Unifi Inc (UFI) 2009 Q2 法說會逐字稿

Good morning. My name is Lynn, and I will be your conference operator today. 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 session. (Operator Instructions).

Thank you. I will now turn the conference over to Mr. Ronald Smith, Chief Financial Officer. Please go ahead, sir.

Thanks, operator, 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 second-quarter conference call link found on the homepage. I hope that you have the presentation available, as it will be easier to track through the information discussed in this call.

Before we begin, I need to first advise that certain statements included herein may be forward-looking statements within the meaning of federal securities laws. Management cautions that these statement 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 risk factors that may impact these results.

Before we review the preliminary operating results for the quarter, I would like to turn the call over to Bill, who will provide a brief overview of the market conditions that are impacting our results. Bill?

Thanks, Ron. Good morning, everyone. The operating conditions that we and every other company endured during the second quarter were among the harshest anyone has seen in decades as consumers cut spending significantly during the important holiday season. The market conditions in each of our business segments have deteriorated, and I will take a few moments to give you some background on each.

Apparel retail sales declined about 7% in the fourth quarter of annual 2008 compared to a year ago, and many experts believe that retail sales would have declined even further had it not been for the deep discounts offered to move merchandise. Retail apparel inventory increased between 2% and 5% every month from June 2008 through October, and apparel and hosiery producers reported that their inventory was up 9% compared to year-ago levels.

With this much retail and finished good inventory available, production at fabric and apparel mills declined 20% and 24%, respectively, during the fourth quarter compared to a year ago. As a result, Unifi fiber sales into apparel segment were down about 30% in December quarter as compared to the prior year.

Going forward, industry experts expect apparel retail sales to be 10% to 12% lower year-over-year for the next six months, before a gradual recovery. Therefore, we anticipate our sales will settle at around 90% of last year's level once the downstream inventories are depleted and consumption of retail begins to rebound.

One positive note to the apparel story continues to be imports of synthetic apparel from the CAFTA region, which were up 13% in 2008 compared to the prior year. Many US retailers, saddled with significant inventories imported from Asia, have become very conservative in their sourcing decisions and are taking advantage of the shorter lead times offered by the CAFTA region to better manage inventories and deliveries. Consequently, our sales into the CAFTA region were up 13% for the year, and we expect continued strength and growth in sales through the region as more apparel production is shifted from Asia into the region to reduce the sourcing lead times.

In the automotive segment, US sales of cars and light trucks declined 18% in 2008. As with apparel, the decline in production accelerated throughout the year, ending with a 26% decline in the December 2008 quarter compared to 2007. In addition, auto dealers currently have about 95 days of inventory on the lots, which is about 50% higher than normal. This will further drive down production in 2009, essentially resulting in a 10-month production year at reduced rates.

This situation, however, had less impact on Unifi than in the past, as our dependence on the automotive segment has been reduced over the last several years. This segment accounts for just 6% to 7% of our sales revenue today versus 12% to 14% just a few years ago.

In the furnishings segment, new home sales plunged in December, capping the worst year for sales since 1982. As a result, year-to-date shipments of upholstered furniture are down nearly 15% from year-ago levels, which has led to a similar decline in production at furnishing mills. The Company's sales to the furnishing segment were down 18% during the December quarter as compared to the same period of the prior year.

To summarize, the primary challenge to our supply chain over the next couple quarters is excessive downstream inventory. Retail inventories of apparel, home furnishings and autos are high, and they are being consumed at reduced rates noted earlier. Until the supply chain works through this inventory, new orders for the Company may improve slightly, but will continue to be below year-ago levels.

I'll comment on our strategies for the second half of the fiscal year at the end of the call, but for now, I will turn the call back over to Ron, who will take you through our preliminary results for the December quarter.

Thanks, Bill. If you are following along from the website presentation, we will begin our comments on slide 3. Net sales for the current quarter were $125.7 million, a decrease of $57.7 million over the prior-year December quarter. We experienced dramatic sales declines in November and December in response to the high inventory levels and rapidly deteriorating market conditions Bill outlined earlier.

In addition, prior-year sales included approximately $7 million of sales from our commodity POY operation in Kinston, North Carolina, which was closed in December 2007 -- I'm sorry -- in the December 2007 quarter. The Company is reporting a net loss including discontinued operations of $9.1 million, or $0.15 per share, for the quarter compared to a net loss of $7.7 million, or $0.13 per share, for the prior-year December quarter.

The quarter-over-quarter decline is a result of a 270 basis point decline in gross margin, which was negatively impacted by $3 million of higher priced raw material purchases from the first quarter moving their way through the inventory systems, and the effects of reduced volumes on our cost structure. Nevertheless, we expect margin improvement through the second half of fiscal 2009 as raw material costs have stabilized below the peak that we saw in July, and our volume and cost strategies are beginning to take effect.

SG&A expenses for the quarter were $9.3 million, which represents a $1 million improvement over the prior-year quarter, after eliminating the effects of the $1.7 million severance charge in the 2007 quarter. During the year, our SG&A expenses are running well below budget, as we have taken steps to eliminate non-critical spending while continuing to fund our premium value-added product strategies.

Turning to page 4, net sales for the first half of the fiscal year were $294.7 million, down $59.2 million compared to the prior year's net sales of $353.9 million, which included approximately $19 million of sales from the now closed Kinston facilities. During the September 2008 quarter, the loss of sales from the Kinston facilities were masked by higher volumes and price over the prior year. During the December 2008 quarter, volumes declined drastically in November and December, and the polyester price began to move down as the raw material price dropped considerably.

The Company is reporting a net loss, including discontinued operations, of $9.7 million, or $0.16 per share, for the first half of fiscal 2009 compared to a net loss of $16.9 million, or $0.28 per share, for the prior-year period. Included in the results for the six months of fiscal 2009 is a net pretax gain of $5.2 million related to the sale of certain real property and related assets in Yadkinville and $3.6 million of income from the Company's share of its earnings from its equity affiliate partners. SG&A expenses were 6% lower in the first half of fiscal 2009 compared to a year ago, absent the $5.3 million in executive severance charges and deposit write-offs recorded in SG&A for the first half of fiscal 2008.

Turning to page 5, quarter over quarter, total volume declined 32% on a consolidated basis, while overall pricing improved 1%. Compared to the September quarter, total volume declined 20% on a consolidated basis and the overall price declined 5%.

Within our segments, polyester volumes decreased 33% compared to the prior-year December quarter as a result of volume declines, both domestically and in Brazil. In comparison to the September quarter, polyester volume decreased 19%, despite a relatively strong shipping month in October and overall pricing declined 4%.

Year-over-year sales in our PVA products have been flat as the supply chain appears to temporarily be focused on the sell-through of existing items. The finished inventory at hosiery mills and the resulting decline in production at knitting mills led to declines in our nylon volume. Quarter-over-quarter, nylon volumes decreased 30%, and overall pricing declined 4%, due primarily to a shift in mix. Compared to the September quarter, nylon volume decreased 20% on a consolidated basis, and overall pricing declined by 3% due to the same mix shift.

Now we will turn to the balance sheet highlights, which you can find on slide 6. Cash on hand at the end of the December quarter was $12.6 million, down $7.8 million compared to the end of the September quarter. The primary components of the change in cash were $6.8 million of proceeds from asset sales, offset by working capital uses; an $11 million semiannual interest payment; and the $2.5 million effect on cash in Brazil from the strengthening of the US dollar against the Brazilian real.

At the end of the December quarter, total cash was $32.4 million, which represents a $15.3 million decrease from September. Total cash at the end of December included $11.1 million of restricted cash in the US and $8.7 million of restricted cash in Brazil. The primary components of the change in total cash were the previously noted $7.8 million decline in cash on hand, as well as approximately $4 million of usage for CapEx and the payment of the Brazilian ICMS tax incentive loans that matured during the quarter. Total long-term debt as of the end of December was $194 million, a decrease of $3 million from September.

As we move through these difficult times, we are confident in our capital structure and our ability to continue pursuing our established strategies while the supply chain works through the destocking issues. We have significant cash on hand and a stable long-term capital structure. Our Senior Secured Notes do not mature until 2014, and they do not contain any ongoing financial maintenance covenants. Our revolver doesn't renew until May of 2011, and only has financial maintenance covenants if our availability gets below $25 million. At the end of December, we did not have any borrowings under the revolver, and our availability was $76 million.

Nevertheless, we are going to increasingly focus on liquidity and cash generation until the economic conditions start improving noticeably. Over the next six months, we are going to especially focus on adjusting our working capital requirements to meet the current run rate of our business. We plan to continue challenging all nonessential spending in both capital and expense, and at this time we do not anticipate buying back any of our Senior Secured Notes in open market purchases.

However, it is likely that we will utilize a portion of our restricted cash to tender for a portion of our 11.5%Senior Secured Notes at par. Under the terms of the note indenture agreements, if proceeds from the sale of collateral remain in restricted cash for 360 days, they become excess collateral proceeds. And the only use for such excess collateral proceeds is to remain in the first priority collateral account, earning minimal interest, or for the use of bonds to make a tender offer for a portion of the notes at par. At this time, we have approximately $9 million of excess collateral proceeds, which we will likely utilize to tender for a like amount of bonds at par over the next quarter.

Net working capital balances have decreased $4 million from the end of the September quarter. The primary drivers of the working capital decrease were a volume-related decrease in net receivables and the impact of the US dollar to Brazilian exchange rate. Inventory levels remained unchanged despite the volume reductions, as the dramatic reduction in demand for our products in November and December did not allow us to react quickly enough.

As we moved out of the quarter, we began reducing finished inventories through our holiday shutdown, and we have begun executing plans to significantly reduce our overall inventory over the next two quarters. By the end of the fiscal year, we expect our receivable balance to increase slightly from higher sales, but we expect a substantial reduction in inventory to create a net working capital improvement of $8 million to $10 million.

Finally on the balance sheet, it is important to note the impact of the changes in the US dollar to Brazilian real exchange rates. At June 2008, the exchange rate was 1.59 real to the US dollar. At the end of December 2008, the real had devalued to 2.34 reals to the US dollar, which resulted in a charge -- I'm sorry -- which resulted in a change to accumulated other [components] of income of almost $30 million. Going forward, economists expect this impact to partially reverse as the real strengthens, but we do not expect it to return to the 1.59 exchange-rate level within the near future.

Turning to slide 7, our 34% share of Parkdale America generated approximately $600,000 of income during the December quarter and $4 million of income year-to-date. We have received $2.1 million of distributions through Parkdale America during the first six months of fiscal 2009.

Turning to slide 8, the Company reported adjusted EBITDA of $2.1 million, which was within the forecasted range of $2 million to $4 million provided on our December 19 press release. The adjusted EBITDA for the quarter excludes $2.1 million of expense related to the completion of several projects designed to optimize our asset configuration and the commercializing of our PVA products. Each of these projects has a near-term payback and is critical to the accomplishment of our long-term strategies.

Adjusted EBITDA for the six months of fiscal 2009 is $16 million. In light of the significant volume declines we have experienced and the minimal volume improvement we now see over the next six months, driven by both reduced consumer spending and the drawdown of high downstream supply chain inventories, we are now forecasting EBITDA for the fiscal 2009 to be in the range of $20 million to $30 million.

Within the quarters, we expect adjusted EBITDA for the March 2009 quarter to be similar to the December 2008 quarter, and we expect improvement in the fourth quarter as planned operational and cost improvements take effect and we begin to see slightly improved volumes. It is important to note that we are providing these forecasts and related assumptions despite the significant degree of uncertainty we are all seeing in the economic environment. These estimates are our best guess at this time, but we do not believe -- I'm sorry -- but we do believe our forward-looking view will be somewhat clearer on the investor call in March, specifically as it relates to the volume assumptions.

Before I turn the call back over to Bill, I would like to provide a brief update on China and some key dates for this quarter. The Company is very close to finalizing the definitive agreements required for the sale of its 50% ownership and interest in Yihua Unifi Fibre Industry Limited, UFI, through our partner, Sinopec Yizheng Chemical Fibre. YCFC's parent company has agreed to purchase the Company's ownership interest in UFI for a revised purchase price of $9 million, which resulted in an approximately $1.5 million impairment charge in the December quarter. From here, YCFC requires Board approval to sign the contract; then once signed, local provincial approval is required. As with any negotiation of this type, there can be no assurances that this transaction will close, but our current timeline calls for closing within the next 60 days.

Turning to the March quarter, I would like to remind everyone of a couple key dates coming up. We expect final results for the December quarter to be filed with the SEC in our 10-Q tomorrow, and our quiet period for the third quarter will begin on March 27 and extend through our earnings release conference call, which is currently scheduled for April 30.

With that, I would like to turn the call back over to Bill for a few final comments.

Thanks, Ron. We're certainly facing challenges. There is no question about that. However, we have confidence that the fundamental improvements we've made to our underlying business in the last year and additional improvements planned in the short term will help to assure we weather these turbulent times.

Our second-quarter results were negatively impacted by high-priced inventory flowing through our operations, and more importantly, a falloff in sales much greater than retail performance would indicate. For instance, our largest segment, apparel, was off 7% at retail in the last quarter. Our sales into that segment were down about 30%, while we actually gained share in that market. While the high-priced inventory of raw materials will taper off in the current quarter, we anticipate sales will continue to be negatively impacted by high downstream inventories for an additional four to six months, and then settle at levels more consistent with retail sales.

In this environment, we will continue to cut and control cost, accelerate operational improvements and progress, drive increased market share and aggressively reduce our working capital. In fact, as previously noted, we expect our fiscal fourth quarter to be measurably better than the third quarter, even with comparable volume levels, due to several million dollars additional cost and operational initiatives taking effect. By doing so, we expect to maintain positive free cash flow through the end of the fiscal year.

We will also continue to drive our core strategies, which have not changed. We've made tremendous progress in improving the fundamentals of our business over the last year. For example, should volume levels settle at 10% below last fiscal year, our EBITDA rate would be comparable to last year. Based on our current plans for the remainder of this fiscal year, we are cutting our SG&A annualized run rate by $8 million, or 18%, versus fiscal 2007, while nearly doubling our future-looking R&D and marketing efforts. We have significantly reduced manufacturing costs through the consolidation of our beaming operations in Yadkinville and operational efficiencies in all our plants.

We are seeing improved margins, driven primarily by mix improvement and rigorous raw material purchasing practices, and we have increased our share in the North American market. Through these efforts, we have improved our operating performance at various volume levels by 15% to 20% versus last fiscal year. And we have several additional business improvement programs in progress which could add millions of dollars annual improvement to our bottom line.

These programs are being driven by an organization that is positive. We can't control consumer confidence or tighten credit. What we can control is the continuous improvement of our costs, operational efficiencies, market share and product mix, and that is exactly what the Company is doing.

With that, I would now like to turn the floor over for questions. Operator?

(Operator Instructions) [Peter Finelli, Riva Ridge.]

Good morning. Wanted to just confirms the EBITDA forecast. The $20 million to $30 million, was that for the back half of the year or was that a full-year number?

That is the full-year number.

Okay. And also on the free cash flow guidance, you said free cash flow positive through the end of the fiscal year. So again, is that -- just to confirm -- is that back half or is that a full-year free cash flow positive number?

That one is a back-half number (multiple speakers) the working capital improvement we were talking about.

Okay. And then lastly, the $9 million of restricted cash that is earmarked for the bond tender, you said that was coming up in the next month, or is that coming up in the next three months? Just wanted to get better timing on that.

It already became excess collateral on proceeds. I think we announced that back in December when we did that press release. We have another tranche that could come up in March. We don't think we are going to add anything to what we had, the $8.8 million we had, but we could be a couple hundred thousand dollars off there. So once we get comfort around that, I think that would be at the point where we would do the tender for moving forward.

Got it. Okay. Thanks, guys.

(Operator Instructions) Mark Fraker, ISI Capital.

Can you give me a little more color on PVA by segment and how is that doing? That is sort of the future we are looking to. and just any color you can give on that.

Yes, I think from -- the view I will give -- and obviously Bill can chime in here -- but we had said previously we expected PVA to increase 50% this year. I think what we are seeing really over the last quarter has been a flattening out on PVA. So we will probably see some growth, but it won't be a significant amount of growth.

I think as far as additional color, I think we still feel real strong about the product offerings we have out there. We just launched another Repreve staple product that we think is going to be pretty significant going forward. But I think the attitude we are seeing right now with retail is they got burned by these long supply chains and the excess inventory they had, so they are trying to make sure they get all their sell-throughs done with the existing items they have before they go developing new products.

So I think what we've seen is a leveling off and it will tick back up as we move through to the next 18 to 24 months.

Let me add to that. Basically, as we've said, apparel at retail is off about 7%. Our business was off about 30%. If you look at our PVA sales into apparel, they are about flat. And when I mention a mix improvement driving improved margin, it is primarily the fact that our PVA products have stayed relatively flat while our more commodity business has been falling off. So we are certainly encouraged by that and certainly should retail turn around or as this inventory goes through the system, we would expect to see some pickup in our PVA sales.

So I guess what had happened earlier was there was just a shift in the channel between like a REI and a Patagonia to Wal-Mart kind of thing. Is that still going on?

I think that is, from looking at the data. But I think it is a little misleading to say all of our PVA was going in that. I think one of our largest PVA programs is in Wal-Mart. So we do have quite a bit in mass merchant, as well as specialty and department. But I definitely think the very nature of PVA, some of the product is targeted more towards the higher-end specialty stores.

So it has had some impact, but it certainly isn't a situation where all of our PVA is up in that level and none of it is down in mass, because there is quite a bit down in mass.

Okay.

I'll add one more thing, too. The comment we made around some of the nylon, that the negative shift in mix around nylon was specifically around the PVA program in nylon that got delayed, that it was an inventory reduction that happened there in the December quarter. We expect that one to come back up. But that is the perfect example of how the PVA can impact an individual segment we have.

Okay. That answers my question. Thank you.

(Operator Instructions) Jonathan Sacks, Stonehill Capital.

I just had a handful of smaller questions. Obviously, the JV is winding down and we hope to get the proceeds on that, but I recall there was going to be a $3 million or $4 million new investment in China, I guess with our own entities. Has that been made yet or is that still to come?

That one will come as a part of the closing process. One of the investments that our new JV is making is in some of the inventory that is set -- in some of our PVA inventory that is setting currently in the JV. So that investment will come over the next probably two quarters, and we will -- we are excited about where that is at, where it is headed. We got our license here over the last couple weeks and we're up and running.

So we've got everything we need at this point in time to get started. We are really just waiting on -- we actually had a team over in China this week doing some negotiations, so we are just waiting on those -- the last level of approvals to go through there, and then we will be up and running.

I think even though we haven't gotten to that point, the commercial organization is already set in place and it's doing quite a bit of work today. It's actually moving some pounds for the JV -- or most of the PVA pounds through the JV today. So we are there and we are up and running. It is just going to be a matter of flipping from a joint venture sale to a Unifi sale once we get this closed.

Okay. But we are still talking roughly maybe $5 million of net proceeds, of $9 million and reinvesting $3 million or $4 million, something like that?

Yes, and I think that -- the first part of that will come pretty -- over the next little bit. But as that business grows, there could be additional working capital requirements, and that is kind of the range, the $3 million to $5 million range we gave.

Okay. And then can you just remind me what assets you have left for sale, if any? Do you still have a Kinston asset that was for sale and the contract fell through?

A little bit of background on that. Last March, when we announced we were exiting the Kinston -- or we were -- it was March 2008, when we were exiting the Kinston facility. If you remember, that was a transaction where basically duPont paid us $3 million and we paid them $3 million back for remediation of that site. So that got us off the site and got us from having to deal with any of the environmental issues that we originally assumed as a part of the original purchase from DuPont. So it was a rather complex transaction.

And at that time, we had said we don't really have any more significant assets for sale around that business, because one of the likely buyers was -- it required a three-way negotiation, and that three-way negotiation just wasn't moving at that point in time. So we went ahead with the DuPont transaction.

Then come June, that third party came in. We reached an agreement and we were moving forward. And I think the agreement was -- these will be nominal numbers -- but it was about $12 million of proceeds, and we were going to have to give $4 million of those to DuPont, so we were going to net back about $8 million. We actually signed a contract with that third party.

Then in August or early September, we were notified that they were not moving forward with that contract. So our assets are still there, and they are still held for sale. We have the right to sell those under the agreement we made with DuPont between now and March 2010. We will not find another buyer that fits that profile as well as the third party we had. So they are not -- I certainly wouldn't go out and make an estimate that they are worth the same amount that we entered that contract for.

But they are -- those are assets that are valuable assets. and we have gone through the process. We've got them listed with a broker. He has talked to interested parties. So we are moving along with that, and I think they are on the books for about $1.5 million, $1.7 million today. So we obviously, just under the accounting rules, we think they are worth that or more than that.

Okay.

Other than that, from an assets held for sale standpoint, we currently don't have any other plants or any other significant assets that we have listed for sale.

And on Parkdale, I know you don't have control over what dividends come out, but do you want to maybe just comment on how that business is doing and what expectations or thoughts you have about potential dividends coming from Parkdale?

If you go back over the history of Parkdale, it has been -- I think if you looked over the nine or 10 years we've been in that joint venture, it's averaged kind of $8 million to $10 million. We've already gotten $2.1 million this year because it had a very good second half. It had a very good January to June in 2008.

Our expectations for dividends -- we don't have control, but our expectations for dividends are that we would continue to see a dividend flow coming off of that investment. Last year, the dividend flow wasn't as large as it could have been -- kind of the discretionary dividend wasn't as large as it could have been, because they were doing some modernization and some CapEx. But that is completed at this point in time, and we would expect that to start back up.

Ultimately when it is going to happen, we model -- from our modeling standpoint, we model in that $6 million to $8 million on an annual basis. And it just depends on what the operating results are.

As far as the operating results, Parkdale had -- I think they -- without going into how their quarters were or how their months were -- they had a similar trajectory to what we had. They had a solid -- their October was obviously better than their December was, I guess is the best way to put that. And they are selling quite a bit into the apparel supply chain.

So I would assume -- they are seeing the same phenomena we are seeing, where retail is off 7% to 10%, but fabric and fiber is off 25% to 30%, as people work through this destocking issue.

So would you still be expecting a significant portion of this year's dividend to come basically in the next six months before June, or what win is the timing of that?

Typically what happens there, once the audit is done, then the March or April Board meeting -- I guess the April board meeting is when -- but again, it could or could not happen. We have very little control over that. But typically, that is the timeframe, is if a discretionary dividend happens, it is going to be sometime in that fourth quarter.

When I say discretionary, there is provision in the agreement that a certain percentage of net income gets paid to the partners as a part of the operating agreement. I think it is 30% of net income gets paid out because it is an LLC, under the theory that you are going to have to pay taxes on this income. So that is what that $2.1 million payment was. It was the dividend as required by the agreement. But the discretionary one, typically that is a part of the Board process.

I'm sorry, so that would be in Unifi's fourth quarter, i.e. the June quarter?

Correct -- I'm sorry, yes.

And then can you just comment a little bit on CapEx outlook for the next year and whether that has changed at all?

I think for us, we've got -- we had a project that was very important to our PVA in Yadkinville around our spinning plant. It allowed it -- it opened up quite a bit of flexibility around PVA, as well as opened up some sourcing options for the raw materials for that plant. So I think that is going to move forward, and we would stand -- I think we gave $14 million to $16 million as our guidance for this year. We probably won't spend all $16 million, but it won't be significantly different.

As far as going forward --.

As far as going forward, Ron, I would expect we'd be more like more historic levels, maybe $8 million to $10 million range. Is that about what we have been doing?

And then I just want to ask you two more questions. I don't want to hog the line, but I'm not sure if there are others in queue. If you could just comment on how much pricing power you have. And you mentioned gaining market share. Are your competitors experiencing the same dynamics?

It is hard -- ask that a question again, please. I'm sorry.

Sorry. I guess I'm wondering how much pricing power does the Company have. And presumably your competitors are dealing with all of the same industry headwinds that Unifi is.

Yes, that is very accurate. And you know, in looking at when raw materials, especially in polyester, went up significantly last summer, we were able to capture some of that going up, but certainly not all of it. Now as they are coming down, we are trying to get back to maybe where we were before last summer. And I think there is a good chance we will be there.

As far as our share gain, we are primarily targeting imports with some lower-cost POY that we are purchasing from India. And we've seen some success there.

Thank you so much. Appreciate it.

[Michael Snyder], MacKay Shields.

Good morning, guys. I think Jonathan asked a bunch of mine. But can you talk a little bit more about inventory levels in the channel and kind of what -- maybe assumptions for each end market to sort of clear, so that obviously production levels could start increasing. And then also maybe tie that into your raw material costs and when you really think you will get the full impact of lower raw material costs in your margins.

That's a multi-faceted question.

I will start with the raw material one. I know we said there was probably a $3 million overhang from the first quarter and from the second quarter because of that higher-priced raw material inventory. The prices dropped, and the low point was in December. So we've had -- we still do have some overhang coming into the March quarter, and that overhang will be $1.5 million to $2 million.

And we have a little bit of additional -- that's probably important, too -- in our projections for the fourth quarter, because we had shutdown time in November, both in November and December, we had quite a bit of fixed costs that were capitalized on the balance sheet because the low utilization rates required us to put those up on the balance sheet. And we've probably got another $1.5 million to $2 million that is coming through here in the December quarter from kind of an unusual event standpoint.

When you take that $1.5 million to $2 million plus the $1.5 million to $2 million of the final -- of that higher-priced inventory rolling through our accounting system. That is putting the negative pressure on our forecast for the March quarter. I think as far as the margin piece of it, I guess that is your --.

I guess the main question I heard was the downstream inventories and what do we anticipate there. Based on all the information we have, I mean, it is clear that there is excessive downstream inventory in both apparel and automotive. Our best view right now, based on retail probably being off more like 10% to 12% over the next six months, is it is going to take four to six months for this inventory to work its way through the system. But we expect to see our volumes increase gradually over that time, and we would expect that they are going to settle at about what retail it is.

On the automotive side, frankly, the automotive business fell off more than 30% for us over the last couple quarters, as basically OEMs just stopped producing altogether. We are basically expecting a 10-month production cycle here, because they've got about two months' too much inventory, and that production cycle will be at lower purchase rates. So we may be looking -- I don't want to give you an exact number, but certainly 10%, 15%, 20% less than last year. Though our dependence on that has really shrunk quite a bit; it is about half as much of our business as it used to be. Did that answer your question?

Yes, I know it is a hard -- it is hard to pin down, but obviously, that is sort of the key to improved profitability for you guys, is hopefully getting through that excess inventory so that not only can you obviously increase volumes, but you can benefit from the lower raw material costs in your inventory.

Can you also talk a little bit about receivables quality? Any concerns you have on the horizon with some of your larger customers, I guess.

We are keeping a close eye on that. I think from a general standpoint, our agings deteriorated slightly. I think if you look at the days in the current 1 to 15 bucket and compare it to the past due rather than 15 days, we probably had $2 million, $2.5 million that have slipped out of that current bucket over into the past due bucket.

So we have seen some slowdown in payments, but we are working real closely with those guys. They are going -- they are seeing at fabric mills the same issues we are seeing, so we are redoubling our efforts to make sure we've got everything under control.

I think if -- the two points I'd make on that, we don't have that customer, other than probably Hanes Brands -- and we've disclosed Hanes Brands at different points in time have been greater than 10% of our business -- other than Hanes Brands, we don't have that $5 million to $8 million to $10 million customer out there anymore, where we saw significant bankruptcies over the last, say, five years of Unifi's history.

So we are rather diversified. We are spread out. And of our top five customers, those guys are in fairly good shape. The five largest exposures, I guess, is probably a better way to put it -- those guys are in pretty good shape. But we are working closely with those guys and we have even started taking some credit insurance on some of our export sales into the regions. So we are doing quite a bit on that front, and we are definitely keeping our eye open with where we are at today.

Thanks a lot.

[Jay Garrett], Ahab Capital.

Just a quick question. You somewhat commented on it regarding the raw materials and the inventory sell-through, but I am just having a hard time building to your 20 to 30 EBITDA guidance. I mean you are at 16 now. You somewhat had the perfect storm of selling through higher cost inventories, as well as end market weakness. And obviously, the raw material picture is going to get a little better. Could you just maybe talk about what type of end market assumptions you have that you are taking to get to that number?

I think back in our comments, we said we felt like the December quarter was off 7%. But in the December quarter, we had a very -- we had a relatively strong shipping month in October, and then we had two really bad quarters -- I'm sorry, two really bad months in November and December there.

As far as our assumptions for going forward, we actually see retail being off more than 7%. We see retail being off about 10% at 12%. And that is through our conversations with our customers and through our conversations with the brands and retailers. We have a large -- our largest show of the year -- our largest kind of downstream marketing show of the year is in January and August.

Well, we were just there two weeks ago, and our view from conversations collectively with those guys is we are going to be -- they are looking at down 10% to 12%. They don't know -- I think at the end of the day, we talked -- they have the same uncertainties that everybody else does, because they don't have the power to pull consumers in; at the end of the day, it's what consumers are willing to spend.

So they were fairly uncertain, but the numbers that kept getting thrown around were -- there were significant discounts offered to drive volume in the holiday season and start moving inventory. That inventory -- that volume was going to -- that was going to go away. So they were expecting less than 7% -- sorry -- further deterioration from 7% over the next quarter. Some of them thought it was going to take two months, some of them thought four months, some of them thought six months.

What we took that to say and built into our forecast was it took six months for inventory to build. We talked about the June through October for inventory build, and then volume fell off. So we are expecting another six months of more like than November/December levels, maybe a little bit better than that. And we are expecting it to improve slightly -- actually to be down more in March and to improve slightly in June.

So that was the basis for our projections. That came out with the number, and from that we added in, hey, we are running a little bit better than what we forecasted already in January. We've got these initiatives, these cost initiatives that we Bill talked about that we see coming into effect. But they are not going to come into effect immediately. There is going to be some time lag on that. So that is our view of having a December -- having more like a December quarter in March and then having a better quarter in June.

And then the last thing I will say, the comment I made to Mike earlier about that, when you added those numbers up, the $3 million to $4 million of prior quarter kind of overhang costs relative to this quarter, because that inventory that was sitting there at the end of December had those costs in it. That is probably the big components of how we got to our forecast.

All right. Well, thanks. Good luck.

Thanks.

At this time, there are no further questions. I would like to thank you for your participation. That concludes today's conference call. You may now disconnect.