -- I mean, there have been prices that have been raised here and there as a general result of raw materials both in polyester and nylon. So, no, we've not had -- it's not been problematic for Unifi.

Okay. Next, just maybe with regard to the market, again, there's a new trade legislation that's been bantered about, this counter-veiling duties from goods coming in from China. Are you seeing any retailers or customers react to that new tariff that's being put in place with regards to goods coming out of China?

I haven't seen it yet. And I'm not -- there's a lot of things that go on in trade legislation. There's been some that have been outside of the textile area that don't impact us. I think, in fact, one of the latest ones that was probably put out related to other non-textile -- to non-textile products. And so it's going to put some pressure on the retailers. But at this point, the one we've seen doesn't really wrap textiles into it.

We still have the safeguards that were put in place last year in the textile area. There is some discussions going on regarding Korea that's not in the China area. So the one you're referring to specifically, I think, hasn't affected us and probably won't affect us at this point.

Okay. Could you give us an idea of what your overall polyester volumes are on an annualized basis if -- or maybe what your value-added mix is. If you expect your value-added mix to be roughly 17 million pounds accruing at 7%, what's your overall polyester volume capability today, given the Dillon acquisition?

Well, there's a couple of questions in there. I mean, from a PVA standpoint forward, net range, as we talked about before, is somewhere around the 8% kind of number. We expect that to grow as the percentage of our overall sales.

We haven't given you a breakdown of our pounds because it's both POI external sales. It's DTY sales. And we typically haven't given those pounds, really from a competitive reason, because our competitors could take our top line, divide it by our pounds and get pricing numbers. And we prefer not to have our competitors know our average price.

Okay. And last question, could you talk about the individual market segments you sell into and maybe which ones saw the biggest rebound in Q3 and maybe which ones still remain soft?

Well, one of the ones that remain soft -- and you see that in our decision to close Mayodan -- the dye business remains soft. With the automotive business moving away from a package dyed and these package dyed businesses that remain that was C&A business, moving to a competitor -- another company that has a vertical-integrated business with the dye house. Most of what we're running for the dye house is upholstered -- the end use as an upholstery in home furnishings. And that has been slow. That's been slow both in the industry and the couple of major customers we have, of course Joan Fabrics being one of them, were slow, primarily because we had them on a CBD basis. And they had very tight liquidity. So that was one of the areas that probably had the biggest impact from a decline standpoint.

The nylon business remained relatively steady. The hosiery business and the other end uses that our nylon products go into, like intimate apparel, et cetera, has remained okay. I mean, nylon business has been pretty much, from a volume perspective, about where we had planned it to be.

So the bulk of what came back was probably in the apparel -- ultimately, end use would be in the apparel business from a volume -- from the larger point of the volume standpoint. Because nylon was relatively steady quarter-over-quarter between December and March, which the dyed business continuing to struggle from a volume perspective.

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

Thank you. Your next question is coming from Michelle Salshutz of Lehmann Brothers.

Actually, that's Michael Salshutz, but --

How you doing? A couple of questions. I guess just on the mix issue, you kind of indicated that it was going to continue -- sort of continue sort of along the current suboptimal path here. Any thoughts on what's going on there or on why your mix is less desirable than we hoped?

Well, it's just that the end use, it comes -- it really comes down to where the orders are with the customers. The particular products that they're going into don't require that -- the differentiated especially. So at least a larger percentage of it came back as a -- in the commodity range so there's lower margins on those. We're working on that mix issue. We do think it will persist at least for the next quarters.

Also, the issue I just mentioned to Bryan that impacts that mix, is the -- in the dye house, when you're running automotive, for instance through that, typically it's a higher quality yarn -- sorry -- a differentiated yarn versus the low-end commodity. So that volume is not there as well. So plays into that mix issue. But some of the mix that came back for the apparel segment is a higher percentage than we would as guessed, as the volume came back. But it is what it is. And we're looking at that mix issue. We'll work through that. But I don't think we'll be able to make a significant change in that mix for this fourth fiscal quarter.

PVA -- as I said earlier, PVA remains strong. PVA is increasing. So that's where really the sweet spot is for us. And as Bryan mentioned, we're apparently also developing new yarns that are -- we're not talking about today that we hope to bring to commercialization down the road.

Okay. In terms of the customer, I guess -- well, it's always hard to judge this. Your sense is the customers, if the raw materials go up, that the customer base is going to have to accept some price increases, some of that should pass through?

Yes. I mean, the reason I talked about the delta in my formal remarks between our raw material price in Asia is, you look back last year, the delta got fairly large, $0.16, which really we didn't see a lot of business move to imports at that gap level because it was temporary. We expect this gap to be temporary as well. Except we expect the gap to close back down to the $0.07 range, which is on the high end of the normal range that we've seen for years. And at that delta, it really doesn't make a lot of sense to import for a variety of reasons -- capital needs, adjust in time delivery, all those type of things. So we do think that the spike is temporary. And we've said both to our customers and, I think, to our investors here that we expect this to occur this summer and possibly even next summer. Each summer season, have a spike and then have it come back down in September as the driving season ends, until the refineries find an alternative for that octane issue and use something beside the xylenes.

Okay. In terms of -- do you have any customers that are sort of in the Joan Fabrics category here that you're monitoring closely that could be problems in the near term?

We have a -- we don't have any that are on or that we've pulled out and set in a separate site in a risk category. But I would tell you that there are a couple that we know have relatively tight liquidity. And we're keeping them on a pretty close reign. But no ones anywhere near the situation that Joan has been in for the last 12 months.

Okay. And some of these questions are reasonably significant customers or are they relatively small players?

There's at least one that's a large player, not to the size of a Joan receivable, but a reasonable sized player. But, again, we just -- we monitor closely but don't have it specifically called out as a risk.

Okay. Parkdale -- are you done for the year, do you think, with the distributions for Parkdale? Should we expect the $5.8 million is the full year number?

Well, with the exception -- and I won't say that we'll definitely get some more. But we typically also get smaller dividends, if you will, for -- it's an LLC. So we get a distribution for tax payments. So you could see us get some small -- smaller dividends, maybe depending on what the projection would be. Could be another $750,000 to $1 million over the next nine months.

Here's an example. In the first quarter of '07 -- the first fiscal quarter of '07, we received about $230,000, which was a tax payment. So all total, in this fiscal year, our dividends from them is about just slightly over $6 million. And you could see another 600 -- call it $600,000 to $1 million, just depending on what their income is and how much those tax payments would be.

Okay. Any sense on the inventory levels down the chain? Are you sense customers are at a comfortable level, low, a little more than they want? Any sense on how inventories are tracking?

I think they're relatively comfortable. I think they worked down a lot of inventory this last December quarter. And, of course, I think the one reason we saw a fairly large wave of orders come in, in January, right away after the break, is because they were so low on inventory. I think it's now leveled off. And we did see a very large wave that came in, in January and February. And I would say, by the time we get into March and April, it's at a relatively normal pace. And I believe that's the case.

Okay. In terms of working capital, just through the list -- just go quarter here -- do you expect working capital will be a source of funds or use of funds? What would be your expectation?

It may be a slight benefit from the standpoint that we are trying to lower inventory slightly, where there's probably a little bit of room there. The biggest use, why working capital went up a lot basically was all really due to Dillon. You take the inventory level -- the inventory that came in that we bought, plus the fact that we did not buy receivables. So basically, even if you give 30-day terms to customers, we have a large amount of receivables, as I said, somewhere in that range of 9 to 11.

And by the way, the reason I give the range is that we have moved product around between the two facilities so it's not as easy just to go in and look and see exactly which receivables technically are Dillon. So I'm giving you a range. But that was the reason that it went up so much this quarter.

There's a little room to get some out in inventory, I think, this next quarter. And AP, accounts payable, will probably be a little higher at your end, as it typically is as we go through and do a full hard close at year end.

Okay. In terms of capitol, capital outlays for the year, any -- but I guess beyond the Dillon moving cost, any changes from previous expectations?

No change in the previous guidance on where we think the fiscal year would be for capital expenditures. We have -- we have some moving costs associated Mayodan. We may -- we may move some winders from there to Reidsville. We're about $7 million CapEx here to date. So I think we've said 10 to 12. We'll probably be at the low end of our range.

Okay. And just one quick think on the Unifi-Sans, you still on target to receive those proceeds by the end of the calendar year?

We said the first fiscal -- the first calendar of '08 is probably going --

Okay. But that should still be the expectation. Great. Okay, thank you.

You're welcome.

Thank you. Your next question is coming from [Phillip Emma] of [Pryce Bridge].

Good morning. The Dillon number was not in last year's March quarter. So what was the -- what was the sales numbers when you back out Dillon out of this year's first -- out of this year's quarter, rather?

Well, it's a little -- again, moving the -- moving the production as we've done and really somewhat -- in preparation of the announcement we made this morning, it's somewhat difficult to put a set number on that.

Right.

But it's -- it's going to be somewhere in the -- probably the -- a little over $20 million range. So what it shows you is that, when we were -- last quarter, there was a [inaudible] really to earnings that we went through last earnings call, which was the inability to run Kinston full at the two lines. We took one line down. There's a lot of high fixed costs at Kinston, also the higher priced dividends, even though sales might have been up. We also -- what clouded the issue for you was that last year we also had sales in Dillon, POI. But those became internal.

So in last year's numbers, when you're comparing it, there's only $12 million of POI sales that was included in our sales number that no longer is in our number. So when you back out that, the net impact of Dillon is half of that because we had $10 to $12 million of POI sales. So sales are probably up in that range of, if you take that out, the general range of 15 to 18.

EBITDA is up quite substantially. That's because we're running Kinston at a much higher rate. Once you get above a certain level with all those fixed costs, that's when you -- that's when you can start to make some money on the product.

Okay. So I guess I'm looking at your nine-month number. And your revenues were down 10%.

Right, in that --

Is it somewhere closer to the 10% or is it --?

It's probably 12 percentage, maybe.

Okay. So without Dillon, it was down about 12%?

That would -- yes, that would be a good number for the range.

In the second quarter, on your last call, you presented a chart that showed the estimate of financial impact due to Dillon. And you showed an EBITDA number of $76 million?

Based on the $56 million that was in the prior year audit.

Right. So what kind of a time frame expectation was that based on? And if you had to adjust that chart today, where would you -- where would you put that expectation? Is it still $76 million? Is substantially less than $76 million? And what sort of time frame should you be thinking about for trying to get to that kind of a number.

Okay. Well, let me try to address it this way. We provided the $56 million because that was the audited -- last audited number that we had. I don't believe that, at this time -- and what we said on our last call, we expected Dillon -- I know, I didn't separate Dillon out. And we're not separating Dillon out this quarter. We said that expectations for this fiscal year is that Dillon would add approximately $3 million of EBITDA a quarter for this first six months as we work through transition issues. And then we would start to see the benefits of this synergy starting in the next fiscal year.

And I think I also followed up by saying that we'll be putting together all those numbers, providing an actual number for fiscal '08 in our July call. So I leave you a little bit in a gray area there because we wanted to start with an audited number of $56 million. And I guess you're free to have a different starting point from your perspective. But from a company perspective, we wanted to start with an audited number. The only thing I can tell you is we will give you an exact number for fiscal year '08 with everything consolidated when we get on our July call. But at this point, I don't have a reason to -- a reason to reevaluate the synergies that are coming in from Dillon at this point.

We have to look and see what we think next year's fiscal year's going to bring as far as market decline, as I've already mentioned. How that will affect our business and put that all together. And as I said, I think Bryan Hunt's question -- yes, we will get a moderate amount of savings from the closure, it will help to offset some of the market decline we see. So is it a net increase? We'll have to see how it plays out with what we expect the market decline to do to our numbers.

Tight. When you make the Dillon acquisitions, did you anticipate doing this consolidation? Or was that something that you -- did you discover after the fact that there was some reason to do it? Or what was the thought process behind why that's now being done?

No, that was considered at the very beginning.

Yes. And just from a big picture, can you give a sense of where -- where the pressure is coming from? Is it your customers are having problems with selling to their customers? Is it an increase in your customers' products coming in from overseas, hurting their ability to sell? Is it your direct competitors bringing more in from off shore? Where's the real -- where's the real pressure coming from in your business?

At the end of the day, it's a supply chain issue. It's at the end of the chain where our customers' pressure from the retailers on price, of course, to compete with imported goods. So it's the entire supply chain. And when I mentioned earlier about home furnishings, there's more and more importation of finished goods and fabric related to the home furnishings business than there ever way. And that's put that particular segment under quite a bit of pressure in the supply chain.

From a direct competition standpoint on imports or our products, which is yarn, I think, in the last 12 months, it's actually slightly declined. But it's at least flat. It's not been a significant move. Let's put it that way, between the last six months. The imports -- Imports is a total of consumption for DTY, which is textured yarn. It represents about 20% of the consumption in the United States. And I think, in this first quarter, imports of finished goods where down about -- on DTY was down about 7%. So it's really the supply chain. It's really the finished goods that -- is where we are working with our supply partners and our customers to be competitive with imported finished goods.

Okay. So if the pressure is going from the retailer end. that should imply that there's going to be a problem passing on price increases. I mean, I assume that their customers are not so willing to take the price increases. So either your customers are going to get squeezed on margin or you're going to get squeezed on margin.

Well, it's really -- it's really -- the retailers are really sourcing globally. The retailer is sources a lot of items from the region. I didn't mention this previously in response to your other question. But in a lot of product now, either in the form of direct yarn shipments or in the form of fabric, is going into half the countries, the CAFTA region, a lot of performance ware, et cetera. So that region is growing. There's a lot of capital investment going there. And the retailers are starting a dual sourcing for the reasons we've talked about in the past, which is the replenishment issue of getting goods back on the shelf in the same selling season, just having dual source, et cetera. So we are seeing improvement there.

Our customers are starting to -- some of our customers have set facilities there from a fabric production standpoint. So we're seeing more and more of that, which helps to compete against the finished goods issue.

Now, we've also said -- so I don't mislead you here -- is that it's not for all goods. It's not for all apparel. There's a certain segment of the business that competes very well with Asian imports that's done in the CAFTA region. And I guess an important point is to make that CAFTA is a permanent trade agreement. So now that it is permanent, we are seeing more and more capital investment going in there.

Okay. Great. Thank you very much.

You're welcome.

Thank you. Your next question is coming [Marianna Kushner] of [Norma Asset Managemen.

Hi, I have a few questions. First of all, the guidance for June quarter, $15 million to $16 million, it's down from $17 million to $18 million that you suggested on the last call. Is that primarily due to that mix issue or is it also due to perhaps more competitive situations, if you would, you're witnesses right now?

It's really the mix issue. It's -- that mix issue impacts us about a -- it's about $2 million number. And that's the delta between what I've just guided to versus last quarter. And we're -- as I've said, we're going to actively work to fix that. But it's mix related.

Okay. And then, when you talk about premium value, added products, that they're growing, but then on the other hand, you're talking about mix issues. So mix issue is within the products outside of PVA?

Yes. I mean, there's really -- we've -- I think we've mentioned this previously -- is that, you want to look at our products in three broad categories, you can look at commodities, another category of what we might call differentiated or specialty products. And then PVA sits on top of that. Those are our premium yarns, our branded yarns that do carry better margins. But they are -- if they're running at 8, say, 10% of our total, while it does add good value and we're growing that segment, it's the mix between the commodities and the differentiated product that has moved on us a bit, while PVA has stayed very steady. It stayed steady in December, even though it was a bad quarter. And it stayed steady this quarter. It's growing slightly this quarter because of Repreve. So it doesn't have that huge of an impact because it's stayed steady. But we run a lot of pounds through both commodity and the differentiated area. And that mix has changed on us slightly, to have a higher percentage of commodity versus the differentiated product.

And what does that make in terms of percentage commodity versus differentiated?

Well, normally within -- normally it run -- we had it down to a percentage. And this is a general -- I'm going to generalize it a bit for you. If you look at commodity, it was running somewhere around a 45% to 48% kind of number. And I just said PVA was running about 8%. So that leaves you the delta with differentiated, which is, again, somewhere around the 40%, 48%, 44 to 48%. You get a number depending on your range. So the commodity and the differentiated is almost split -- their percentage is almost equal in size. So when more ends up being in commodity, when those commodities carry very small margins -- and I've said on other calls that you could be looking for zero to 2%. There are products that cover your overhead but don't really put a lot of money on the bottom line. So that has had an impact on the bottom line.

Okay. And you mentioned, as an example, dye business that remains soft and how some customers moved away from what you're offering. Is it a permanent change?

Well, although things go in cycles, right now, the movement away -- and we're talking about moving away, we're talking about moving away from a package dye -- is what we do for the automotive business -- to piece dyed, which is where someone takes our natural yarns, makes fabric and then dyes the entire fabric. So we still have the sales, in many cases, in the natural yarn. But, of course, we don't have the value added process. So from an automotive standpoint, it's about 10% maybe of our dye business, which actually was -- has been higher than that in the past. So we still have some of that business. But it has moved away both because of it's moved to package dyed to piece dyed and then the CNA business, which was -- which still is package dyed, has moved to a competitor who's vertically integrated and not only dyes the yarn but also makes the fabric itself. And we're selling the natural yarn to that company. And then it's -- and we do some -- also some piece dying. So we sale the natural yarn, which is a white yarn.

I still didn't understand how you can recapture this if it's moved away to a vertical-integrated customer.

Well, you asked if it was permanent. What I was referring to is does it cycle back to where piece dyed comes back in the package dyed. There are limits. Will it? I can't say that it will or won't. But let's just talk about the limitations of piece dyed for a minute. One advantage of package dyed is that you can provide more custom -- I don't want to say custom color, but a custom fabric where you can put different colors in the fabric because the yarn itself has different colors.

If you wanted a stripe, for instance, you could easily use different colored yarns and have intricate designs in the patterns. Whereas, if it's piece dyed, you have basically one color. You're taking the fabric and dying the entire fabric. And that fabric is then in, say, for instance, a seat cover. So right now -- and it's also less expensive. So right now, the trend is piece dyed. And it continues to move to piece dyed.

And the foreign automakers have been doing piece dying for a while now. And we're seeing some movement at the Big Three away from package dyed to piece dyed. So we don't see, in the near term, that movement of that cycle turning back. So we are faced with that issue -- the dye house. That's one of the reasons we did close Mayodan, was because of that change in mix in the dye houses, and didn't feel that it was both volume and cost to maintain two of them at this time.

Okay. And regarding volume, change in volumes year-over-year, is it possible -- I know there are a lot of moving products here, but is it possible to quantify the impact of market attrition on volumes?

Well, our share, I mean, I think it's basically -- that's where it comes from. When you look at our share, and with or without Dillon, it doesn't matter. If you take it even without Dillon, before the acquisition in January -- so if you look at it through December, our share of the market really remains relatively unchanged. It's been running somewhere around -- was always running somewhere around that 42% kind of number, I believe. And it hasn't really changed at all. So we're retaining the business that's here. So to specifically answer your question, it relates back to the supply chain issue and the customers' standpoint.

Okay. And Joan Fabrics, are they operating? I didn't understand the comment about their future prospects.

Yes, what we said was we just recently, just actually a day or so ago, agreed with him under the conditions that we will provide them product going forward. We have been shipping to them inventory -- product out of inventory. So they have been running that product. And we will begin producing for them very shortly for them to get back into production for their customers.

Okay. And just, finally, on the analyst meeting that you had, I believe in January, you talked a lot about CAFTA region and how it will kick in on a bigger scheme, a bigger scale this year. And on this call, you seem to be a bit more cautious about the -- about the pressures. And you're not mentioning CAFTA that frequently. I mean, did your view change? Did some of the market dynamics change where Asian competition became one-tenth and CAFTA region isn't that big of a factor?

No. I mean, just the fact that I didn't mention it in my formal remarks, we still feel the same about CAFTA. CAFTA region is expected to grow, which I think I mentioned a few minutes ago to either Michael or Phillip on the call. We're very encouraged by the amount of capital that's being put into the CAFTA region by both our customers who exist today and by new potential customers who are coming to the region. And we have sales -- a couple of sales guys who call on a lot of customers there. We're seeing an increase in our imports on yarns directly. And we believe we're seeing increased exports of fabric by our existing customers in the United States to the region. So, no, we're still very encouraged by the investment that's going down there.

I mean, imports from the CBI was about -- is relatively flat to last year. So from an Asian import standpoint, that has not eroded that business. And we expect to see more and more investment going into the region. So we expect it to grow in '07. It will be expected to grow in '08. So we are putting emphasis on selling product there, also working with both downstream customers and direct customers in developing products that can be made there that will be competitive with Asian imports.

Okay. Thank you.

Thank you. Your next question is coming from Chris Dechiario of ISI Capital.

Morning.

Hi, Chris.

Hi, I just want to follow up on a couple of things that you've spoken about a little bit already. In terms of the Joan Fabrics Mastercraft bankruptcy, I guess, should I take from what you've said that you don't really see any long-term effects on that on Unifi, other than the industry affects that happened to Mastercraft that have caused them to go bankrupt. But in terms of the bankruptcy itself, you expect them to continue the going concern? You're going to continue supplying them roughly at the same level that you had been prior to the bankruptcy?

I would think it will be probably about the same level as prior to the bankruptcy, maybe slightly more. I won't discuss our exact conditions on which we agreed to continue. But we don't expect to have any additional exposure if they were not to succeed in their reorganization.

I don't think it's any secret that, in the marketplace at least, what their plan is for the business. They could possibly sell of certain segments of the business. I believe that's what they're -- what they would prefer to do. But we will probably get our share -- our view is that, one way or the other, we'll get our share of that business as it moves around the -- whatever the reorganization turns out to be. Whether they end up running the business long term or they sell out certain components of it and retain certain components of it, we'll believe that we'll retain at least the volume that we've seen in the last, say, six months or so.

Okay. So whoever -- no matter who the owner of the different pieces of the business, you expect to retain that business?

At least what we were dying in the last six months. I mean, it's certainly, depending on the court to sell a certain portion of the business to someone who's a fabric producer and has their own dye house, then, of course, we wouldn't see that business return. But I think there's already, I think -- we've already closed Mayodan for that reason. And so I think the volumes that we'll expect to see from Mastercraft, even after the reorganization, will be at a level that we will be able to sustain the volumes that we expect into the one dye house, which is Reidsville.

And can you say approximately, sort of an average, how many pounds per week you typically would sell to them?

I prefer not to though.

And what do you expect that the capacity utilization of the regional facility will be after you've integrated the operations from Mayodan?

Part of that depends on how much spun product, which is not -- we dye more than just filament there, which is what we produce. We dye some cotton. We also dye some rayons there as well. So it really depends on how much of that is in the mix so that the volume could -- it's going to be -- it's going to be very busy compared to what it has been in the past. So it's going to be at a percentage that we believe will return value to keep that dye house in business.

Right. And do you think there will still be some excess capacity so that, if you were to get -- if things were to change or something would happen and you would get additional dye business, there would be room for expansion or room to do that there?

Yes. We won't be running full. Let me just say that. We won't be running full. But we'll have room to take on some new business if we get that business, yes.

Okay. And then the $700,000 inventory write down related to Joan Fabrics, just was that accounted for -- was that in cost and consult, or where was that in the income statement?

Cost and consult.

Great. Okay. Okay, and then you talked about actively working to fix the mix issue. What kind of things can you do to fix that? I mean, is that -- I guess the way I'd look at it is just sort of -- it's the demand of the demand. What kind of things could you do to improve the mix?

Well, we've actually done some in the past. We've found ourselves somewhat in this position a couple of years ago. And I won't go into all of our strategies. But we did -- we management, a couple of years ago, when we found ourselves throwing a lot of low-end commodity that didn't make sense. In some cases, it was simply price sensitive, some getting Joan back started now, running more value-added pounds through the dye house will help as well. So there's several strategies we're going to employ. And I -- again, for market purposes, I'm not going to describe each of those on the call.

Sure. Okay. And I may have just missed this in the discussion about China. Obviously, it's going to be increasing the sales, but it sounds like it's going to be increasing here pretty dramatically, of course, the next year. Is it still expected to be break-even by the end of the fiscal year? And is that break-even EBITDA or break-even net income?

I think what Bryan just said was expected to be break-even in the month of June and July. So the quarter might still show a small loss. But from the month of June, as Bryan has expected, to be at the break-even level and then proceeding to become positive thereafter.

And that's break-even net income?

That's a net -- that's at the net income line.

Okay. Okay.

And we -- it is about time for our one last question. So I don't know, Chris, if you have at a last question or if there's somebody else in the queue that wants to get one question in.

I have a quick one. I don't want to take somebody else's -- out of the cash, how much is in the U.S. and how much is in Brazil and Europe?

It's about 50-50. There's about 50% of it in the U.S., which would be about $13 million. And in Brazil, it's about a little over $11 million. The balance still sits in Europe.

Okay, thank you.

Okay. Operator, we have time for -- is there anybody else in the queue? We have time for one more question.

Thank you. Your final question is coming from Aaron Braun of Willow Creek Capital.

Yes, good morning, gentleman. Maybe these are good enough to end on. We've seen an increased level of shareholder activities in small-cap arena companies such as Unifi. And given the board's relatively low level of stock ownership, I'm curious what kind of game plan dovetailing onto the strategic review that you've been engaged in for quite an extended period here, what some of the plans may be that you can update us on for monetizing some of the embedded value in the company, such as the Parkdale joint venture or the China joint -- operation or just looking at the core operation at a $60 million EBITDA run rate. Just kind of where are you on those types or issues? And what, as long-term shareholders, can we expect to see in addressing some of those issues? Thank you.

Well, broadly, I think that we are not straying from our strategy that we put forth earlier, about a year ago, which is to consolidate the domestic market. You see us doing that today, which you know we have done one previously with Kinston. Bryan has gone through China. We're continuing to grow China. I mean, China is a growth platform. The market there is a growing at an extreme rate of around 10% a year. There's a lot of customers that we're sampling today, so we're very encouraged where China's going to go. So we're keeping with that platform.

As we've also mentioned, that's what we've talked about, our PVA products today. We're continuing to develop new products. So we're really -- to your point of growing shareholder value, we believe that the strategic direction that we outlined to you about a year ago is the right path. We are keeping to that path. And I think you can see that we're going things that are executing to achieve those goals of obtaining, getting more EBITDA and cash flow and potentially net income here in the United States.

The down-stream selling effort continues to stay strong. We're going to be selling the Unifi-Sans. We're going to put to them to generate cash there of $15 million, where it contributes very little to our -- in fact, it doesn't contribute to our EBITDA because it's a 50% ownership. So we're constantly doing those moves, smaller moves that we don't talk about to help manufacturing costs. We've moved some air jet texturing equipment from what we refer to as T-2 into T-5, again, to lower manufacturing costs. It was done with very little expense. It's not a major closure. So we're continuing to stay focused on that overall sort of three-prong strategy of growing China, growing product development because that's where the need is, from the retailer standpoint, to differentiate ourselves with out down-stream customers. And we're staying focused on our domestic consolidation plan of lowering our manufacturing costs through taking out excess capacity in the market.

So thank you for your question.

Operator, before we conclude, I do want to make one comment. We've noticed that several times over the last couple of quarters, we do get calls from shareholders during our quiet period, which begins the day after our close of the quarter. And I know if frustrates many of you that we don't call you back. And I think we try to tell you we can't call you -- we won't call you back.

So I'll just remind you that we do go on our quiet period on that day. I apologize for the fact that we do not call you back and speak with you. But in keeping with the Reg FD after we've closed the quarter, even if you have a general question that you say is not related to the quarter, we feel more comfortable not having a discussion on any of those topics just so that there isn't any perception that we would have talked about the quarter.

So with that, we want to thank each of you for being on the call today. And thank you for supporting Unifi. And we look forward to talking to you again in July. Thank you.

Operator, that concludes our call.

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