Unifi Inc (UFI) 2008 Q3 法說會逐字稿

At this time, I would like to welcome everyone to the Unifi third 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, Ron Smith, Unifi's Chief Financial Officer. Sir, you may begin your conference.

Thanks, Pam, and good morning, everyone. Joining me for the conference call 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 third 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 in this call.

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

Therefore, these statements are not guarantees of future performance, and involve certain risks that are difficult to predict. Actual outcomes and results may differ materially from what is expressed, forecasted or implied by these statements. I direct you to the disclosure in our 10-Qs and 10-Ks regarding various factors that may impact these results.

Before we review the financials for the quarter and year-to-date periods, I'd like to turn the call over to Bill Jasper, who will provide a brief overview of the market conditions that impacted our March quarter results. Bill?

Thanks, Ron, and good morning, everyone. As Ron mentioned, I will be providing a brief update on the business conditions that impacted our results for the quarter. As you are all aware, the economic conditions in the U.S. have continued to deteriorate, which is evidenced by the following facts. The Consumer Price Index for March was 4% higher than one year ago, with increases of 17.2% in energy and 8.2% in transportation, both of which affect our business. Consumers are spending an average of more than $0.50 per gallon for gasoline today than a year ago, which is stretching household budgets even thinner. And the March 2008 Consumer Confidence Index is at a five-year low, and as consumer confidence in the economy fades, so does their willingness to spend.

These economic conditions and the uncertainty for the future are taking their toll on many business segments. And let me take a minute to highlight the conditions of a few of our key segments. Retail sales for apparel have decreased sharply, with same-store sales at major apparel retailers falling at or close to double-digit rates. Demand from the apparel segment was weak as retail adjusted its forecasts and inventory levels.

Overall impacts for synthetic apparel for the first two months -- I'm sorry, overall imports of synthetic apparel for the first two months of 2008 declined 2.4%. On a positive note, even though imports were down, imports from the CAFTA region increased 14%, as U.S. retailers are opting to take advantage of shorter lead times offered by CAFTA, where a majority of the garments are made using U.S. fiber.

In the automotive segment, sales of new vehicles in the U.S. are at a 15-year low. Sales of U.S. light vehicles were 8% lower in the March-ending quarter of this year compared to the period last year. And all manufacturers, including the big three Japanese automakers, have announced production cuts. And finally, retail sales for furniture and home furnishings fell by 6.6% during February and March compared to the prior year period, reflecting continued softness in the housing sector.

The result of all this is that U.S. polyester consumption for the March-ending quarter contracted at twice the expected rate, which negatively impacted our domestic buy-ins, which Ron will detail for you later.

In addition to this, our polyester business continues to be impacted by rising costs of raw materials. Although pricing for one of our key ingredients has come down from its historic peak in January, current polyester raw material prices are still approximately 20% higher than they were at the same time last year.

The combination of record high crude oil prices, increased seasonal demand for PET bottles, which compete with textile polyester for feedstock, and still high prices for monoethylene glycol continue to put further upward pressure on raw material prices during our current quarter.

That said, we have continued to focus on our plan to achieve sustainable profitability. As the domestic polyester market softened, we adjusted our plan, accelerating cost containment and manufacturing efficiency improvements, aggressively competing for share, and managing sourcing strategies for maximum benefit in all businesses and regions.

Additionally, our premier value-added business continues to grow quarter over quarter led by Reprieve, our 100% recycled product, and we continue to work with our vendors and customers to minimize the impact on our margins. Accordingly, our results for the third quarter are markedly improved over the previous quarter, and we remain committed to continued improvement despite difficult economic conditions.

With all that as a backdrop, I'll turn the call back over to Ron, who will take you through our results for the March quarter and the first nine months of fiscal 2008. Ron?

Thanks, Bill. If you're following along from the website presentation, I'll begin my comments on slide three. Net sales for the current March quarter were $169.8 million, a decrease of 8.4, or 4.7% over the prior year March quarter. The Company is reporting pre-tax income from continuing operations of $1.5 million for the current March quarter, which compares to a pre-tax loss of $16 million for the prior March quarter.

Net income for the March quarter was $12,000, which is an improvement over the net loss of $13.3 million, or $0.22 per share, for the prior year quarter. For comparison purposes, it is important to note the current quarter includes a $2.2 million positive impact from a recovery related to a settlement of previously accrued restructuring charges. Additionally, the prior year quarter included a pre-tax impairment charge totaling $12.9 million associated with the write-down of certain plants and equipment.

The current quarter restructuring recovery was derived from the Company settling certain disputed amounts with the Kinston tenant related to site level service reimbursements and a reduction in the actual cost of providing such services. As a result, the Company reduced our net out-of-pocket costs for providing these services, and thereby reduced the related restructuring reserve by a net $2.2 million, with the benefit included in the restructuring recovery line of the statement of operations.

SG&A expense for the March quarter was $10.1 million, which is reflective of a run rate based on our continued progress and the management of overhead and support costs. SG&A for the current quarter was down $1.1 million compared to the prior year March quarter.

Turning to page four, we've prepared a new slide that highlights the changes in volume and pricing for everyone. In comparison to the prior year March quarter, consolidated total volume declined 15.5% on a consolidated basis, while overall pricing improved 10.8%. It's important to note that the prior year March quarter was one in which the Company experienced strong demand for our commodity yarns as orders returned after high inventory levels from the poor December 2006 quarter worked their way through the supply chain.

Within our segments, quarter over prior year quarter, polyester volumes decreased 18.1% and pricing improved 9.5%. In comparison to the December quarter, polyester volume declined 9% on a consolidated basis, while overall pricing improved 2.5%, indicating a limited level of success in passing along the double-digit increases in raw material prices and the impact of the Company's decision to take on additional commodity volume to more fully utilize our operation and protect market share.

The quarter was also negatively impacted by lost commodity POI sales caused by the shutdown of our Kinston operation, and the general market declines in automotives and furnishings noted earlier by Bill. On a positive note, our operations in Brazil exceeded expectations, as we drove more technical high value products, and the strengthening reals.

Nine-month volumes increased 12.3% quarter over prior year quarter, which was partially offset by a 3.4% decline in pricing. The increased volume and decreased price are primarily due to most of our volume increases coming from the sales of textured nylon, while our higher-priced covered yarn volumes remain constant. Despite general softness in retail in the apparel segment, nylon volumes continue to be strong due to consumer and fashion preferences, particularly in the shapewear segment.

Turning to slide five, net sales for the first nine months of fiscal 2008 were $523 million, which is an increase of $18.7 million, or 3.7%, compared to the prior year-to-date period, which only included three months of sales related to the January 2007 Dillon acquisition. On a year-to-date basis, total volume has declined by 5.3% on a consolidated basis, while overall pricing improved 9%.

The Company is reporting a pre-tax loss from continuing operations of $28.2 million, which compares to a pre-tax loss of $46.3 million for the prior year period. Generally speaking, improvements in the Company's conversion margin have been offset by year-to-date restructuring impairment, severance and shutdown costs, which are detailed on the succeeding EBITDA slide.

Net loss for the first nine months of fiscal 2008 was $16.9 million, or $0.28 per share, which compares to a net loss of $41.6 million, or $0.76 per share, for the prior year period. Year-to-date SG&A expenses were $36.5 million, and include $5.3 million in severance and unusual charges. Year-over-year SG&A costs are down 1.7, excluding such severance and unusual charges.

Now we'll turn the balance sheet, which you can find on slide six. Cash on hand at the end of the March quarter was $26 million, which reflects a slight increase compared to the end of the December quarter. The Company paid down our revolver by $5 million in the March quarter, and has paid an additional $5 million since the end of the quarter. Our total balance on the revolver now stands at $15 million.

Prior to the March quarter, the Company entered into an agreement to sell its Dillon plant and property for $4 million. The Company also sold the Kinston site back to DuPont in a transaction that netted no proceeds but helped mitigate potential risks related to the site, and allows us to avoid the future cost of maintaining the site. As a result of these transactions, the Company's book value of assets held for sale now stands at zero.

Total cash and equivalents, including restricted cash, at the end of the March quarter were $43 million, which is a slight decrease from the $44 million reported at the close of fiscal 2007. In addition to cash on hand, the Company has approximately $75 million of availability under its $100 million revolving credit facility, and total long-term debt, including $20 million of borrowings under the revolver as of the end of the quarter, at $208.4 million -- sorry, $218.4 million.

Net working capital balances increased $9.3 million from the end of the December quarter. Inventory increased $7.8 million compared to the December quarter as the Company built inventory ahead of anticipated April raw material increases. During the June quarter, we expect an $8 million to $10 million improvement in working capital as we decreased inventories in the anticipation of a late summer decline in raw material prices.

Turning to slide seven, the Company reported $13.6 million in adjusted EBITDA for the March quarter, which brings us to $37.8 million of year-to-date adjusted EBITDA. Based on current forecasts, the Company expects adjusted EBITDA for the June quarter to be in the $16 to $17 million range. These estimates for the quarter put our annual guidance in the range of $54 million to $55 million, which is at the lower end of our previous guidance.

Before we turn the -- open the floor to questions, I'd like to turn the floor back over to Bill for an update on our joint venture in China.

Thanks, Ron. Our primary objective in China is to provide and grow locally produced high value and premier value-added products to the Chinese market. To date, we have grown this business, and have projections for continued and profitable growth.

However, these sales continue to be a small percentage of the total output of our JV, and losses from the JV's commodity sales have continued, offsetting the benefits of the growth in the higher value products. We project continuing losses in the commodity segments, as raw material prices have increased, demand in the Chinese market has softened, and competition from lower cost competitors has intensified.

Accordingly, the new leadership team here at Unifi has been working with our JV partner to develop a viable path to profitability for the JV. We have performed an exhaustive review of the business, and we are in the process of exploring strategic options with our partner. While we continue to remain committed to China and our original goal of providing domestically produced value-added products to our Asian customers, we must do so competitively.

We remain encouraged by the growth of our value-added products and the support that we are receiving from our customers, but we believe a fundamental change in the structure of the JV is necessary. At this time, we are not in a position to provide further details about the specifics of these discussions, but available options include resizing the JV to a more profitable mix or exiting of the JV altogether.

In conclusion, I'd like to add a few closing remarks. Over the last six months, we've made significant progress despite worsening U.S. economic conditions and higher than expected raw material costs. During the quarter, we achieved a profitable run rate and have developed specific and aggressive plans to continuously improve those results. Our focus will remain on driving profitability and cash generation domestically, improving our China results, growing our premier value-added business, and targeting strategic growth opportunities aimed at increasing shareholder value.

And with that, I'll turn it back to Ron.

Before we turn the floor back to the operator, I'd like to remind everyone of a couple key dates. Our quiet period begins on the last day of our fiscal quarter, which is June 29 this quarter, and extends through our next earnings conference call, which is currently scheduled for July 31st.

At this time, I'd like to turn the floor over to the operator for questions. Pam?

Thank you. (OPERATOR INSTRUCTIONS) We will pause for just a moment to compile the Q&A roster. Thank you. Your first question is coming from Bryan Hunt with Wachovia. Please go ahead, sir.

Hi, this is actually Meredith Fowler for Bryan. As a result of some of the price increases you've taken over the last quarters, are you seeing customers backing off purchases at all?

Well, I guess the best way to answer that is any reductions we're seeing in sales, we believe are being primarily driven by softness in the market. We've not lost share that we're aware of because of price increases, as, frankly, the entire polyester business is seeing these raw material increases, and to the best of our knowledge, our competitors have been raising prices also.

All right. And then are you getting enough recycle material to meet the demand for your Reprieve product?

Yes. We have no problem getting enough recycle material to meet our needs, and we've actually identified sources that exceed our needs today, so we have quite a bit of growth potential there.

Also, we've heard a new spandex plant is coming online in Turkey. How is this going to affect pricing in the covered yarn market?

I'm sorry, you broke up when you said that. Can you say it again?

Sorry. We've heard that a new spandex plant is coming online in Turkey. How is this going to affect pricing in the covered yarn market?

More capacity is going to be a positive for us, but I think from our perspective, most of that raw material comes here domestically. And in that nylon business, 70% to 80% of that business requires NAFTA/CAFTA yarns. So most of our supply chain is set up here domestically with the addition of our raw material supply from our joint venture in Israel, which also qualifies under certain of those trade legislations. So I think it'll help -- generally speaking, it'll help from the global pricing, but for us specifically, it'll help -- our market is a little bit more contained because of the trade preferences.

All right. And then, also, we understand that you've extended 90-day terms to some of your larger customers in Mexico. Are you looking to tighten those terms going forward to improve working capital?

Yes, I don't think there's -- we don't usually talk specifically about terms in specific locations. What I will say is typically export customers have more extended terms, and 60 to 90 days for export business is typically what we compete with. And we look at terms on a case-by-case basis and kind of move forward from there. I think the -- we definitely -- working capital is definitely a high priority for us during -- for us going forward. We built quite a bit. We talked about building the inventory in anticipation of the shutdown, so working capital for us is definitely a focus we're going to put a lot of attention to. But whether we give 90 days in Mexico or whether we give 60 days somewhere else is not something we'd discuss at this time.

All right. And then, lastly, has capacity in the dyed yarn market rationalized in the last quarter?

No, it hasn't. I think we compete -- we're the dominant player, I guess, in the market, but there are several smaller companies, one being public with Burke, Burke Yarns, and a couple of the private guys. But there hasn't been -- we've seen some slowdowns. Our best view is some of our competitors aren't running seven; they're running five or even four days. But there hasn't been a takeout of capacity or rationalization.

All right, thank you.

Thanks.

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

Yes, good morning, Ron. Good morning, Bill.

Hey, Chris.

Good morning.

Just a couple questions. Given what's the deterioration in economic conditions, are you seeing any problems with any other customers? I know you last few years have had some problems with customers filing for bankruptcy, and we were pretty much through that. Last we spoke, you didn't really see anything on the horizon. But, given what's been going on in the economy and the slowdown in the polyester market, are you seeing any sort of problems that are starting to surface with some customers?

I think the best way to answer that one is talk a little bit about the past. We have, over the last three to four years, had some significant bankruptcies, from Joan-Mastercraft to Collins & Aikman and a few before that. Our business has really turned into a business where we have a much more diverse customer base, so the customer that has the $8 million or $10 million exposure -- we just don't have that customer anymore. Most of those guys have been through what's happened over the last couple years, so we really don't have those large customers anymore that have credit issues. We still have three or four large customers, but those large customers are in real good shape compared to where we have been with our large customers from a pure credit standpoint. That's kind of point one.

Point two is the health of our aging is actually a little bit better than it's been in the past. You can see from the provision for bad debt line on our income statement, we break out specific accounts where we have concerns about and make specific reserves, but the majority of that reserve comes from a purely mechanical calculation based off the health of our aging, and the result of that you obviously see in the provision for bad debt line. So our health of our aging is -- has improved as we went through the year.

Great, great. Okay. And then relating to Parkdale, I guess their fiscal year ended in December -- I didn't know if you could give us any insight into what kind of year they had, especially given the cotton prices having gone up a lot, and also your expectations for timing and amount of dividend from them.

I guess what we've said historically from the Parkdale and from our investment in that equity affiliate, we expect kind of $6 million to $8 million of dividend from those guys on an annual basis, and we forecast that into our cash flows. We really have very little control over that, and the pattern of those dividends range from $20 million one year to just $1 million the next year. So from a flow of dividends, that's definitely something we're discussing with Parkdale, and we're trying to work -- we're working on, but we don't have any -- we don't have necessarily an expectation on that.

From the state of the Parkdale business -- excuse me, I got choked up there. But from the state of the Parkdale business, this year, we're not providing the amended -- we're not amending our K to put in their full set of financial statements, but we are providing some additional information to you guys as we go out in the Q, breaking out our equity affiliates as we need to. So I think from looking at those numbers, you'll see Parkdale has had a relatively good year this year.

There is some concern over cotton pricing. It's up 32% kind of year-over-year. I looked at some numbers last night or the night before that said cotton could continue to go up in the future. I think the view -- without speaking for those guys, ultimately the view is going to be they're going to have to -- there's going to have to be some price increases passed along through the supply chain. I think where they stand today, because of the way they buy cotton and the way they hedge cotton, I'm not sure that the impact of that has been completely felt yet through their financials.

Right. Okay. Okay, did you expect, I guess, whatever amount it's going to be will come in the fourth quarter?

Well, I mean, there's a mechanical amount that says the JV pays out 30% of net income. Because it's an LLC, it pays out 30% of net income. We would, obviously, get a third of that. So that has been coming. I think in the quarter there was a $500,000 dividend that -- we received a $500,000 dividend on that, so that's happened. The other part is the subjective part about what's the state of their business and the state of CapEx for moving forward. They've just announced they were -- I think they publicly announced they were doing some CapEx around that, so we're working with those guys with what that's going to mean for us from a cash flow standpoint.

Right. Okay. And just to be 100 percent sure, your $54 million to $55 million guidance excludes dividends from Parkdale?

That's a good point, Chris. I should have pointed that out. Our term adjusted EBITDA -- I think we've moved around on that a little bit in the past internally versus what we talked about externally. We've made everything consistent now. When we talk about adjusted EBITDA, it doesn't include anything from equity affiliates at all. We reflect -- we changed our slides to reflect that. If we're talking of -- if we're adding Parkdale or China or anything else in that, we would say adjusted EBITDA including distributions from equity affiliates. So when we say adjusted EBITDA now, it doesn't have any impact of equity affiliates in it.

Okay, great. Thanks for clarifying that. And I guess there's just two more questions, if I can. On the -- do you see an ability to raise prices again here, since you really weren't able to pass along much of your raw material price increases up until now? Or is it really still a market share issue, where you want to maintain market share and maintain enough capacity utilization in your plans where you're probably -- I mean, without further raw material price increases, you're probably going to keep prices where they are?

Well, as raw materials go up, which they did in April pretty substantially on the polyester side, we are -- we have announced a price increase, and we are out actively raising prices today. And I don't want to say right now how much we'll get or if we'll get it across the entire product line, but we are out actively raising prices right now, as raw materials globally have gone up pretty substantially in April.

Just to point out, too, I mean, I think the point of the raw materials -- a lot of this is seasonal, and it's due to the summer driving season and the additional consumption of bottle resin, so prices are going to run up here, as they always have. The problem was they started at a record high level or a five-year-high level. But the prices are going to run up here through the fourth quarter -- through our fourth quarter, our June quarter, and then we're expecting to see some relief in that as we move forward. So as of right now, what we're doing is working real hard with our supply chain backwards and working real hard going forward with our customer to make sure we minimize the impact of that on our margins.

Right, right. Okay, and my last question -- if you could just remind me -- I'm sure I knew this at some point -- why depreciation and amortization on the statement of cash flows doesn't equal the D&A added back in your EBITDA reconciliation.

I think it's the amortization of some of the costs related to the bonds, some of the financial costs.

Okay.

It's in interest expense.

Great. Thank you.

Okay.

Thank you. (OPERATOR INSTRUCTIONS) Thank you. Your next question is coming from Marianna Kushner with Nomura Asset Management. Please go ahead.

Hi, I wanted to clarify, is there a way you could provide a rough suggestion on what the EBITDA is between polyester and nylon?

Basically, we're not breaking -- we don't break out EBITDA. I guess we --

Maybe operating income?

Yes, when we do our Q, we'll have our breakout of our segments in our Q. But I think, generally, with -- nylon has performed significantly better than it has in the past. Our raw material issues that we had around the [quarter] here with polyester -- we didn't see those raw material price increases in nylon because it's a different supply chain.

So nylon has improved, and I would say, just a rough estimate off the top of my head -- the problem I'm having with it is that the depreciation we add back internally as we review these statements is not exactly the depreciation that comes out on the balance sheet, because there's an SG&A component of depreciation we don't add back in our internal statements, so that's why I don't have the number right off the top of my head. But I would say kind of a 60-40 -- yes, probably a 60-40, maybe a two-thirds, one-third, with polyester being the larger share.

Okay. And it used to be that nylon was significantly less than that, right, if I recall?

Yes, nylon has had a strong year. I mean, nylon, for the last, I want to say, probably four to five quarters, we've seen a change in consumer preference from -- back to hosiery, some of the leading indicators, some of the fashion in Europe are taking us back towards hosiery. We've also seen the emergence of the shapewear -- Spanx and some of the other things. So nylon has had a -- some market fundamentals have improved over the last year and a half in nylon, so that business has definitely improved significantly.

I think what I'd add to that, Ron, is we consolidated from three plants down to one about a year and a half ago, and we're fully realizing our operation cost benefits.

Uh-huh. And actually, that was a follow up to what you just mentioned. I mean, do you have a better sense in terms of how this consumer preference is for shapewear, for all these hosiery-related things, how long that's going to last? Is that just a temporary thing, or do you see some of those trends continuing for some time?

Well, we're continuing to see growth at this time, though not at the same level of growth we were seeing maybe six months ago, so it would appear the preference change is still on the upswing. It's difficult to say how long a fashion trend will end. It could be a year; it could be five years. It's very, very difficult.

I think the other point we said was the early indicators -- I mean, if you look, a lot of the fashion here trails Europe. If you look at early indicators, if you look at some of the fashion shows, you're looking at what's happening in Europe, nylon -- that trends seems to be continuing out for a couple years. Now, once we get past that, it's anybody's guess whether it's going to cycle back towards a more casual environment or continue to go towards a more formal environment.

Right.

Okay. All right, thank you.

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

Hi, good morning.

Hey, Allen.

Morning.

Just a broad question. Are you satisfied now with the -- and I know that may not be the right word -- with your footprint in the United States in terms of your ability to grow the business on a long-term basis?

I think from an asset basis, we've consolidated down into our most modern plant. I mean, if you guys have heard us talk, especially when we're on the road, we talk about we spent $1 billion in CapEx in the late '90s. We've consolidated around those billion dollars' worth of assets, and we're in our most modern, most efficient operation. So I think where we're at, we feel really good about our asset base. We don't see significant CapEx on the horizon. We do a good job of maintaining our eight -- or, I'm sorry, $10 million to $12 million of CapEx is where we see things going here in the future, so I don't think there's going to be a lot of investment required to keep us where we're at. I think what we have, we've got some world-class technology and world-class capability. Our development team is working on that to try to grow the business specifically around our PVA products, and we're pretty happy with where we are on an asset basis.

Yes, and --

So -- I'm sorry, go ahead.

I was going to say basically, as our PVA products grow, we would just be displacing commodity products that we're producing on the facilities that are making the PVA products, so we've got sufficient growth capability in our PVA products.

So, maybe asked differently, if X equals 100, meaning you were running full, what are you running in the U.S. these days in the different businesses?

I think from a -- if you break them out by the businesses, our polyester business -- it really depends on -- if you look at our POI operation with the shutdown of Kinston, we're making -- we're at a plant efficiency of 95% or 96%. I mean, we're running everything we can run on our POI business, and we're sourcing outside.

I think, moving to the textured processes, on a market perspective, utilization is in the kind of mid-70s. I think we're running low 80s to mid-80s, so we have been able to hold onto some share as the economic conditions have worsened here recently. Move out into the nylon business, I think that business is running fairly strong in certain segments. The fine fine denier products that we talked about around the shapewear and hosiery are running really strong. I mean, they're in probably the low 90s.

I think when you got on some of the double-cover or some of the more -- the heavier denier products, we're probably low 70s to mid-70s on that. So we have some availability to increase capacity, and for places in that -- like in the nylon business that's growing, we're definitely trying to keep up with that and trying to shift production where we can to be able to make sure we're able to meet demand. But I'll go back to my CapEx comment -- I'm not sure if that's where you're going, but from a CapEx perspective, we don't see that being significant.

Okay. So really, just to finish up, so because you've talked so often about this change of product mix in the United States, what I'm assuming by your comments is that the mix change that you've made to some of these environmental-friendly products -- and I don't remember exactly what you call them -- you have the capability to produce those products today without adding significant new equipment. Am I saying that right, in the U.S.?

That is correct.

Okay. And lastly, from -- to China, obviously, if, for example, you were to decide to fold the tent and go home without trying to go into what it would cost you, is there some degree of overlap of clientele, meaning that you're producing certain products for certain customers that you do in the United States also in China and you'd have to deal with that reality, or is there -- is there much of that, or is it pretty slim?

Well, let me answer it this way. Our original intent when we went to China was to have locally produced high value and TVA products sold to Chinese and Asian customers. Irregardless of where we end up with our strategic review of the JV, that is still our intent and will continue to be our intent. And I really can't say any more than that right now until we get further into these discussions. Did that answer your question?

Well, no, what I was really getting at, I'm just going to make up -- let's say you have customer X that's been a customer of yours in the United States for many, many years, and you've -- in this JV, you're producing some of customer X's requirements in China, okay, just because it was efficient or for whatever reason. My question is, should you change your strategy in China, do you risk losing that relationship? I mean, I'm just conceptualizing, obviously, but I'm just trying to understand it better.

Okay. Well, I mean, we do have some customers that we supply domestically from our domestic operations and also supply their Chinese needs from our Chinese JV operations, and we would remain committed to continue to do that.

Okay.

So, no, I don't believe we will have any major issues with customers we're servicing now.

Okay. But you understand where I was coming from, then. Okay, great.

Absolutely. I mean, we're developing those contingency plans right now either way, however things work out with our partner in China.

Yes, the strategy, in China.

Okay. And lastly, because I didn't think there was anybody else in the queue, is there anything -- as your debt is reduced, is there anything to preclude you from buying up some of the public debt?

Under our revolver, I think if we're under a certain amount, we can go out and buy -- I'm sorry, if we're over a certain amount in our revolver, we can go out and buy up to $10 million of debt of our senior notes. Once we get out of the revolver, obviously on a pro forma basis, there's no limited amount that we can -- there's no limit to the amount we can go buy back of those notes.

And are you anywhere near that threshold now?

I'm not sure about threshold. I mean, our revolver is at $15 million. Once we get below that threshold, I think it's $10 million where we can buy as much as we want to. So once we get below $10 million, we can buy back as much as we want to, so we're -- we are near that threshold.

But theoretically, you're sitting with cash on the balance sheet, so if you wanted to, you could pay that down tomorrow. Isn't that true?

Yes.

Okay, so what -- I'm just -- what's stopping you from doing that besides just trying to run the balance sheet a certain way? I'm just trying to understand what the pragmatism of not taking cash that's yielding -- I don't know what -- hopefully you down own any of that garbage, but on the assumption you have 1% or 2% that you're earning in cash and you could pay down a revolver where you're probably paying a hell of a lot more and you have debt outstanding that, my guess is, is probably yielding in the double digits, so I'm not clear why you wouldn't do that.

We're looking through all those options. We've had conversations with the Board level about that. Ultimately for us, cash is king, building cash is king, getting out of the revolver. But we're definitely looking at is that something we should do in the future, and ultimately the vision that we paint for this is what Unified is going to look like in the future and what the capital structure is it's going to take to get there is what we're evaluating. So, yeah, it's definitely under advisement.

Thank you.

Thank you. Your next question is coming from CJ Baldoni with Evergreen Investment. Please go ahead.

Hi, thanks for taking my call. I have a couple clarification questions. I think you said working capital was going to be a source of cash in the fourth quarter as you draw down some of your inventories. What was the range? Did you say 8 to 12?

No, 8 to 10.

Eight to ten?

Yes, sir.

And then there's been some discussion about capital expenditures. This year, I think you had indicated earlier that you were looking to spend $10 million. Is that kind of still the number that you're looking at?

Yes.

And then with respect to assets held for sale, you made a comment that the book value of assets for sale is zero. Could you review what assets are for sale, if any?

There's not a significant amount. I mean, we do still have assets held for sale. Part of that transaction at Kinston with DuPont was that we reserved the right to sell certain assets down there for a period of two years, but those assets had already been fully depreciated. They -- well, when we bought them, they -- we basically bought them with a basis in them of zero, because we bought that business for inventory less a discount. But we had a basis of zero on those assets, so there's not a significant $4 million or $5 million worth or $10 million worth of assets held for sale that are sitting out there that I would be forecasting in as this is what we can possibly get. We are working to sell those assets, and we'll see kind of how that comes once we get finished with it.

Okay. And then would you do me a favor and could you just break down your debt structure, like what the balances are under your various facilities? For some reason, my numbers don't really foot to what you disclosed as your total debt. I'm just making -- I want to make sure that I have everything.

I think we said a 218 number.

Right.

As of March 23rd, we said 221 is the long-term debt and other liabilities. So of that, 218 was the debt part we talked about.

Okay.

That debt is made up of $190 million of the senior secured notes, 11.5% 2014 notes. There's $20 million of revolver as of the end of the March period. There's probably $2 million to $3 million of some lease obligations in there. And then the last piece, in Brazil we have a tax incentive program where basically as we put cash -- as we have to put cash away on the books to pay our VAT tax down there, you can borrow against that, and the rate you pay is basically half of the rate you earn in that escrow account, so it's a tax incentive program. So that's the basic makeup of that.

What's the balance on the Brazilian facility?

It's about $7 million.

Seven?

Yes.

And then --

But remember, the important part of that is there's an offsetting asset up on the balance sheet where it literally is cash sitting in an account that we're able to borrow against.

And could you break down the geography of your cash balances?

We typically don't go that far. I guess -- well, I guess we do in the guarantored footnotes. You'll see it here coming up. In Brazil and Colombia, which are non-guarantors, there's about 8.5 -- $8.7 million. There's another $1.3 million or so in Ireland, where we're continuing to wind down our operation we shut down over there probably four years ago, three years ago. And the rest of the cash is basically in the U.S.

And could you just remind me, if you don't mind, how -- what the mechanics are with respect to the restricted cash? When does that get utilized?

Yes, the restricted cash -- if we have an asset sale or a transaction of asset sales that are greater than $2 million, we have to put those proceeds into a restricted cash account. We get to draw down that cash account through additional assets, and those additional assets could be CapEx, or it could be some type of transaction if we -- like a Dillon transaction. Those assets would have counted as purchased under that. So that's how they go in and how they come out.

The other provision around that is if we get more than $10 million in restricted cash that's been in the account for more than 360 days, we have to offer that back to the note holders basically at par. From a -- when that issue will come up, we're probably seven, eight months away from when that'll come up if we just use kind of a pro rata push out of the cash flow -- I'm sorry, a pro rata extension of what we think CapEx is going to be over the next 12 to 15 months.

So basically, as you're spending CapEx, you're drawing down that account to where it's not necessarily one-for-one?

Oh, it's one-to-one. It's -- we've just sold quite a bit of assets this year, so that's what's built it, but it would be even higher had we not -- I think we've sold $24 million or $25 million worth of assets this year. But as we've spent CapEx, we've been able to draw that down.

So kind of referencing back to an earlier question about your desire to maybe reduce debt through open market purchases of bonds, I mean, if you -- prior to -- I mean, could you take cash in that restricted cash account and use it for such purpose?

No. Well, yes and no. The vast majority of our assets are under collateral for the new agree -- in the new agreement, whether they're guarantors or whether they're restricted subsidiaries. If we sell an asset that is not collateral under the agreement, then those dollars we can use to pay down the revolver -- I'm sorry, we can use to buy back the notes. But that's a real small class of assets, so the vast majority of it is that the assets we sell go into the restricted cash account, and no, we cannot use them to buy back bonds at discounted rates.

[Unfortunate.] Okay, thank you very much for taking the time.

Great.

Thank you. Mr. Smith, there appears to be no further questions at this time.

Okay, thank you, operator.

Okay. I guess in closing, it's been six months since the new leadership team took over here at Unifi, and we're encouraged by our results to date. We're very optimistic that we will develop and execute a plan to improve China, and we've got specific and actionable plans aimed at continuing to improve our profitability. And with that, I would like to thank you all for your interest, and have a good day.

Thank you, and this does conclude today's Unifi third quarter earnings conference call. You may now disconnect your lines, and have a pleasant day.