Unifi Inc (UFI) 2008 Q2 法說會逐字稿

At this time, I would like to welcome everyone to the Unifi second-quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS) Thank you.

It is now my pleasure to turn the floor over to your host, Unifi's Chief Financial Officer, Ron Smith. Sir, you may begin your conference.

Thanks, Rich, and good morning everyone. Joining me for the conference today is Bill Jasper, our President and CEO. During this call, we will be referencing presentation materials that can be found on our website, www.unifi.com. The presentation can be accessed by clicking the second-quarter conference call link found on the home page. I hope you have the presentation available as it will make it much easier to track through the information discussed on this call.

Before we begin, I need to first advise you that certain statements included herein may be forward-looking statements within the meaning of federal securities laws. Management cautions that these statements are based on management's current expectations, estimates, and our 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.

Before we begin the review of the financials for the quarter, I would like to turn the call over to Bill Jasper, who will provide a brief overview and outlook for each of our major sales segments. Bill?

Thanks, Ron, and good morning, everyone. As Ron mentioned, I'm going to provide a brief update on business conditions and a general outlook for each.

After several consecutive years averaging double-digit declines, the rate of contraction for polyester yarn conception in the US eased in calendar year 2007, as domestic business began to stabilize and shipments into CAFTA grew. US polyester consumption declined 5% in 2007, compared to declines of 8% and 14% in 2005 and '06, respectively.

Nylon consumption declined about 4%, consistent with the last few years, as growth in shape wear garments partially offset declining sock and pantyhose.

For calendar year 2007, we estimate apparel represented 43% of our total sales; socks and hosiery 21%; home and contract furnishings 15%; automotive 8%; and industrial 10%.

Regionally supplied apparel, which encompasses North and Central America, represents over 30% of all apparel sold at retail and the US. Apparel imports from CAFTA using US fiber increased 4% in 2007 over 2006, and CAFTA production is expected to continue to grow in 2008 as apparel retailers and brands use regional supply as a part of a balanced global sourcing strategy.

In retail, we did see some weakness in December and expect continued weakness in the first half of calendar year 2008 with slight improvement throughout the year. Absent any other significant declines in overall consumer spending, we anticipate yarn sales into the apparel segment to remain stable over the next few years.

The decline of US sock production is expected to continue while production in the CAFTA region is expected to grow, offsetting some of the losses in the US. We continue to explore alternatives to improve volumes in this segment, and we see positive opportunities for our premium value-added yarns as brands and retailers look to differentiate their products. In addition, retail sales of shape wear garments have shown consistent growth over the last several quarters, positively impacting this segment.

In furnishings, most home textiles have moved to Asia over the last few years as full package imports continue to dominate that market. We do expect that the remaining US production will stay relatively stable, though the overall home upholstery business has been negatively affected by the slowdown in the US housing market.

However, the contract portion of the upholstery segment has been resilient, and we are starting to see a return of demand as production is redistributed after the bankruptcies of Quaker and Mastercraft last year.

In the automotive segment, domestic producers primarily utilize US-made yarns and fabrics due to their just-in-time inventory and stringent quality requirements. Accordingly, US yarn shipments into the automotive segment correlate directly with domestic auto builds. In calendar year 2008, we anticipate declines in builds of about 2% to 3%.

Finally, we anticipate improvement in the industrial segment, which is comprised of a wide variety of small and diverse end-use applications. Our focus here has been and will be on driving profitable growth by concentrating our efforts on the more technical end-use applications, which are more defensible against low-priced commodity competition from imports.

Now looking forward, overall during calendar year 2008 we still expect a slight decline in the combined US and regional yarn markets, with a rate of contraction similar to or less than the 4% to 5% experienced in 2007 as year-over-year volume declines in our domestic markets are offset by continued growth in regional apparel and hosiery.

Our premium value-added yarns continue to provide us with the opportunity to differentiate ourselves as we compete for volume in many of these segments. Volume for Repreve, our 100% recycled yarn, continues to increase at a substantial rate. In addition to the initial success we have had with Repreve in the apparel segment, the brand has also gained traction in the contract, home furnishings, automotive, and hosiery segments. The Company will continue to invest in Repreve and has plans to diversify our product offerings under the Repreve umbrella.

We are also investing in R&D for the next generation of new products and remain committed to our premium value-added strategy, which has been further validated by the success of Repreve.

To further drive growth of value-added products globally, the Company officially launched Repreve into Asian markets at the Intertextiles Shanghai Apparel Fabrics Show this past October. The launch of Repreve into the Chinese market allows our global supply network to maintain first-quality standards and consistency in all regions, and enhances our ability to supply brands and retailers globally.

With this as a backdrop, I would like to turn the call back over to Ron, who will take you through our results for the December quarter. Ron?

Thanks, Bill. If you are following along from the website presentation, we will begin our comments on slide 3. Net sales for the current December quarter, which includes sales related to the January 2007 Dillon acquisition, were $183 million, an increase of $26 million or 16.6% over prior-year December quarter. Volume increased 8.6% on a consolidated basis, and overall pricing improved 8.3%. Although volume stayed stronger than anticipated during the quarter, the rate in increase in raw material pricing was much faster than anticipated.

The impact of certain supply chain dynamics resulted in a 50% increase in MEG prices, one of the two primary ingredients in polyester. This MEG increase resulted in an overall polyester raw material increase of about 17% from the beginning to the end of the quarter, and elevated it to a level 20% higher than the prior-year December quarter.

Due to the unexpected nature of this increase, we were unable to immediately pass along all of the increases during the December quarter. But recent sales price increases have allowed us to return to a more normal spread over raw materials. For the coming quarter, we are projecting raw material pricing to remain relatively flat.

Within our segments, quarter over prior-year quarter polyester volumes increased 6.3% and pricing improved 7.7%. Nylon volumes increased 30%, and prices declined 4.6% due to a mix, as much of the added volume was textured yarns rather than higher-priced covered yarns. Nylon volumes benefited from the continuing growth of hosiery production in the CAFTA region, as well as strength in the shape wear segment.

The Company is reporting pre-tax loss from continuing operations of $13.6 million for the current December quarter, which compares to a pre-tax loss of $19.7 million for the prior-year December quarter. Included in pre-tax income for this quarter are the following charges, each of which are detailed as adjustments on the EBITDA slide.

Cost of sales was negatively impacted by a onetime $2.5 million charge related to the closure of our Kinston facility, including material losses, severance, and other costs related to fulfilling certain contractual applications. An additional $4.2 million in restructuring charges primarily related to the expected net cost of fulfilling site service obligations through June 2008 to a tenant that remains in the Kinston facility. $2.2 million of non-cash impairment charges related to the write-down of certain long-lived assets primarily related to the consolidation of the Dillon volume into our Yadkinville facility. And $1.7 million of SG&A costs, related to severance for our former CFO/COO, Bill Lowe.

Net income for the December quarter including discontinued operations was a net loss of $7.7 million or $0.13 per share, which is an improvement over the net loss of $18.2 million or $0.35 per share loss for the prior-year December quarter.

SG&A expenses for the December quarter were $12.0 million, inclusive of $1.7 million in severance, and $1.2 million of fees and amortization related to the January 2007 Dillon acquisition. Absent such severance and Dillon-related expenses, quarter over prior-year quarter SG&A costs are down $1.3 million, which reflects the continued progress in the management of our overhead costs in relation to current market conditions.

Turning to slide 4, net sales for the first six months of fiscal year 2008, which also includes sales related to the Dillon acquisition, were $354 million, an increase of $27 million or 8.3% compared to the first half of fiscal 2007.

In comparison to the prior-year first half, total volume increased 0.2% on a consolidated basis and overall pricing improved 8%.

The Company is reporting a pre-tax loss from continuing operations of $29.7 million for the first half of fiscal 2008, which compares to a pre-tax loss of $30.3 million for the prior-year period. Pre-tax income for the first half was positively impacted by an improvement of $8.9 million in gross margin and a $5 million improvement in earnings from the Company's share of its investment in Equity Affiliate Partners.

These improvements were offset by year-to-date restructuring and severance and shutdown costs detailed on the succeeding adjusted EBITDA slide.

Net income for the first half of 2008 including discontinued operations was a net loss of $17 million or $0.28 per share, an improvement over the net loss of $28 million or $0.54 per share for the prior-year period.

SG&A expense for the six months was $26 million and included $5.3 million in severance and unusual charges as well as $2.3 million in fees and amortization related to the Dillon acquisition. Excluding such severance, unusual charges, and Dillon-related cost, year-over-year SG&A costs were down $2.6 million for the six-month period.

Now, we will turn to the balance sheet, which you can find on slide 5. Cash on hand at the end of the December quarter was $25.8 million, which reflects a decrease of $8.1 million from the September quarter, as we paid our semi-annual interest payment on the $190 million of senior secured notes and paid down our revolver $5 million.

Total cash and cash equivalents including restricted cash at the end of the December quarter was $44.6 million, which is essentially unchanged from the $44.1 million reported at the close of the fiscal-year 2007.

As per our loan covenants, cash proceeds from certain asset sales, including the sale of our investment in Unifi-SANS and its related manufacturing facility, increase our restricted cash balance to $18.8 million.

During fiscal 2008, the Company has received $19.3 million in proceeds from the sale of idle assets in our investment in our former Unifi-SANS joint venture. We also anticipate an additional $4 million in asset sales during the March quarter, a sale that was originally expected to be completed in the December quarter.

In addition to the cash on handed, the Company has approximately $70 million of availability under its $100 million revolving credit facility. Total long-term debt including $25 million of borrowings under the revolver was $23.8 million at the end of the quarter.

Net working capital decreased $6 million from the end of the September quarter. Inventory decreased $18.5 million compared to the end of the September quarter as the Company worked down inventory of partially oriented yarn to transition into source POY.

Our Accounts Receivable balance increased $5.9 million primarily as a result of additional export sales into the region, which come with longer terms. Our Accounts Payable balance decreased $6.7 million as a result of reduced purchases of raw materials while we work off the bridge inventory produced to facilitate the transition from Kinston to source POY, as well as other timing differences. As we scale up our outside purchases of POY over the quarter, we expect significant increases in the related Accounts Payable balances.

Turning to slide 6, the Company reported $12.1 million in adjusted EBITDA, excluding dividends from Equity Affiliates for the December quarter, which was within the $12 million to $13 million forecast provided on our last earnings call.

Based on our current forecast, we're still expecting to be within our previous guidance of $55 million to $60 million in adjusted EBITDA, excluding distributions from Equity Affiliates for fiscal 2008. We expect the third quarter to be $3 million to $4 million lower than the fourth quarter as a result of fewer operating weeks in the third quarter and continued improvement in results as we progress in the implementation of our strategic initiatives.

Before we open the floor to questions, I would like to talk briefly about China. The aforementioned 17% increase in raw material prices was not isolated to the US. It was a global occurrence. As a result, the market in China has been very soft recently, and we expect weakness to continue through Chinese New Year, which is in mid-February, as manufacturers work off inventory while they wait for pricing relief.

In addition, export volume has declined as consumer demand softened primarily in the Europe and the US. The combined effect of lower demand and increasing raw material prices has been idle capacity in the market, which has put additional pricing pressure on the supply chain.

Nevertheless, we remain encouraged by the potential of the Chinese market and continue to see opportunities to produce and sell our PVA products there, especially our 100% recycled product, Repreve.

Related to the Chinese JV itself, the new leadership team remains dissatisfied with the operating results in China. Accordingly, we're working with our JV partner to develop appropriate strategies aimed at accelerating the path to profitability. In the meantime, we expect the JV results to improve incrementally once the margin pressure related to the raw material pricing subsides after Chinese New Year.

In conclusion, I would also like to remind everyone of a couple key dates coming up. Our third-quarter quiet period will begin on the last day of our fiscal third quarter, which is March 23, 2008, and extend through our next earnings conference call, which is currently scheduled for May 1.

With that said, we would like to now open the floor to questions. Operator?

(OPERATOR INSTRUCTIONS) Bryan Hunt, Wachovia.

I was wondering if you could talk about your sales in the quarter. They were much stronger than you anticipated and you alluded to that in the call. Could you talk about what areas, specifically product categories, in which you saw the strength that you didn't anticipate going into the quarter?

Yes, really in two areas. On the polyester side, we saw more strength in the CAFTA region than we had anticipated and actually in apparel. On the nylon side it was primarily in sheer hosiery and shape wear.

Just for -- I can't write as fast as Ron talks. Could you talk about what your poly volume and pricing was for the quarter, on an increase? Whether it increased or decreased and what the pricing was.

Yes, hang on one second, I'll get back to that page. For polyester, volumes were up 6.3% and pricing was up 7.7%. In nylon we had a 30% increase over last year, but prices declined 4.6%. A lot of that was a shift in mix. I know I got confused right in the conference call there, but a shift in mix towards less covered yarn and more textured yarn, which comes at a lower price. It is less of a value-added process and it also has a lower price. So a lot of that volume came from that.

You also have to remember, our December quarter last year was a $3.5 million EBITDA quarter. It was a very soft quarter for us. So that is another part of where that increase comes from.

You had an easy comparison.

Right, exactly.

When you look at your restricted cash balance, you had a significant build. I imagine you have to use that restricted cash either for, one, CapEx backed into the business or, two, to pay down your revolver balances per your covenants.

One thing there, we can't -- that restricted cash is on the notes, not on the revolver. So we can't pay down the revolver with (multiple speakers).

I'm sorry, I meant to say the notes. Given the amount of cash you are sitting on right now, you're not going to burn through that cash given your CapEx spend rate for two years. Have you all looked at or evaluated buying back notes?

We have talked about. That is something we had a discussion about that at the Board yesterday. But right now, we haven't made a decision on that, about what we're going to do as far as moving forward.

I will say from a -- terms of the notes themselves, if we have more than $10 million that is out there for longer than 360 days, we have to offer that back to the noteholders, as per the terms of the agreement.

So we definitely -- we understand that, we're looking at that, and we're seeing how all that shakes out. But we understand the opportunity there to buy back some notes at discounted prices.

Looking at your CapEx, have you changed your CapEx plans at all in light of the current environment?

We have always said $10 million to $12 million a year has been our guidance for CapEx. We really haven't spent that in the last three or four years. We spent $8 million, $9 million, $10 million; but we rarely get -- we have not gotten to $12 million, and we rarely even get to the $10 million.

I think the reason we say that is because a lot of this business was built on technology and becoming or staying competitive at the technology level. So if we saw something come along that would provide us an advantage, we would look to make CapEx with a quick return on it. We would be looking look to be making CapEx there.

But right now, we are still probably -- we're definitely at the low end of the $10 million to $12 million, and maybe even a little bit less than with what we expect to spend for the rest of the year.

Looking at all your new product initiatives and the sales growth you saw in the quarter, did you pick up any new material customers that allowed you to drive some of this volume? Or could you talk about any new customers you picked up because of recent product developments? That is my last question; I will get back in the queue.

Okay, I will --.

Yes, let me -- I will answer that. Basically, most of the growth we saw in both polyester and nylon were with existing customers. Now they may have seen some new customers or just organic growth in the market. But basically, it was with our existing customer base.

The other piece of it is, we talked about getting aggressive towards filling up the plants as part of our strategy, with the shutdown of Kinston and bringing in some lower-priced raw materials, being able to go in and attack some of the lower-price markets at acceptable margins. So we are starting that process a little bit.

Yes, there was some of that, but (multiple speakers) just starting to see the benefit of that. We will see much more of that in the next quarter.

Great. Thank you.

Jeffrey Stewart of Piper Jaffray.

Thanks. Ron, one sort of housekeeping item. On slide 6, do you mind telling us where is the gain and loss for sale? I may have asked you this already. But where does that appear on the income statement in the press release?

It's in -- hang on one second. It is in OEOI, our other income other expenses.

It's in that $2,184,000?

Yes, exactly.

Okay.

In addition to that, in that line there's some foreign currency gains and we were able to sell about $800,000 worth of nitrogen credits related to us not eating as much capacity in Kinston as we had before.

Okay, a couple other things. One is -- we have talked about this before, about the American & Efird issue, and that thread business. What is the status of that? I know that there was -- I don't know if it was a CAFTA issue, or -- what is the outlook for that thread business for you?

It was a -- we have right now adjusted our price point on that in order to keep that business. There was a ruling that came down probably 12 months ago that excluded the US origin requirement for that yarn that was going into twisted yarn. We disagreed with that ruling, and we're going down the path of challenging that ruling right now.

There is a legal path of challenging it by going to Customs and trying to get the ruling overturned. There is also a legislative path, I guess, by going to Congress and saying -- listen, this is not the deal we agreed to when we supported CAFTA. You guys need to go back and fix it to what we agreed to.

So we are proceeding down both of those paths, and we will see where they come out. But it's not something that we would expect that is going to change imminently in the next 30 to 90 days.

It would be fair to say we have adjusted our sales strategies and our plans to accept that the [Gilman] ruling or the ruling is there. Certainly if we do get it overturned, there would be some upside for us there.

Actually it leads into my next question, is, given that there is one big player participating in that move in the sock business in Central America, does that put you on the wrong side of that relationship? The ability to penetrate that Central America customer as they are ramping up in production in Honduras?

There is one big player there today. There are other players who are planning to move and grow in that area. Frankly, our relationship with that one big player is good, it is very professional, and we have got opportunities there.

Okay, great.

We're working with this guy. I mean, we are working with those guys too on other kind of trade-related issues. We're all part of the regional trade group, and we are working with those guys on other issues. So this is just one issue where we --

We happen to be on the other side, that's right.

Okay. I guess, I may have missed it, but when you were giving the outlook for the EBITDA range for this year, I don't think you said anything about volumes and sales. I am just wondering maybe just for -- to help us out with what you are expecting in sort of margins for the second half as we flip to that. What can we expect?

We didn't give guidance on that. The only thing I will say is we have announced our strategy back in October, and we're continuing down that path of utilizing all of our assets and being able to take our -- the new flexibility from getting out of Kinston and making our POY to sourcing POY, and going after some new business.

So we would expect volumes to improve kind of quarter over trailing quarter, but we have not given -- we have not and don't give any other guidance around kind of top line or margin numbers.

But it is probably fair to say that that significant pop year-over-year, the $183,000 versus $156,000, part of that is due to the fact that that number in December last year was down 18%?

Yes, exactly. What we said on the market was, the market has been in double-digit declines for the last few years. We started saying over the last probably six months that we are seeing some stability in the market. That number came in at negative 3% for DTY; negative 4% for POY.

When you're coming from 16% and 10% down to that negative 3% or 4%, that is definitely more stability. What we think here going forward, and I think Bill mentioned that in his comments, was we expect 2008 to continue that trend. You don't have far to go from 3% to zero; but we don't expect growth, but we do expect some more stability there.

Okay, so it is probably better to actually look at -- as we look at the December sales results to look at the 2005 quarter; and your figure out exactly what the contribution would have been from Kinston; and that will probably help us get a better feel for the real sales trends.

Right.

Okay. All right. Thank you.

[Mike Snider] of MacKay Shields.

Good morning. Most of my questions were answered, but one that you could maybe give a little bit more detail on is the whole Kinston-Yadkinville transition. Had put some numbers out previously in terms of working off excess working capital; I think it was $12 million or $13 million. Then additional POY savings of like around $12 million, but it would be recognized probably more in fiscal '09.

But could you talk a little bit about how that is going and whether your timing or some of the amounts that we just talked above have changed at all?

I will start with it and let Bill follow up if he likes. But I think from a working capital standpoint, we started --2009 we consumed about -- I think it was about $13 million of working capital in the September quarter as we built inventory. We expected that to get back down as we worked through fiscal 2008.

Within the quarter, we actually changed some of the terms with one of our raw materials suppliers. We traded out some terms for an additional discount. So we may not get all the way back down to working capital levels that we were at in June 2007; we may be at $3 million or $4 million short of that.

But other than that, we feel right on plan with getting ourselves back down to where we were at there in June 2007, by the time we get to the end of this year. Then we see some additional working capital savings coming through next year.

Regarding the transition from Kinston to sourced and to Yadkinville, I think the transition -- the actual literal transition has happened for all the products now. We are just starting to see some of the benefits of the raw materials coming in from our other outsourced supply, compared to the products we were making ourselves.

We're working off that newfound flexibility of being able to -- rather than having a requirement to run a certain level of volume in the certain type of products, we are just beginning to see that benefit now here in this quarter.

Yes; and what I would add to that, Ron, is in the quarter we have -- in the December quarter we have not seen all of the benefits of the Kinston shutdown, primarily because raw materials went up so dramatically so quickly. We were not able to pass those along as quickly as they were coming to us without disrupting the market. We have passed most of those along now in January, so we ought to see some additional benefits as we go forward.

Same kind of timing that we talked about before?

For the working capital or for the benefits?

Both.

I think most of the working capital will happen between now and June of 2008. We will get most of that pickup between now and then from the September levels.

I think the savings piece of it, we won't see very much of that in this quarter. Because literally it takes a while with -- we are pretty, our processes are pretty sequential. So once we bring in POY, we texture it, a lot of times we cover it or beam it or do other things to it.

So I don't think we will see much benefit in the third quarter for the new sourcing strategy. We will see some benefit, but not as much as we will see in the fourth. I think once we get to the fourth, that is more what we are considering the run rate for next year to be.

Okay, and just last quick question. You guys have done a pretty good job of selling off pretty much all your idle assets and completing most of that, the balance of it this year. Is there anything kind of left out there? Any kind of residual assets that you guys have identified?

Yes, we have the Dillon plant, which we are under negotiations right now. We actually expected to close that in November. It has dragged on just a little bit, but we expect to close that in the next 30 to 60 days, here in the March quarter.

In addition to that, we have some smaller plants and some machinery and equipment around in different places. But there is nothing -- that part is nothing material. The only exception to that, I guess, would be in Kinston we've got a big site down there that we're trying to figure out exactly what the future for that holds. We're not ready to talk anything about what that means. But we will be working with that and give you guys updates as we move forward.

Okay, thanks very much.

[Peter Finelli] of [River Ridge] Capital.

Hey, Ron. Last time we spoke, I think you were planning on meeting with the China team and developing more of a finalized budget for the next year and then outwards for the next three years.

Were you able to do that? If so, can you provide any guidance on where you guys shook out?

Yes, we're not providing guidance on China. I think the -- well, actually, the only guidance we provided was -- hey, it is really soft right now, but we expect to get back on track and kind of continued improvement over China once Chinese New Year comes back.

We went -- we were there November and December and we were somewhat encouraged by the opportunities that were presenting itself. We have been working real strongly with our partner to try and figure out what that new path to profitability is like.

We have stopped saying -- we were saying up until October we're right around the corner from profitability. We have stopped saying that and basically said -- we're disappointed with the results and we need to figure out exactly what that specific path to profitability is.

Both us and our partner agree, and we will hold hands and move down that path. So we're still right in the midst of that discussion right now.

Okay, thanks.

Chris Dechiario of ISI Capital.

Morning. I just want to follow up a little bit on Kinston, the benefits going forward on that, again. I guess you had said, obviously, there was a $13 million or $14 million build in the first quarter. You don't expect it to get -- maybe it will be net increase of $3 million or $4 million by the end of the fiscal year.

Correct.

I think you had said that then even beyond getting back to sort of where you were before, there would be an incremental $10 million to $12 million of pickup over and above that in 2009. Is that still the case?

Yes, I don't think it is going to be the full $10 million to $12 million. When we were picking up that working capital, we were running off a much lower volume rate with new management team, new strategy.

The strategy Bill laid out in October was, listen, we're not going to get down to a volume -- we're not going to continue to decline from a volume level. We're going to use this newfound flexibility we have with sourcing to fill up our assets and run all of our assets. The effect of that is it is going to require some working capital in order to be able to finance that growth.

So we are going back to the June '07 number. We're going to get within $3 million to $4 million of that by the time we get to June '08; and then in 2009 we do expect to have some savings. But it certainly won't be at that $10 million to $12 million level.

Okay, you think that is some savings over and above the $3 million to $4 million excess that you end the year with?

Maybe, but not a whole lot. I would -- if we get back to that June '07 level, we will continue down the process of trying to improve. But I think that is probably -- that would be more what I would be expecting is in '09, early part of '09, early part of fiscal '09, we will get back down to that level we were sitting at in June 2007.

But our turns will be much more healthier than they were in 2007 because we will have grown the top line.

Okay. In terms of the cost saves I guess from the better sourcing and all that, I guess originally I kind of remember, it was like $9 million or $10 million, maybe; or $10 million to $12 million; in that range.

I think you had said that the run rate you get to in fourth-quarter '08 is pretty much going to be the run rate in 2009 and beyond. (multiple speakers)

If you compared that back to where we were before we shut down Kinston, we would have that type of level of savings.

We would? So by the time -- let's say we run through 2005 for sure on a year-over-year basis, we will have improved by that $10 million to $12 million from pre-Kinston?

Exactly. Due to the fact that we have shut down Kinston. And then we have all of our other market issues and raw material issues that we have talked about. But yes.

And we're not providing '09 guidance today, but we will expect the benefit of the quarter -- of shutting down Kinston to reach that $10 million to $12 million number.

Right, right. Okay. Then obviously you have maintained your guidance, which is great. I just wanted to know is there -- within that are you anticipating any effect on say third-quarter and fourth-quarter volumes from this price increase that you have had to pass through because of the raw material price increases?

Also any -- and you may have talked about this a little bit. Any effects in terms of a slowdown in apparel, retail, or destocking at the retail level that might affect you as well?

Yes, the first we did was from a -- when we did our forecast for the next -- the rest of the fiscal year, we have a -- we introduced a pretty rigorous forecasting process that we go through every quarter in order to be able to lay out this new guidance, was we took that into account.

We took what we're hearing from our customers. We spend -- our sales guys spend a lot of time down in front of the customers; and we took a lot of that into account as we developed what our forecast was going to look like.

I think generally, we're hearing weak first half of the year, with -- same thing everybody else is hearing. With improvement, especially if we keep kind of going where we are going on the financial markets, with changing of the rates. So I think generally that is where we would -- what we have got baked into our forecast as we stand today.

As far as price increases and volume?

Yes, as far the price increase, I guess the one thing that you have to mention first is that prices went up in Asia too, and we're competing globally here in the US with global supply. And prices have been going up everywhere, so we have not seen very much impact from the price increase.

Okay, thank you.

C.J. Baldoni of Evergreen Investment.

Hi, thanks for taking my question. I have a couple of questions and clarifications. I think I heard you say that in the third quarter you are looking for a $3 billion to $4 million decline in EBITDA versus the fourth quarter. Is that right?

Yes, correct. I mean, we are sitting at $24 million today. We confirmed guidance; and let me make sure I say this clearly. It is adjusted EBITDA, excluding distributions from Equity Affiliates. So today, we stand about $24.2 million and we expect to get to the $55 million to $60 million range. Obviously, that means we mean $31 million of EBITDA over that time period.

What we're saying is, we expect to get there and we're expecting the fourth quarter to be $3 million to $4 million better than the third quarter.

Oh, okay. (multiple speakers) The fourth quarter will be better than the third.

We're going to hit that (multiple speakers) range, but because of the third quarter had a week and a half of shutdown in it, we have a really unique fiscal year. This is a 53-week year. The third quarter has both Christmas and the New Year's shutdown in it. Then the fourth quarter is actually going to have 14 weeks instead of our normal 13 weeks this year.

So the combination of those two things, just by definition, means the fourth quarter is going to be stronger. In addition to that, we have got some strategic initiatives that will be coming online here in the fourth quarter that we believe is going to make the fourth quarter substantially better than the third.

Okay, I definitely misheard you. I thought you were relating it to the prior fourth quarter, which would imply that this fourth quarter would need to be really big.

Oh, I'm sorry.

Then, you touched on the restricted cash. So the usage of that cash is either for reinvestment back into the business under the terms of the notes. What else could you use it for? Do you have any reinvestment plans in place for that?

It is basically reinvestment back into the business in the form of CapEx; or you could do acquisition within permitted businesses. Other than that, if -- and we are -- with the big amount of investments, or big amount of cash we brought in over the last 90 days or 120 days, we have looked out at exactly what point is CapEx going to -- at what rate is CapEx going to pull that restricted cash down?

And when are we going to have more than $10 million that is outstanding over 365 days, which is the terms of the covenant?

So we're working on that, we are looking through it. One of the options that are on the table is actually buying back some of the notes. So we have got several different options that we're looking at there.

What type of hurdle rates do you look at for new investment?

It varies based on obviously how strategic the acquisition is. When we are doing CapEx, we either are doing maintenance CapEx that is required to keep the business running, or we're doing a more investment in new technology that has quick paybacks of two or two and a half years. So that is basically what we're looking at there.

Obviously, when you are looking at a transaction, there is a whole new set of criteria that you bring in. Most of what would be looking at would be strategic, so there's not necessarily a hurdle rate we're looking to get over there.

As I'm sitting here looking at that balance, is there any way that -- can you give us any guidance how we should gauge how you might apply it with respect to growth, strategic growth or growth in new technologies?

No, the only guidance we give around CapEx is that $10 million to $12 million. Right now, there is nothing pressing that says we're going to invest in a new technology. So most of what would be investing in would be maintenance CapEx.

The only other exception to that would be we have been investing -- our Brazilian operation has been a solid performer for us, and we have been investing incrementally in the -- updating the operating capabilities in Brazil. So that is probably the place where we would be making that. But we don't provide any breakout between those two.

Okay, and then, I know that you have mentioned in prior calls that you expect similar levels of joint venture dividends from Parkdale. So is that still the same today?

Yes and no. I think generally our attitude towards Parkdale is over the last several years they have been in the $6 million to $8 million range, if you averaged out. Sometimes they are zero, sometimes they are $20 million. But if you average it out over the long term, that $6 million to $8 million range is what we expect.

We are the minority interest and we have very little control over distributions of cash. I know they are moving forward in that business, and they are excited about the opportunities in that business. So we will be going to those guys to try and get a dividend paid, but it's certainly not something we would forecast or bake into our cash numbers.

So it is too early to say what you expect this year?

Yes, it is too early. But I will say typically it comes kind of the late in the third quarter or early in the fourth quarter, that $6 million to $8 million number. But again, it is not something we would forecast.

Okay, and then lastly, when you were going through the opening comments about the revolver and the availability, I think you said that you have $25 million drawn. Then you said something, 23.8; I didn't catch what that was.

Yes, I got a note that I gave the wrong number there. It was our long-term debt at the end of June, was $223 million. And I read 23 instead of 223.

Oh, okay. $223 million? All right. Then what were the -- so you have availability, full availability under the revolver less what is drawn?

Yes, we have a $100 million revolver. It is an asset-based revolver, inventory in AR. The inventory in AR, the calculation comes in somewhere north of 100, so that we hit our capital of $100 million. From that, you take off the letters of credit we have outstanding, to get down to around $95 million. Then from that $95 million, we have $25 million drawn at this time, which leaves us about $70 million of availability.

Thank you for your time. I'm sorry, were you going to say something else?

We are expecting to pay down about $5 million here in the next week or so.

Thanks, guys.

Operator?

Operator, are you there?

Jason Kremer of Caris & Company.

Good morning. I just have one question left. Everything else has been pretty much answered. Could you tell me if it is feasible to be in the mid single digit in the volume increase in polyester over the next few quarters? Is that sustainable? Or was that a shift in demand into December and out of March this quarter?

Yes, I think part of that is -- again, not giving guidance or top-line guidance or volume guidance. But part of that is our strategy that we announced back in January was we were going to fill up the plants. I would say we're not there. December volumes were not there. We still have a ways to go.

So if you look at kind of trending, trailing quarters, we would expect improvement in volume over the third and then another improvement in the fourth quarter, when you look at kind of a run rate basis. But I guess I can say it is not going to be -- it's certainly not going to be double-digit improvement. So you can defer your single digit out of that.

But we do expect improvement in volume over the next few quarters, especially on the polyester side of the business, where these kind of unique transactions happen where we have shut Kinston and improved our sourcing flexibility.

Okay, great. Thanks.

Allen Zwickler of First Manhattan.

Good morning. How are you guys? Sounds like a very uneventful quarter.

We need some uneventful quarters.

Just back a little bit ago you had certainly written down the value of the Parkdale asset, I'm going to call it, for lack of a better word. Could you just give us an update as to your thinking there?

If -- where I am going is I am sure if the price were right you would probably dispose of it or try to. But if that were to happen, given all the conversations about use of proceeds, does that also apply? Meaning that you would have to live within the covenants, or is that outside the covenants?

No, that is within the covenants. It would go under restricted cash, and we would have 12 months to use it in CapEx or acquisition; or we would be offering it back to the noteholders at par.

Okay, and (multiple speakers)

An update on where we are at with Parkdale, we went through a pretty exhaustive process on trying to get our -- trying to monetize our minority interest. We could have, but it wasn't anywhere near the level of value we would have expected out of that.

So we have taken that off the table. We haven't -- we came back to you guys and basically said, if something gets active on that, and we get close, we will let you guys know. If we start signing agreements or contracts, we will definitely let you guys know as soon as we do that.

But for right now, we're working with our partner trying to figure out the best way to run that business and operate that business going forward.

(multiple speakers) a valuable asset.

Yes, the cash flow that comes off of it is a very valuable asset to us.

Well, I appreciate that, but it is certainly -- knowing the way you guys have been changing things around, you could probably do some good things with the money as well.

Second question, again, more of a 50,000-feet look down, just looking now in the domestic market, I'm going to say the new management team has had sort of a chance to look through. And notwithstanding the easy comparison, what observations are you guys making relative to what you see? How are you feeling about the domestic business just in terms of customer base, etc.? I don't what to go into a whole dissertation, but just now that you've had a chance to put your arms around it, what are your observations?

You know, as we said earlier, we see less erosion the past year than we have in previous years, which indicates that much of the migration to imports probably has happened, which is what we have said in the past.

We think the erosion going forward is going to be moderate or low. Basically, we feel very good about our market and about our plans and about our ability to (multiple speakers).

I'm sorry -- you cut out, I'm sorry, I didn't hear you.

Something in the background there, I'm not sure what happened.

Okay.

But basically, we're staying customer focused. We believe in our plan and we feel very good about where the market is going and where we are going within the market.

Thanks so much.

(OPERATOR INSTRUCTIONS) Chris Dechiario of ISI Capital.

Yes, my question has already been asked, thanks.

Operator, we have got time for one more question.

Jeffrey Stewart of Piper Jaffray.

I feel like I won the lottery. Last question. And you might even answer it.

As I look at Q3 and 4, I am just trying to do a little bit of margin comparison, gross margin comparison sequentially versus 1 and 2. I look back. Last year might not have been a very good point to look at. Is there some seasonality in your first half of your fiscal year versus the second? Or not?

Typically the third and fourth quarter are significantly better than the first and second quarter. That is mostly driven by polyester.

I guess the exception to that is the third quarter for nylon is usually down just because of the products that it goes into. But our fourth quarter is almost always our strongest quarter; followed by our third quarter; and then the second and the first. Actually, probably sequentially in order -- or in reverse order.

Again, make sure you understand, this is a unique year for us with it being a 53-week year and we do have 14 operating weeks in the fourth quarter compared to probably 11.5 operating weeks in the third quarter.

So there should be natural margin momentum or seasonal marginal momentum in the second half of the year?

Yes.

Relative to the first. And can we pile on top of that the other things, the improvements of passing on the price increases as a result of raw material increases that we didn't see in the margin there in the December quarter?

Yes, I would say rather than -- when you look back at December, we did get behind. We sat here in October thinking we were going to be somewhat stable in raw materials for the December quarter and got surprised by that 18%. It wasn't just us; it was the whole market that got surprised by that because of [variability] in the market the way it stands today in raw material prices.

So we did get behind, so when we catch up we will see some improvement around that. Or now that we have caught up here in January, we will see some improvement around that.

And let's be clear about the surprise. I mean, the surprise was a fire in a plant in Saudi Arabia which basically took out 5% of the global MEG supply. So it was truly an event and it was a surprise. So it is not that the market just went crazy. I mean, there was an event that caused it.

So how much of the difference between December and September gross margin -- looks like maybe there was about 150 basis point erosion. You're saying most of the time the December quarter is lower than September?

Most of the time, December is pretty similar and actually slightly better than -- I mean, if you did your quarters from best to worst, it would be 4, 3, 2, 1.

That September quarter is usually our worst quarter. It has the summer shutdown in it, and there's several other reasons from a volume standpoint that that is our worst quarter.

The other thing I will say is the biggest part of the price increase, prices were somewhat flat, maybe up slightly in October; up a little more in November; and then there was a significant increase in December. So it wasn't like prices went up 17% the first day of the quarter and we just sat on our hands for 90 days. That last -- the December quarter is really where we got behind on that.

Our market and the way we work with our customers, we're not changing prices on a daily basis or even a weekly basis. We're giving people a notice that says, look, 30 days out your prices are going up. So that is the -- when we say we got behind, that is the view that we're talking about of where we got behind.

It sounds like from that comment that maybe the month of December was worse than the month of October-November.

From a pricing -- from a conversion margin standpoint, it was a challenge, and the biggest part of the raw material challenge came in December.

Okay. I guess the last question is it looks like that maybe $10 million a quarter might be a -- after you remove the noise from SG&A, maybe is $10 million a good quarterly modeling number for us to use for SG&A?

Yes, I think if you take out the adjustments we had for this quarter, the Bill Lowe severance, it comes in at $10.3 million. So that annualizes out to a little over, like $41 million, $41.3 million. But yes, that is the run rate we are on right now.

We made two restructuring announcements in July and in August that took out $8 million of overhead out of our business. We don't expect -- we're not here today to say there is going to be another one of those. What we are here to say is that we have taken that out. We have seen it. The run rate we are on right now, that $41 million run rate now, is going to be something we expect to be at here for a little while.

Okay, great. That's a very helpful. Thank you. Good luck.

Thanks. Ron, in conclusion, I do want to say three months ago on my first earnings call I talked about some of our key initiatives; and one of them was to get to profitability as quickly as possible. What I do want to say is that even though we fell a little bit behind last quarter because of raw materials, we have got a plan in place; we are executing against that plan; and we are very confident that we're going to continue to execute against that plan and continue to show improving results quarter-over-quarter. And with that, I will --.

Turn it back over to the operator.

Turn it back to the operator.

Thanks, guys.

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