Unifi Inc (UFI) 2008 Q1 法說會逐字稿

Good morning. My name is Elsa and I'll be your conference coordinator today. At this time, I would like to welcome everyone to the Unifi first quarter earnings conference call. (Operator Instructions) It is now my pleasure to turn the floor over to your host, Mr. Ronald Smith. Sir, you may begin your conference.

Thanks, Elsa, and good morning, everyone. Joining me for the conference call today is Bill Jasper, our President and CEO. During this call, we'll be referencing presentation material that can be found on our website at www.unifi.com. That's u-n-i-f.i.com. The presentation can be accessed by clicking the first quarter conference call link found on the home page. I hope that you have the presentation available as it will make it much easier to track through the information discussed on the 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 disclosure in our 10-Qs and 10-Ks regarding the various factors that may impact these results.

And before we begin our financial results for the quarter, I'd like to turn the call over to Bill Jasper, who'll provide a brief overview of the company's priorities and focus for fiscal 2008. Bill?

Thanks Ron, and good morning, everyone. As you are all aware, there have been quite a few changes at the company recently and we're excited by the opportunities that they present to us. We have a new leadership team, several new board members that bring more than 150 years of valuable textile industry experience and over 20% stock ownership in the company.

Our talented and experienced management team now includes Roger Berrier as our Executive Vice President of Sales, Marketing, and Asian Operations; and Ron Smith as our newly appointed Chief Financial Officer. These gentlemen bring 16 years each of experience to their positions and I look forward to their leadership and the support of our board of directors as we work to become, and remain, profitable in the U.S. and Asia.

Let me begin my remarks by first saying that I believe our financial performance of the company over the last several years has been unacceptable; and we intend to change that. Despite being in a difficult and declining market, Unifi has the people, products, technology, supply chain power, and global reach to be successful once again. Our balance sheet is strong and our cash position is improving.

In the past several months, we've taken decisive action to improve our ability to compete. For instance, domestically we maintained our margins over raw materials in the last year despite a period of volatile ingredient prices and market contraction.

We also increased profits from our premiere valued products, or PVA, which generate better margins than our commodity products. Sales of our PVA products have grown by more than 600% since they were first introduced in 2001, and we expect that trend to continue. In fact, in the January through September period of 2007, revenues from our PVA products grew by 50% over the similar period of 2006.

Much of this improvement was driven by the tremendous growth of our 100% recycled product, Repreve. Repreve's being specified into many new apparel applications at well-known brands and our recycled polyester story will be featured on both CNN and the Discovery Channel in the coming months.

The development of Repreve, as well as a strong corporate history and culture of environmental consciousness positions Unifi as an industry leader in a field of growing global importance.

In January 2007, we purchased the texturing operations of the Dillon Yarn Corporation, and in April 2007 consolidated that volume into our Yadkinville and Madison facilities. That transition is complete and we've maintained more than 90% of the Dillon share in that transition.

In August, we announced the closure of our Kinston facility, which was a very difficult decision but a necessary one. By closing Kinston it allows us to run our Yadkinville spinning facility full and at maximum efficiency. It greatly improves our flexibility during times of softer demand. And just as importantly, it allows us a source of POY at globally competitive prices which are well below our Kinston costs. This provides opportunities to compete with and take share from imported polyester filament, which accounts for nearly 25% of domestic consumption.

The final line at Kinston was shut down October 4th and we expect the Kinston production to be fully transitioned to both Yadkinville and source POY by early 2008.

And finally, we've restructured the company to align our overhead with market conditions and our new business model. We've taken out nearly $9 million annually of non-value-added costs in the past few months. These actions have put the company in a position to compete successfully and we have the leadership and board support to drive improvement and grow both revenues and earnings.

In the coming months, the leadership team will concentrate on three key areas, and those are -- first, achieve corporate profitability as soon as possible; maximize cash generation. Secondly, get our China JV profitable and position it for long-term success and growth. And finally, develop our vision and strategy to achieve sustainable growth and create significant shareholder value.

Before I turn the call back over to Ron, let me briefly touch on each of those areas. The first area is achieving corporate profitability as soon as possible and maximizing cash generation. To accomplish this we have, over the past three weeks, developed an aggressive plan and set clear targets at all functional areas of our business in the Americas.

We have identified the critical operating tasks necessary to achieve the targets we've set and these tasks are focused primarily on running high sales to capacity levels; improving our margins over raw materials, including enriching our mix, with a focus on PVA yarns; and growing sales of these products globally. Using our purchase power to assure the lowest possible raw material costs. Rigorous management of our working capital. And a continued focus on eliminating all non-value-added overhead, support, and manufacturing costs. And by that, I mean if an overhead cost is not adding value to either the product or the supply chain, we're going to either minimize it or eliminate it.

The plan is in place and now is the time to execute. These critical operating tasks will be measured weekly to assure we stay on track and achieve quick and lasting results.

The second area of focus is to get our China JV profitable and position it for long-term success. With China's domestic demand for polyester yarns increasing at an annual rate of 8% and the specialty yarn market growing at an annual rate of 10%, the JV is a growth platform in a rapidly growing region. The JV continues to show steady but slow improvement in volume, costs, and PVA growth.

We will be reviewing all China strategy and tactics over the next few weeks to ensure we have disciplined and aggressive plans in place for improvements similar to our domestic initiatives. Our priorities in China will be on improving costs and quality as well as developing a sustainable route to market for our high-value and PVA products.

The final area of focus is develop a vision to capture growth and create sustainable shareholder value. The company is conducting an exhaustive strategic planning process to better understand how we can use our influence as a major player in the domestic market and our sustainable competitive advantages to grow sales and profit in both the short and long term. We are encouraged by the opportunities and will be communicating more on this vision in the coming quarters.

Now, we're in a very challenging business and I recognize our financial performance has been disappointing over the last several years. However, I am confident that we have a leadership team and a board of directors in place that can build a strong, successful, and profitable company for many years to come. One thing is certain. We will have a well-thought-out, realistic but aggressive plan for success; we will focus on efficient execution of these plans; and we will have a bias for action.

With that as a backdrop, I'd like to turn the call back over to Ron to review the results for the quarter. Ron?

Thanks, Bill. If you're following along on the website presentation, begin our comments on Slide 3.

Net sales for the current September quarter were $170.5 million, inclusive of net sales acquired through the Dillon acquisition in January 2007 versus net sales of $169.9 million for the prior-year September quarter. In comparison to the prior-year September quarter, total volume declined 7.1% on a consolidated basis, offset by a 7.4% improvement in pricing.

Quarter over prior-year quarter, polyester volumes declined 7.5%, while pricing increased 6.7% and nylon volumes declined 3.2% while pricing improved 7.5% on a divisional basis.

The primary drivers of quarter-over-quarter volume contraction, even with the addition of the Dillon plant through acquisition, were [watching] issues in the contract and home furnishings market caused by the previously disclosed bankruptcies of Joan, Mastercraft, and Quaker mills; volume pressure on certain commodities utilized in the print cloth and the mattress ticking business; and the shutdown of Dillon's single largest customer, a domestic weaver, last spring. And although there was no credit exposure as the result of a negotiated guarantee, the impact on the volume was substantial.

The company is reporting a pre-tax loss from continuing operations of $16.1 million for the current September quarter, compared to a pre-tax loss of $10.6 million for the prior-year September quarter. Included in this pre-tax income for the quarter are the following unusual charges, each of which are detailed as adjustments on the EBITDA slide.

The first is a $2.4 million SG&A cost related to the severance of our former CEO; $1.2 million of SG&A cost related to write-offs of deposits associated with professional fees incurred during the company's recent strategic alternatives review; $2.6 million of severance charges from the restructuring of July and August and the costs related to early termination of certain contracts at the Kinston facility; and an impairment charge of $4.5 million to adjust the carrying value of the company's ownership interest in Unifi-Sans.

Regarding the investment in the Unifi-Sans joint venture, the company exercised its put option in January and believes it will receive approximately $8.8 million for its share of the business, an additional $3.0 million for the building, totaling $11.8 million in the proceeds. The contracts have been signed and we expect the deal to close during the December quarter.

I would also like to note that during the September quarter, there will be an additional $1.7 million of SG&A charges related to the severance agreement with our former CFO. Additionally, as a part of our strategic planning process, and as a result of our recent restructuring activities, the company intends to perform an exhaustive review of our long-lived assets, which may result in a comprehensive adjustment to the carrying value of certain assets, as appropriate.

The company reported earnings of $0.2 million from its share of the investments in equity affiliate partners, which is a $2.1 million improvement over the $1.9 million prior-year September quarter. Increase in demand for cotton as well as favorable pricing resulted in a positive swing of approximately $0.8 million in earnings of the unconsolidated affiliate Parkdale America; and improvement in the operating results for our China JV resulted in a $0.7 million positive swing.

Net income for the September quarter, including discontinued operations, was a net loss of $9.2 million or $0.15 A share, which compares to a net loss of $10.1 million, or $0.19 per share, for the prior-year September quarter.

SG&A expenses for the current September quarter were $14.5 million, or 8.5% of sales, versus 6.7% of sales for the prior-year September quarter. However, SG&A for the current quarter includes the $3.6 million in previously mentioned unusual charges and $1.1 million of fees and amortization related to the January 2007 Dillon acquisition.

Now we'll turn to the balance sheet, which you can find on Slide 4. Cash on hand at the end of the September quarter was $33.9 million, which reflects a decrease of $6.1 million compared to the $40 million at the end of the June quarter. The primary uses for cash during the quarter were long-term debt repayment of $6 million and working capital requirements. And the sources of cash were operating results of $2.1 million from the sale of Plant 5.

Subsequent to the end of the quarter, the company generated an additional $4.7 million from asset sales and anticipates $4.5 million of further real estates during the quarter. As for our loan covenants, cash proceeds from most of these sales will be additives to the $5 million in restricted cash reported by the company at the end of the September quarter.

In addition to the cash on hand, the company also has appropriate 68-- I'm sorry, $64 million of availability under its $100 million revolving credit facility. Total long-term debt, including $36 million of borrowings under the revolver, is $28.5 million at the end of the September quarter.

Net working capital balances increased $14 million from the end of the June quarter, primarily as a result of the bridge inventory built to transition the POY from Kinston and the related decrease in accounts payable. This June, inventory increased $7 million and accounts payable decreased $8 million. As a note, the company has changed the to FIFO method of accounting for its inventories effective at the beginning of fiscal 2008 and, as a result, all prior-period financial information has been restated. The company believes FIFO would yield a more current value of ending inventories and better reflect our operating results during periods of fluctuating raw material prices.

Turning to Slide 5, the company reported $12.7 million in EBITDA for the September quarter, inclusive of a $694,000 distribution from our equity affiliate, Parkdale America, and within the $12 to $13 million range of the company's previously forecasted guidance.

Before we open the floor to questions, I'd like to talk briefly about some of the challenges we're facing in the December quarter. Although the market appears to be stabilizing and the October volumes have been strong, we are cautious about our revenue targets in the December quarter. Retail apparel and home furnishing sales have been sluggish, and the projections for the holiday season are not optimistic. The inability to move inventory levels of finished goods throughout the supply chain due to reduced customer spending over the holidays could result in a slowdown or cancellation of orders, which is a situation we will monitor closely.

We're also expecting a price increase of approximately 6 to 10% in polyester raw materials in the December quarter. Once through the transition period, the closure of our Kinston facility will allow us more flexibility around our raw materials sources. Nevertheless, this quarter we're leery of the potential impact on margins cost of potential time lags in passing along such increases.

It is also important to note that such raw material price increases are on a global basis, not isolated to the U.S. like they were in 2005 and 2006. Therefore, there should not be any significant movement in price differential between the domestic and imported yarn, and any negative effects should be temporary.

With that being said, we're forecasting adjusted EBITDA of $12 to $13 million for the December quarter, exclusive of the Kinston shutdown costs and severance costs for Bill-- for our CFO; our former CFO. We're also revising our fiscal 2008 adjusted EBITDA guidance to a range of $55 to $60 million, exclusive of the previously noted adjustments.

And finally, with regards to China, we expect continued quarter-over-quarter improvement in the operating results but are not providing quantitative guidance at this time. As discussed earlier, Task 1 for the new leadership group was defining a strategic plan and the related tasks necessary to return our domestic business to profitability.

Over the next several weeks, we'll be performing a similar process at the joint venture in China and will have a more in-depth guidance for you on our January call.

This concludes our update for the September quarter, but before I open the floor to questions, I'd like to refer you to Slide 8 on the webcast. In response to your requests, Bill Jasper and I have scheduled investor days in New York and Los Angeles on November 12th and 14th, respectively. If you have interest in attending, please contact Rebecca Landis at the number our e-mail address provided and we will get back to you shortly with specific paths and locations.

With that, I'd like to now turn the floor over to the operator for questions.

Thank you. (Operator Instructions) Our first question is coming from Bryan Hunt with Wachovia. Please go ahead.

Thank you and good morning. I was wondering, Ron, if you could address the cash that you may have on hand in December. Looking at the asset sales that you've talked about, the real estate that's already happened, the real estate that's expected, and the cash from Sans, you could be sitting on mid-$50 million in cash. Could you rank, in terms of priority, what your use may be for said cash?

Yes. And good morning, Bryan; thanks for the question. Yeah, I think from our perspective, just to summarize a little bit, we do expect those assets held for sale, the total of those, just over $9 million. And we also expect the asset sale of the USTF to go through here in the quarter, so-- which was $11.8 million. So yeah, we do expect significant cash generation as well as some working capital savings as we're working off the working capital built for the transition in Kinston.

I think for us, probably Priority 1's going to be paying back the revolver. Once we get out of the revolver, then we'll take a good long look at what's the plans for going forward. I think that's a big part of what the strategic review that we're going to go through is going to be about. Once-- we're focused on getting back to profitability quickly, and then once we do that over the next couple of quarters, then how are we going to get to-- what are we going to do with the cash we have on hand at that point in time? So I can't give you anything other than right now we'll probably just be getting out of the revolver and then looking for other opportunities with it.

And then specifically, when you've talked about a potential sluggish Q or second quarter, what numbers are you looking at, specifically? I mean, retail sales are still forecast to be up, but just not up as much as a year ago. Do you think that if retail sales are well below everybody's expectations, your orders for spring are going to be weak or-- I mean, could you give us a little bit of guidance on what in particular the company's watching?

Yeah. I mean, I think from our standpoint, we understand retail sales are slightly up but, again, not up as much as before. We think there's some inventory in the pipeline that may cause some issues for us. And it's just the uncertainty we're hearing from the credit crisis and all the other things that are going on out there. It's creating some uncertainty and I think from our standpoint, we're trying to be a little bit more conservative and make sure the things we put in the bank, especially here in the beginning quarters, are stuff we can count on.

Yeah, and I think, Ron, a couple of the other things we're looking at is inventory's up in the apparel supply chain about 13% and that sort of-- and I'm sure as everybody knows, home sales have been weak and new home builds have been weak and there's certainly furniture and other related businesses that we play in which could be weak because of that.

Do you think in October you saw a pull forward of orders based on the outlook for higher pricing in yarn? Because that has played out historically?

I'll tell you from my experience -- and I've been in this industry for quite some time -- you very seldom see much pre-buying before a price increase. And the main reason for that is most of our customers keep very little inventory and they tend to keep very little inventory. So I don't believe it is, now. I believe the increase in sales we've seen in October is real.

I think from a raw materials standpoint, those numbers have been back and forth. They're probably higher today than they were a week ago. Our expectation's for where they're going over the quarter. So I think-- I don't see October being a pre-buy [white sale].

And if you could repeat for me, Ron, what polyester volumes and pricing and nylon pricing and volume -- you speak too fast for my hand to write.

Okay. Hang on; let me find that page.

And then after that, I'll get back in the queue and let someone else ask you a question.

From a polyester standpoint, volumes were down 7.5%; the pricing was up 6.7%. And then nylon, volumes were down 3.2% and pricing was up 7.5%.

Okay; thank you very much.

Thank you. Our next question is coming from Andrew Ebersole with Sentinel Asset Management. Please go ahead.

Good morning. I think on your last call, you guys talked about anticipated savings and working capital benefits from the Kinston closure and you'd put a target of savings at about $12 million and a working capital benefit at about $11 to $12 million. And I just wanted to know whether or not you guys are still comfortable with those figures. And if you could update us on the timing of achieving those savings and that working capital benefit, that'd be great.

Yeah. I think from a working capital standpoint, what we said on the last call, and I think is still true today, we do expect that kind of $10 to $11-- or, $10 to $12 million of working capital savings out of the Kinston shutdown. But it's going to take some time to manifest the sale.

We talked about the working capital that we built over the quarter in order to build some transition inventory, or some bridge inventory there, to make sure we're meeting our customer service levels. And it's going to take some significant time to work that through the chain.

And what we had said before was we expect, over the time period, to get-- over this fiscal year, to get our build back. So the working capital that we built in the quarter, we're going to work that back down over the next three quarters. And then next year, fiscal 2009, will be the year we see the kind of $10 to $12 million pickup in working capital.

And then, from a savings standpoint, I think we still feel really good about the opportunities we're getting around that with that $10 to $11 million-- I'm sorry, $11 to $12 million in savings that will be generated out of that shutdown. And it's creating flexibility-- most of that saving is coming from creating flexibility around our supply chain to be able to do some different things and have some opportunity to purchase in there. So we feel good about that.

So what was the build? And did that all occur in the first quarter?

The build in the first quarter was just over $14 million and we expect it to come back over the next three quarters. So we'll get it back to June '07 levels by the time we get to June '08 levels. And then the following year, we'll be expecting to see another $10 to $12 million of working capital savings on top of that.

So over the course of the fiscal-- of the current fiscal year, what's going to be the working capital movement? Is it going to be (inaudible)

Over the whole fiscal year, it'll basically net zero. We'll be back down to June '07 levels.

Okay. And the revised guidance that you put out there -- does that still exclude the Parkdale dividend?

Yes, it does. I should have said that; it does not include distributions from equity affiliates.

Okay. And then, you-- I just want to confirm -- for the second quarter, you guys are guiding to $12 to $13 million of EBITDA?

Yes.

Can you kind of frame your confidence level around that number? I know there's a lot of moving parts but can you just give us a sense of how achievable that number is? And where the downside resides -- is it more on the volume side or is it more on the raw materials side?

We put the raw material-- the two things we put in there was we're seeing some sluggishness coming back because of the inventory build up at the retail in the supply chain and then the raw material piece. I think from a volume standpoint, we said in the call, I think, or in the script, that October volumes were pretty strong but we're still a little bit leery about is that going to continue through the quarter because of that inventory? So-- Bill could talk a little bit more about that, but-- so I think that's where we're at.

I think from a working capital-- from a raw materials standpoint, that's an ever-moving target. I think we-- we had some expect-- before the quarter started, I guess back in August and September, we had expectations of another fall-winter of prices going back down. We obviously had the issue with the supply chain that's caused prices to go up. And that number's been a moving target; it was moving as of this morning, in reality.

So we're a little bit concerned that the prices that we-- the pricing power-- and we've said before, when prices of our ingredients go up, we're going to pass those prices along. We're a little concerned in our ability to keep that matched up on a month-by-month basis just because there is so much uncertainty in that.

And, Ron, I guess my comment on that would be, I've got very little concern about recovering the raw material prices because, again, they're going up globally, not just here. And barring a major downturn in the textile markets in November-December, I'm feeling pretty confident about the 12 to 13.

So you guys are just speculating on the potential for a decline in demand over the course of November and December. You haven't really seen it yet at retail?

Yeah; in our October results. We said October has been strong from a buying standpoint. So no, we have not seen it as of yet; we're just-- we're reading the same newspapers you guys are reading from a-- the credit crisis and all the things that are going on and are working their way through right now. So yeah, there's nothing specific other than just a general feeling of uncertainty.

And the inventory issue that we talked about before; the 12.-- the 13% year-over-year increase in retail inventory.

All right. And regarding your asset sale program, have you exhausted that at this point? Are there still opportunities going forward beyond what you'd call the Sans sale?

Everything we've shut and put on the market, we've dropped into our asset held-for-sale bucket. And as we get through the quarter, we'll be pretty close to having that exhausted. So I think we're-- there's nothing significant after that. I mean, we've got the two more in this quarter that we talked-- we closed on two already this quarter and we've got two more that we anticipate closing on this quarter. But once we get through those and once we get through this Sans sale, I think we're pretty much at the end of that road for a good period of time.

All right. What's your CapEx guidance for the current fiscal year?

$10 to $12 million. I think we've spent around $1.1 in the current quarter.

All right. And is that pretty much baked in or is there any flex around that number?

That's a number that we've used pretty much-- pretty regularly as guidance on CapEx, I think. I would say the last couple of years, I think we came in at $10 million and $9.3 million. So I'm not sure we'll get all the way to $12 million, but we have budgeted projects on the books that say $12 million's probably a good number. And most of them are-- it's not new machinery or new technology, it's more replacing existing equipment.

All right; thank you.

You're welcome.

Thank you. Our next question is coming from Allen Zwickler with First Manhattan. Please go ahead.

Good morning.

Hi; good morning Alan.

I have two questions, unrelated to each other. One is, could you quantify what your results were in China in the first quarter just to-- while I know you don't want to give the whole year out, I just would like to set some direction in terms of what-- how you're doing there. And so if we could start with that.

Yeah. On a U.S. GAAP basis, China lost-- our part of the China JV was about-- of the China loss was about $1.2 million. And the JV itself had about $37 million in sales.

Okay. And on a different topic -- when you talked about these large growth in-- I'm going to call them the performance products, could you maybe give us a sense for how large they are relative to the size of the corporation? Because growing 50, 60% sounds great but I'm not quite sure what that means in real numbers.

Yeah. In a couple of the investor disclosures we've had before and the one we'll have coming up, the press releases we'll do, we've had a bar chart in there that shows the growth in 2001. I think as of today, it's around 7.5% of our total sales and we expect it-- we've got a goal, obviously, to grow a lot quicker than that with 50% growth over the last nine months. So we expect it to become significant.

The other point I'll say is if you think of just the world textile market in general, probably 10 to 15%, maybe 20%, of the market is what we would call premier value-added-type products. There's another-- out of that, there's another 25 or 30% that's differentiated products and then the other 50% is pretty much commodity products that are made throughout the world and there's no real technological or differentiating factors in those guys. So we've definitely got a goal to get up the supply chain a little bit for-- enrich our mix further in order to be able to get closer to that 15 or 20% level (inaudible).

And is making that product-- is that being done in the U.S., is that being done in China? And do you have the capacity to increase to these goals without significant CapEx?

Yeah, we produce those products both in the U.S. and in China and we have significant additional capacity available as they grow. That will not be an issue.

I guess-- I will say, the only one we've said in the past is around the Repreve. We were getting pretty close to capacity but we've worked out some agreements where we won't be putting in any CapEx in order to support those growths but we'll be partnering with our converter on that to be able to give us the raw material that meets our Repreve standards that we'll be spinning. So we won't be making CapEx but we will be-- that supply chain has been developed in order to be able to meet these growth perspectives, especially.

And the sale of those products, are they to similar customers that you've been selling historically, or are you going into new markets?

I think they're probably-- they're to similar customers. I mean, they're the same people. I mean, we're not selling Repreve into print cloth, right? The market we talked about-- it was purely a commodity market. So it's not universal across the board. But the customers who are buying these products have been customers of ours for along time. And our existing business is what's opened the doors for us to be able to get in and be able to sell these premiere value-added products.

As well as we've got a downstream market where we've got a few people where their sole job is to go down to brands and retailers and tell the Unifi story and pull the products through the chain. Those products are being pulled through both domestically and in Asia.

And if I could just slip in one more quick one relative to China -- do you have the right people there now? Is there going to be a requirement to hire people, Unifi people, to be over there versus the structure that existed before you guys took over?

We put the structure in place that's in place today. Roger Berrier and I will be traveling to China next week and, again, we're going to critically look at everything we're doing there and there may be some changes to the people we have, but right now, that's-- I mean, that's something we'll know a lot better in about two or three weeks.

Good luck, gentlemen.

Thanks.

Thank you. Our next question is coming from Marianna Kushnir with Nomura Asset Management. Please go ahead.

Hi. A few questions, really quick. First of all, the JV that you wrote down by $4.5 million, what JV was it?

It was the Unifi-Sans technical fiber business. It's the business that we're selling. I said we signed contracts but I was corrected; we haven't actually signed the contracts but we've got contracts pretty fully negotiated. We expect to sign them over the next couple of days and to close here in mid-November.

Okay, so the write-down didn't have-- I mean, it didn't impact the estimated proceeds that you're going to receive.

No, kind of chicken or the egg. By the time we got to a negotiated price, then that's when we came back to the process of saying we need to look at doing an impairment because we're going over a disclosure period.

Okay. And then, regarding asset sales proceeds, you were talking about selling some idle assets. And I recall that last quarter you mentioned you were going to receive about $8 million in September quarter and you received a lot less. Is it just a timing issue? Could you talk a little bit more about that?

Sure. I think we said $8 to $10 over the first quarter of September. What we actually sold in the quarter was $2.2 million-- or, $2.1 million. Since the quarter-end, we've sold another $4.5 million of buildings that closed. And then we've got another $4.5 (inaudible) .7 that we expect to close on over the next 30 days. So when you add all those up, it's basically $11 million. And by the time we get them-- we can't get them all done in September quarter, but they will be done-- we expect them to be done over the next 60 days.

Okay. And then regarding working capital, I know you answered some questions before but I just wanted to double-check that again. You were talking about how working capital increased at Kinston and I recall that you were expecting to actually recover working capital there in the magnitude of $12 million and now you're saying that you expect working capital to be roughly kind of neutral rather than a source of cash for fiscal year '08. What changed?

I'm sorry if I didn't make that clear. Basically, what we've said before was over the year, we expect to have to build working capital because we're going to transition out of our own internally produced POY and replace it source POY. So every item that we have that got made through this plant, there's a whole lot change process we have to go through in order to qualify the new business at the customers. So we built this bridge inventory in order to smooth that transition process.

So what we said was we were-- over the fiscal 2008, we were going to build inventory in order to handle that transition. We were going to work that build off over the remainder of 2008 and then in fiscal 2009, we would expect to see the $10 to $12 million of working capital savings.

And we're coming back and basically reconfirming that guidance today. We're saying, in the September quarter, it built $14 million, primarily as a result of this Kinston inventory build for the transition. Over the next three quarters, we expect that $14 million build to be taken back down basically to zero to get our working capital levels back down to where they were at in June 2007. And then in fiscal 2009, we expect to be able to get an additional $10 to $12 million of working capital savings.

Okay. And why do you need to manufacture POY outside? Why can you not do it in house?

I think the-- what we had was-- we had, from our Kinston plant-- And let me be clear. That 's a good question -- let me clear up some confusion. We were making our own POY for basically our own-- our entire POY requirements and we were also selling out to the furniture market.

But what we had was we had an asset in Kinston that was a-- it was an asset designed to make commodity products and designed to run full out. There wasn't a lot of-- there's not a lot of flexibility in Kinston to be able to run at half the machines or three-quarters of the machines. So that requirement to run full out was putting a lot of pressure on our business so we went out and did a strategic alternative-- or, did a planning process to say, "If we shut Kinston, how much would it cost us to replace that production in a more flexible manner from outsourced suppliers?"

And basically, with the leverage we had of taking that out of the market and giving these suppliers new business, we were able to get advantage pricing. And that pricing generated a savings over where we were producing it at. So there was a price reduction -- we can buy it in slightly cheaper than what we were making it at. We can also -- that additional volume, taken to one of our suppliers, allowed us to create leverage on the pricing side for our raw materials of our POY plant in Yadkinville.

And then, the third impact was it created flexibility for us for going forward to be able to go up and down in times of softer or stronger volume.

Yeah, Ron, I guess if I was to summarize (a), we don't have the issue of either continuing to run Kinston during soft demand versus taking it down. I mean, you had a choice of either building inventory or spending money to take it down, which is not cheap.

And secondly, when we ran Kinston, all of our raw material prices were basically driven by formulas at U.S. prices. And as I think you all know, over the last couple of years, the gap between U.S. and Asia pricing has really oscillated up and down, but it's been quite high sometimes.

With the new strategy we have, where we're purchasing POY both domestically and imported gives us the ability to react to those changes in raw material prices between here and Asia and just gives us a tremendous amount of flexibility as well as being much lower prices than what our prices were at Kinston which, again, gives us the ability to compete with imported textured yarns, while we've not been able to do effectively in the past. So it's-- there were several reasons we made the decision to shut Kinston down, all of them good, in my mind.

I'm sorry; did you mention the suppliers of POY that replaced Kinston? Are they domestic suppliers?

Both domestic and imported.

Okay, thank you.

The important part about that is-- we've estimated about 40% of our business requires U.S.-origin yarn so we need a domestic supplier for that piece of it. And then, the import supplier is coming in at slightly lower prices what we have from that domestic supplier. So like Bill was saying, it's given us an avenue to be able to compete a little bit better in some of the other programs we need to compete in.

Thank you.

Thank you. Our next question is coming from Chris Dechiario with ISI Capital. Please go ahead.

Good morning.

Hi, Chris.

My first question is your EBITDA guidance from last quarter would not, I believe, have included the $8 million in expected cost savings this year from the corporate re-org that was announced in August. And does your new guidance incorporate that or not?

Yeah, it does incorporate that. We still expect to get that $8 million of savings.

Okay, so your $55 to $60, which includes the $8 million, the other one, I think it was $60 excluding it. Is that correct?

Yes.

Okay. And the reason for that drop, or the [92], that drop, is pretty much what you've been talking about with the second quarter where you're really looking forward in terms of the effects of the credit crunch on the apparel and home furnishing segments?

Yeah. And from an automotive perspective, too. We think-- automotive, I guess, has been down around 3%. We still have a little bit of our business going through that trade. A little bit of our dial-- a little bit more, probably 10 or 12% of our total business, goes through automotive. So those three things are the big three things. And I think it's us being uncertain about where the future's at with those things and like Bill said, I think we've got a plan in place to be able to get-- reach these numbers and hit the critical operating tasks to hopefully improve on these numbers.

Okay. And if that were to play out that way, do you see more potential for consolidating facilities or--?

I think from a volume standpoint, we feel pretty strong about we're going to be able to-- the advantage that Kinston's bringing us-- as well as the advantage of the new POY sourcing strategy is going to be able-- is going to allow us to be able to go out and be a little bit stronger with presence in the marketplace on some isolated pockets where we can go get volume.

So I don't see consolidation being on the radar here the next kind of six to 12 months. I think we see a tough market because of some of the consumer issues, or some of the issues down the chain at retail, but we still feel volume's going to be pretty strong.

Okay. And then, the-- just the asset sales numbers that you were talking about for this quarter is $4-plus million that you've already closed, another $4-plus million that you were expecting to close. Those numbers don't include the roughly $3 million from the Sans fiber building; is that correct?

Yeah, correct; those do not include that. It's the $2.2 we had in the June-- sorry, the September quarter; then we had another basically $4.5 already this quarter, another $4.5 the rest of the quarter, and then you've got the $3 for the Sans building and the $8.75 for the Sans business.

Right; okay. And then, in terms of the--

Chris, one other point on that. I mentioned in that, I just wanted to highlight, that according to the terms of our bond, lots of that stuff will be classified as asset sales under the terms of our bonds and will have to go through that restricted cash account that but be able to obviously draw back down through CapEx.

Yeah, that's actually-- thanks for mentioning that; yes. Okay. In terms of the reorganization of the officers in the company, with Bill Lowe having left, which I think is a loss for the company, and now you don't really have anybody as COO, how-- are you going to be replacing the COO position? And is that person going to eventually be the person that's in charge of China? I'm just trying to get a little more color on sort of the COO--

I think right now, the intention is to leave-- obviously, Bill's been moved into the CEO and President's role and I've been moved into the CFO role. I think also -- one thing you didn't mention -- the Board created this Executive Committee, which has Steve Wener and Alf Webster, both of who are leaders of the industry for the last 25 or 30 years. So I think the combination of those three things will ultimately be the one that drives and manages the company.

From a China perspective, Roger Berrier, our Executive VP, he's got lots of responsibility but-- that he's been adding to his plate, but Priority 1 for him is going to be China here in the next quarter, just to see exactly where we're at, get the process in place, develop the strategic plan that we can manage and measure off of. So I think from a China perspective, it's going to be-- it's going to fall in Roger's lap.

Oh, okay. And then so effectively, Bill Jasper will be effectively the chief-- COO -- acting, in a way, COO. Or this subcommittee of the board; is that what you're saying?

Exactly. I mean, the combination of those two will be playing the former role of the COO and the CEO. I mean, I can speak from my standpoint, and Bill, obviously, can chime in. But that Executive Committee -- having Alf and Steve -- we've had one or two meetings already, and having those guys there and being to draw on their experience and wisdom and leadership-- I mean, they're not going to--

One thing I will state for sure is we're not going to take our eye off the cost perspective. We understand that one of the important critical success factors for our business is making sure we maintain cost-consciousness and we keep our overheads structured in a way, or sized in a way, based on the size of our business. So we're definitely committed to that goal.

Okay. Just a couple more quick questions. How much do you expect this year in cash-- how much do you expect to expend in cash severance and restructuring charges?

We've got $1.1 plus $2.6 plus $1.8 so around-- a little over $6 million.

Okay; and that'll be throughout the course of the year?

Oh, I'm sorry; from-- that's the expense; that's the expense side of it. From a cash standpoint, we're paying, like, with Bill-- with the CFO and with the CEO's termination agreements, those guys are basically going-- as of now, those guys are basically going to be pre-paid out over a three-year time period. So we won't be-- about $2 million is the number that we'll be paying out in cash this year.

Okay. And then, the cash on hand -- just how does that break out between U.S., Brazil, and what you might have remaining in Europe?

Give me one second to get to that page. We've got about $20.2 million U.S., about $10.9 million in Brazil; the rest of it is in Europe and other places. And the other thing, I guess we're going to get about $3.8 million back from Brazil here in November in the repatriation.

Okay, great. Okay, thanks, Ron.

Sure.

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

Thank you. I had enough time for a few follow-ups. Could you give us an update on the selling thread tariff legislation and where that stands and-- again, just give an update on that?

I'll be happy to do that; and I don't have a lot of the details here with me. But we continue to look for avenues to challenge that. We still believe that the ruling made, though by the letter of the law was correct, we believe the intention was different. We believe we have several avenues we can go down and we continue to pursue that.

And with the addition of Costa Rica into-- the final addition of Costa Rica into CAFTA, maybe that'll help us with our efforts around that.

I guess the other point is, from a twisting point-- that's one thing to bring up. We have seen price pressure because of the change in the ruling. But from a volume standpoint, we've been able to sustain and actually improve some of the volumes with the addition of the twistings that Dillon had off-- I mean, as a part of that acquisition.

Okay. So you're seeing pricing pressure but you haven't lost any volume, so nothing really lost in terms of the economics at this point in time?

Exactly.

And it's still-- twisting's still a decent business for us and it pulls through a lot of our POY and our DTY so it's--

Yeah. We've lost a little margin and we've not lost any volume.

All right; great. I was wondering if you could just talk about Brazil as well. I mean, it's such a microcosm unto itself, given the tariff barriers there. You've sent more equipment down there, or sold equipment, repatriated cash through transactions that way. Could you talk about how the business has grown and maybe what your outlook is for that business over all?

Yeah. I think Brazil-- their issue is-- the issue they've had recently is around currency, the devaluation of the dollar. They're buying raw materials on U.S. dollar pricing and paying for it 25 or 30 days later, then ultimately paying the cost to convert it and sell it and collect in reais 60 days after that. So those currency fluctuations have made it difficult on those guys down there. They've had some challenges, I think, from a--

But from a volume standpoint, we still see that market as a solid market and a growing market. That business is expected-- I'm sorry -- the market is expected to grow from 5 to 10% a year going forward. So we believe that's a good market; it's got a solid opportunity. And those guys have done a good job of managing their business and they actually were slightly ahead of budget this quarter and we expect them to come in either at that or above that going forward.

And do you see the need to send more equipment down there? Is that running at capacity?

It's running about 70% of capacity now, but there's a couple of areas where we could ship not really new technology but technology they don't have, I guess would be a better way to put it. So some of our auto machines; the technology they don't have to serve an emergent texturing market, for instance. We could send machinery down there and we're constantly evaluating that.

If you talk to their-- the president down there, every quarter, he comes up, he brings three or four CapEx projects for us to take-- to look at. So I think we do see the opportunity for growth in that market and we'll continue to evaluate each of those periodically.

The only comment I'd add to that, Ron, is over the past six months, we have moved six texturing machines from the U.S. down to Brazil. And the primary reason was to replace less-modern machines and higher-cost machines with these more efficient machines.

All right. And switching gears, Parkdale sounds like you did really well this quarter -- you got some cash out of them. Is the expectation that they're going to do better than last year, and should we expect a bigger dividend out of them?

Yeah. I mean, I think from Parkdale, what we've always said-- we do full disclosure of their financials there in our amended case, coming up probably in March. But I think what we've always said there is that business, we're sitting in the minority chair so we're riding along. I think what we expect is budget or slightly better out of that business.

And from a cash flow standpoint, the board of the JV, of which we have one of three seats, is constantly evaluating different opportunities for that business. But it's CapEx, doing similar to what Bill was talking about -- replacing over-generation equipment with newer-generation equipment that may be more efficient.

So yes, we do expect dividends. We expect it to be kind of in that similar $6 to $8 million range that it has in the past. But we also expect their business to be doing a little bit better than it has; I'm just not sure that's going to relate into a larger dividend coming back to us.

And then lastly, you talked about your Repreve raw materials supplier. The last couple of conference calls, you guys had talked about the ability to grow it but you were somewhat restrained, or constrained, by raw materials. Does this change in supply of raw materials change the growth dynamics dramatically? Do you feel like you'll be able to meet all the demands in the market next year, or--? Talk about that.

Yeah, the limitations we talked about in the past were because we were using our own internal waste and a small amount of external waste. We're still using the same supplier to convert the waste; what we've done is we've gotten aggressive and gone out and established supplies of additional external waste, which will allow us to grow. So it was really the waste supply that was limiting us and we've gotten beyond our previous restrictions on that.

And so with your change in waste supply, is this a business you could double next year or even grow faster than that?

Potentially, yes.

All right; thank you very much.

Operator, we've got time for one more call-- or one more question.

Thank you. Our last call is coming from C. J. Baldoni with Evergreen Investments. Please go ahead.

Yeah, hi; how are you? I'm sorry if you already questioned this-- I got distracted here when-- I think you were talking about your cash balances and where they were located geographically. Did you say that $10.9 million was in Brazil?

Yes.

Looking back at my notes from the last quarter, I thought that you had indicated that you were going to repatriate $10 million. Is that still the plan, or did I hear you say a lower amount?

Within-- I'm sorry, that's a good point. I should have been more clear about that. Within the quarter, we've already brought back $5.3 million. And then in November, we expect to bring back an additional $3.9. So that's basically the $10 million we were talking about. So today, that business has $10.9 or $11 million, of which we've got about $3.9 that we expect to bring back. And then, there was an additional $800,000 in a couple of other smaller machine sales we did during the quarter. So in total, we basically are going to repatriate back about $10 million; we just didn't get it all done in the September quarter.

Okay; sorry about that.

No problem.

And then, you mentioned in your release that some of the unusual items fell into SG&A and cost of goods sold. I believe that you said $3.6 million was in cost of goods sold, and I see that in your reconciliation table. What was the piece that fell into the cost of goods sold? Sorry-- I meant the SG&A.

Okay, let me give you a couple of them. We had-- the 822 in severance done at Kinston was in cost of goods sold and the rest of it in SG&A. We had the severance for our former CP-- I'm sorry, CEO of $2.4 million and then another $1.2 million of deposits related to our prior strategic alternatives process.

In addition to that, next quarter we are going to have an additional cost of goods sold hit based on severance down in Kinston.

Right. Can you just elaborate on the $1.2 million, the deposit write-off, you said for professional fees?

Sure. Basically what it was was part of the fees we paid in that strategic alternatives process as well as in the Parkdale process. Part of the fees we paid to investment bankers had tails on it, basically saying if we do a deal with those guys, we'll be able to take those fees and credit those against deal fees in the future. And those tails had a term to them.

As those tails started coming to an end, we're looking out, saying, we don't have a deal out there that would qualify under them, so there was no reason to keep those up on the balance sheet so we wrote them off. So it's dollars that were spent two years ago -- a year and a half or two years ago -- that we had previously capitalized that no longer have a valid use so we're writing those off.

And lastly, excuse my ignorance here, but when I look at your balance sheet, the highlights slide, it doesn't reconcile to me to the debt that I've, I guess, pieced together from your Ks and Qs or your Qs. Could you just run through -- I mean, you repaid $6 million in the quarter. What did you pay off? You said the revolver's still at $36, right?

No, the revolver's at $30; I'm sorry.

Oh, okay; I misunderstood.

It was $36 in June; it was at $30 at the end of September, and today it stands about $25 million.

Oh, okay; I must have misunderstood your comments.

And then, one other thing. The rest of the debt, the long-term debt, to get you up to the $228 number, is primarily some-- there one small-- there's a couple of capital leases in there but it's also an ICMS loan down in Brazil which is basically-- it's an incentive program in Brazil where you have to put back your VAT taxes, but then you can borrow against that, and the borrowings are half the rate that you earn when you put in your cash. So it's a positive cash flow for us to do that so there's an offsetting receivable-- I'm sorry, there's an offsetting balance up on the balance sheet of cash.

Okay, great. Thank you very much.

Okay. In closing, let me first clarify some comments we had made about the COO and the COO leaving; I did want to clarify that. As part of our restructure and reduction of overhead costs, we have eliminated two executive officer positions and we do not, at this time, intend to replace those. Again, that was part of our overhead reductions.

With that, we'd like to conclude our remarks and thank everyone for your interest in the company. We understand the challenges ahead. Nevertheless, the board and leadership team are excited about getting back to profitability in the near term and creating a vision for future success and generating improved shareholder value.

And with that, thank you. Operator?

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