Unifi Inc (UFI) 2009 Q3 法說會逐字稿

Good morning. My name is Vernelle and I will be your conference operator today. 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 session. (Operator instructions) Thank you. I would now like to turn the call 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 Third 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 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/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 10Q's and 10K's regarding various factors that may impact these results.

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

Thanks, Ron and good morning everyone. The global economic downturn and resulting erosion of US consumer confidence and spending have impacted all textile supply chains and markets the last two quarters. On a year-over-year basis, US apparel sales at retail are down 5% to 8% and home furnishings retail sales are down 12% to 14%. However, the sales volume impact has been far greater on our business as excessive inventories were built in these supply chains and fabric mills, finished good providers and retailers have curtailed new production and orders in an effort to reduce their investment in working capital.

As a result of this inventory de-stocking, our year-over-year revenue have been off by 31% and 30% for the second and third fiscal quarters respectively, despite retail sales for our collective markets being off by far less. As the third quarter progressed, however, we did see sales volume improvement in some of our segments and we anticipate continued improvement through the next few quarters as our sales ultimately align with market conditions, once supply chain inventories are brought to more normal levels.

Like many companies, we aggressively reduced inventories last quarter, lowering them by $25.5 million. While this did impact our gross margins as our production volumes were well below sales, our cash position has improved significantly. As you know, the financial performance of our company is highly dependent on capacity utilization. We've made tremendous progress in improving our business through the completion of several cost and margin improvement initiatives. As a result, we have reduced the volume required to operate our business profitability by over 10% and project our financial results will be comparable to fiscal 2008 once our sales ultimately improve to levels consistent with the reduced retail sales.

I'll provide additional comments on our business and future strategies after Ron reviews our results. Ron?

Thanks, Bill. If you're following along from the website presentation, we'll begin our comments on slide 3.

Net sales for the current quarter were $119 million, a decrease of $51 million or 30% over the prior year March quarter. We experienced significant sales declines for the quarter in response to the high inventory levels and poor market conditions that Bill outlined earlier. From a historical perspective, the Company was generally ahead of the sales plan in July and August and in September and October volumes softened. Sales began falling precipitously in November and this fall continued through January. Since then we've seen stabilization in the domestic polyester business and month-over-month improvement in the nylon and Brazil business.

The Company is reporting a net loss of $33 million or $0.53 per share for the quarter compared to a breakeven for the prior year March quarter. Results for the current quarter were negatively impacted by a $18.6 million impairment charge related to the Dillon Yarn acquisition in 2007. At quarter end the Company evaluated the carrying value of the related goodwill and, based on the Company's estimated future cash flows for the polyester division, we concluded that the entire amount of goodwill had been impaired.

Also during the quarter operating profit was negatively impacted by more than $3.5 million of higher priced raw materials moving through our inventory and an additional $1.8 million of under-absorbed converting cost resulting from the reduced production volumes. Now that this higher priced inventory has been depleted, we expect to start seeing the conversion benefit of reduced raw materials going forward. Although this benefit may be temporarily reduced $0.04 to $0.05 for polyester price increases in May and June due to PX and PTA suppliers temporarily idling capacity caused by soft demand. Going forward, however, we're increasingly confident in our ability to hold the conversion margin loss in calendar year 2008 as a result of the erratic swings in polyester raw material prices.

SG&A expenses for the quarter were $9.5 million, which represent a $600,000 improvement over the prior year quarter. Our SG&A expenses continue to run below budget and during the quarter we have taken additional steps to reduce headcount and eliminate non-critical spending, while continuing to provide additional funding as compared to the prior year for our premium, value added product strategies.

Turning the page to page 4. Net sales for the first nine months of the fiscal year were $413 million, down $110 million from the prior year's net sales of $524 million, which was inclusive of approximately $20 million in sales from the Kinston facility closed in October of 2007.

The Company is reporting a net loss of $43 million or $0.69 per share for the first nine months of fiscal 2009, compared to a net loss of $17 million or $0.28 per share for the prior year period. In addition to the $18.6 million non-cash goodwill impairment charge mentioned earlier, the loss from the first nine months of fiscal 2009 also included a $1.5 million impairment related to our former investment in the China JV and a $3.5 million charge related to asset consolidation and optimization.

On a year-to-date basis, SG&A expense continued to run 6% lower in the first nine months of fiscal 2009, even after eliminating the $5.3 million effect of executive severance and deposit write-off charges in the first half of fiscal 2008.

Turning to page 5. Quarter-over-prior year-quarter volume declined 27% on a consolidated basis, while overall pricing declined by 3%. Compared to the December quarter, total volume declined 2% on a consolidated basis and the overall price declined 4%. While we have been very disappointed by the quarter-over-quarter declines caused by the global recession, we are encouraged by the month-over-month improvement we have seen in certain segments, as Bill mentioned earlier, indicating that inventory de-stocking issues have begun to abate.

Within our segments polyester volume continued to be negatively affected by soft demand in the apparel, furnishings and automotive product categories. Polyester volumes decreased 28% compared to the prior year March quarter, as a result of declines both domestically and in Brazil. Compared to the December quarter, overall pricing declined 7%, primarily due to our response to the reductions in raw material pricing.

In nylon, finished goods inventory at retail and hosiery mills and the resulting decline in knitting production have continued to drive nylon volume declines. Quarter-over-prior year-quarter nylon volume increased 22% -- I'm sorry -- quarter-over-prior year-quarter nylon volume decreased 22%, but increased 3% as compared to the December quarter. One additional point to note here, year-to-date sales of our premier value added products are down, as well. But the declines are approximately half of what the rest of the business is experiencing and Bill will discuss some of those factors at the end of his next remarks.

Now we'll turn the balance sheet highlights which you can find on slide 6. Cash on hand at the end of the March quarter was $23.5 million, representing an $11 million increase compared to the end of the December quarter. The primary driver of the changes in cash on hand was a $22 million improvement in working capital, offset by negative EBITDA and capital expenditures in Brazil. The improvement in working capital was driving by a significant inventory reductions across the Company, as we aggressively adjusted our levels to normalize our inventory turns and match the sales volumes we are currently experiencing. And $5.5 million of the improvement related to the timing of our semi-annual interest payments on our 2014 notes.

At the end of the March quarter restricted cash totaled $16 million, representing a $3.8 million decrease from the December quarter due to domestic capital expenditures and the repayment of ICMS loans in Brazil as they matured.

During the quarter we initiated a process to utilize $8.8 million of domestic restricted cash to tender for bonds at par per the terms of the indenture. The tender was successfully completed during the June quarter and will result in an approximately $1 million annual interest savings going forward.

Also, after the end of the March quarter the Company announced the completion of the equity interest sale of its former Chinese joint venture for $9 million, which will be reflected in our operating cash in the June quarter.

Total debt as of the end of March was $192 million, a decrease of $2 million from the December quarter. Under the revolver we still have no outstanding borrowings and our current availability is $70 million, a slight decrease from the last quarter as we pulled down inventory levels.

As we mentioned on our last earnings call, we're going to increasingly focus on liquidity and cash generation until economic conditions start improving noticeably. However, once these conditions begin to show further signs of improvement, the Company anticipates it will be the debt market periodically to repurchase incremental portions of our 11.5% senior secured notes.

Finally on the balance sheet I want to take a second to remind you of the impact we have experienced this year from the changes in the US dollar to Brazilian real exchange rate. In June 2008 the exchange rate was 1.59 real to the US dollar. By the end of March, 2009 it had devalued to 2.32, which resulted in a change to the accumulated other comprehensive income on the balance sheet of almost $30 million. Going forward, economists expect a partial reversal as the real strengthens but do not expect it to return to the 1.59 exchange rate within the near future.

Turning to slide 7. Our 34% share of Parkdale America generated approximately $1.3 million of income during the March quarter and $5.4 million of income year to date. On April 3rd the Company filed an amended 10-K to include the audited financial statements of Parkdale American for 2008. Parkdale America reported $462 million in net sales for 2008, which is a 4.3% increase over 2007.

Parkdale America also reported net income of $30.7 million and finished the fiscal year with $11.4 million in cash and cash equivalents and had no outstanding debt.

Turning to slide 8. The Company reported adjusted EBITDA of negative $2.3 million, which represents a total decline of $4.5 million from the December quarter. Although total sales volumes in the March quarter declined 2% on a consolidated basis, our domestic production volumes declined by over 5% in polyester and 13% in nylon due to our inventory reduction initiatives. This difference between production and shipping volumes resulted in approximately $1.8 million of under-absorbed converting costs during the quarter. In addition, we were also negatively impacted by $3.5 million related to the higher-priced raw material purchases finally working their way out of our inventory.

Within our segments, results for the domestic polyester and nylon businesses were both approximately $1 million worse than the December quarter. In Brazil adjusted EBITDA declined $2.3 million versus the December quarter, as Brazil's volume improved. But the impact was more than offset by a decline in the per unit conversion, again related to the dramatic fall in raw material prices over the last quarter.

Adjusted EBITDA for the first nine months of fiscal 2009 was $14 million. In the June quarter we expect improvement as planned operational and cost improvements take effect, the negative impact of the higher priced inventories subside and we begin to see gradual volume improvements. We're forecasting adjusted EBITDA to be in the $6 million to $8 million range for the June quarter, which will put us at the bottom end of the adjusted EBITDA range for fiscal 2009, provided on our January earnings call. I would also like to take a second to point out the significance of that quarterly run-rate. Even with the depressed volume levels we expect during the June quarter, the EBITDA run rate of $6 million to $8 million will be near or slightly above the positive free cash flow from operations threshold which we see as the first step back to profitability.

Speaking of free cash flow, I'd like to provide you with some updated cash flow drivers. In capital expenditures we expect to spend $3.9 million in the June quarter as we complete the POY production upgrades in the polyester business. In fiscal 2010 we expect capital expenditures to return to normal maintenance levels of $8 million or less.

As a result of the tender during the quarter, our annual interest expense on the 2014 notes will be reduced by over $1 million. And from a cash standpoint, we are still not a cash taxpayer domestically due to the net operating loss carried forwards we have.

Finally, before I turn the call back over to Bill, I'd like to provide a brief update on some of the key dates for the next quarter. We expect final results for the March quarter to be filed in our 10-Q on Friday, May 8th and our quiet period for the June quarter will begin on June 26th and extend through our earnings conference call which is currently scheduled for Wednesday, June 29th.

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

Thanks, Ron. I'll finish with a few additional updates on our business. First, the Company's supply agreement with our largest customer, Hanes Brands, Incorporated, expired on April 23rd. Both parties have been satisfied with the performance and value of our partnership and we have established the framework for a new, long term supply contract. We anticipate this agreement will be finalized during the June quarter.

The challenges in the economy have also impacted our PVA volumes, which have declined although at a lower rate than the rest of our business. Downstream development activities using our PVA products continue to be very strong. However, brands and retailers have green lighted more basic programs in this economy to hit value oriented price points. The adoption cycle for PVA programs is being tempered by the economy, but we remain very encouraged by the ongoing development activities, particularly those using our Repreve recycled products.

We will continue to invest in and fund R&D efforts and customers can continue to expect us to bring new and innovative products to the market. Customer response to our recently introduced staple Repreve has been extremely positive and we believe our Repreve FR, the first recycled fiber with inherent flame retardant technology will be a big success in the contract market.

Early in the current quarter we completed the previously announced sale of our stake in our China JV and our wholly owned China subsidiary, UTSC, continues to expand the sales and promotion of the Company's specialty and PVA products, including the introduction of the next generation Sorbtek, moisture management technology. Additionally, we continue to develop sustainable textiles under the Repreve brand and we will begin localizing our recycling efforts in China. We are very encouraged by the number of development programs in progress and we have sampled or put into development numerous PVA products, including Repreve filament and staple, Sorbtek and Reflexx.

Similar to the US, however, the adoption timetable for some of these programs may be linked to improvements in the economy. But, we project that UTSC will be operating at or near breakeven, even in these difficult times, a substantial improvement over the results of our now exited joint venture.

In addition to China, the CAFTA region continues to be a very important part of our customers' global sourcing strategies. The CAFTA region's share of synthetic apparel is the 12% to 13% range and is expected to grow over the next few years, making the region a critical component of the apparel supply chain. To better service customers in the CAFTA region, the Company is exploring options for placing manufacturing capabilities in Central America. At this point, all options are being explored, including joint venture opportunities, as well as greenfield scenarios. And the total investment in the initial stages is expected to be $10 million or less. We will continue to update you on progress as new information becomes available and is appropriate.

Our Brazil operation had especially strong results in the first fiscal quarter, but those results deteriorated through the second and third quarters as the Brazil economy softened. However, through efficiency improvements, share gain and mix enrichment we anticipate significantly improved results in the fourth and subsequent quarters.

Finally, by staying focused on the continuous improvement of our cost operational efficiencies, market share and product mix we have made many fundamental improvements to our underlying domestic business. When combined, we have realized over $25 million in annual improvement to our underlying financial results domestically. Some examples of these improvements are -- we have significantly reduced our manufacturing costs through the consolidation of our assets; reduced headcount throughout the organization; and improved operational efficiencies in all our plants. We have reduced SG&A costs by over $3 million annually when compared to calendar 2008. We have regained lost margin in our polyester business and have improved margins through mix improvement and the renegotiation of raw material contracts. And finally, we have gained and continue to aggressively grow share in the North American polyester, dyed yarn and nylon markets.

In this difficult economic environment we will continue to stay focused on cash and expect more balance sheet improvements this quarter. We are also pursuing additional business improvement initiatives aimed at further improving our financial performance. We expect this recession will be long and the recovery will be slow. We have positioned ourselves well and are much better able to weather the storm than we were just a year ago. We expect to see gradual improvement in our business through the current quarter and the first half of our 2010 fiscal year. We will stay the course and remain committed as an organization to operational excellence, margin improvement, global growth and the ongoing development and commercialization of new and innovative products.

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

Thank you. (Operator instructions) Our first question is from the line of Chris Dechiario with ISI Capital.

Good morning. A few questions. I guess just, since you were just speaking about it, the possible greenfield projects that may be having some manufacturing capabilities in Latin America. You said you expect it to be $10 million or less in Cap Ex if you did that. What type of annual savings would you be looking at? Or do you have any idea, sort of ballpark, if you were to do that?

Chris, that's not something we're disclosing at this point. I think we're in the green- -- we're in the exploration stages right now. Just to remind everyone, most of the business we ship that participates in the CAFTA region, it's where we sell to domestic knitters or weavers and then they move -- they sell the fabric through their region to be cut and so on and brought back up here. We don't -- we have a small amount of direct yarn sales that we sell down there, that's been growing. And so for us what we're doing is looking at the cost of servicing that market. Where is the best place to be to service that market and the most advantageous way to do it? And like Bill said in his comments, we're looking at all kind of different scenarios, whether it's partnership or whether it's greenfield. We're kind of running the gamut of that. We just want to get you guys -- we just want to introduce that concept, one. And then two, let you know we're not talking about a $100 million expansion here. I mean, we're talking about only around that direct yarn shipment. And so, it would be something that we will be working through. It's not, again, it's not a $100 million deal. It's a $10 million deal.

Okay. Also, did you notice any receivables quality deterioration in the quarter? Any different than the previous quarters?

Yes and no. I think we paid a lot more attention to it, as the condition of companies and the condition of the economy. So, we paid a lot more attention and we were on top of it, even more than we normally are. I think a little bit of the oddity was our current actually improved. We look at it in the buckets, the current and the 1 to 15 kind of past due. That bucket actually grew as a percent of the total. So, we got -- we did improve the health of the aging for the vast majority of our aging. Some of the older stuff, as you would expect, has gotten a whole lot older. You get out into the further buckets, that's gotten a whole lot older and so we spent a whole lot time working with those guys and developing payment (technical difficulties) scenarios moving forward.

But I can't say it's improved. The base -- the biggest majority, the vast majority of it, that current piece plus the 1 to 15 has gotten to be a bigger percentage of the total [basket.] So, generally it's improved with some [outlyers].

Okay. Do you expect any additional dividends from Parkdale in the fourth quarter?

Like we said in the comments, they had I think it was $11 million in cash. They had a receivable, an "other" receivable on their books. I think it was somewhere of $6 million or $7 million that was related to the cotton subsidy. So, I think that -- we understand those payments are coming monthly now. So, I would expect the cash balance to have built down there and we're always working with those guys to understand kind of investment opportunity versus dividend potential for those guys. So, we're not forecasting or budgeting anything. But we're certainly working with them to try to understand what we can do there.

Right. Because given the cash they have in receivables and no debt and the fact that they still seem to be cash flow positive. The amount that you've received so far this year I guess was less than the normal range, [because] otherwise I would have expected it to be at least in the range.

Right. Yes. I think it was about $2.5 million, $2.9 million we've received so far this year.

Okay. And --

Hey, Chris, one thing while I've got the floor. I noticed that I said the wrong date on the script. Our conference call for the June quarter will be July 29th. I think I said June 29th. So just -- everybody drops off. It will be July 29th.

Yes. Okay. Thanks. And then just in terms of cash and I know this is described in your Q. But I don't know if you could give some description, just a little more detail breakout in terms of the cash, in terms of how much is in the various baskets? Just really sort of in Brazil, in the restricted basket and the other collateral basket just so that I have an idea now after the tender for the notes, you know, what's left in each one?

From a domestic, the breakout on the balance sheet slide back on page 6. We have $23.5 million of total cash. We have $8.8 million of restricted cash domestically. Obviously that $8.8 million is what we did the tender offer with. And we have $7.2 million of restricted cash in Brazil. And again, the way that cash works is it's collateral for a debt. And so, those debts are going to mature between now and June of 2010. And as those things mature, the debt matures and the cash pays it off. So, they'll be coming out pretty much pro ratably over the next 13 months, 14 months.

The cash -- back to the $23.5 million -- a little over $6 million of that was domestic. About $13 million of that was in Brazil. And then the rest of it was either in China or in foreign holding companies. And then to that $23.5 million, obviously when the (inaudible) all the proceeds from the sale of our investment in the joint venture is not included in that. So, that will ultimately come back to that foreign holding company.

Okay. So, the $9 million from the sale of the JV is not included in any of these numbers?

Correct. We missed it by about five hours, getting it in the quarter. But it came in the day after quarter closed. And I'm pretty -- yes, we made that -- we announced it there on March 31st.

Okay. And then I'm sorry if I missed it. The amounts that would be in the sort of non-collateral basket would just be part of domestic cash in the US?

Yes. Like, for instance, the sale of China, that's not restricted because it's not collateral. It goes into 410B. It goes into that basket and then we can use those proceeds to either make capital expenditures over the next 12 months or we can buy back bonds out of the marketplace with those. And the same type of provisions though. I know you know this, but the same type of provisions. That [410B] basket, if the dollars in there, if they stay in that basket, although it's not -- it's commingled. It's with our other cash balances. But if they stay in that virtual basket for more than 360 days, they get locked up into what's called excess proceeds. And if excess proceeds ever get above $10 million you have the requirement to go buy back bonds at par. But with bonds trading below par, obviously we're never going to let that happen. Because before it gets to above $10 million we would go out into the marketplace and buy at market rather than waiting and having to pay par.

Okay. Last question. I know you didn't quantify it in your remarks today. I'm not sure if you can. But just your expected fourth quarter cash from working capital improvements or inventory reduction that you're -- sort of a range that you might be expecting?

We are expecting small working capital improvements in the quarter. I told you Cap Ex was $3.9 million. That was the global Cap Ex number. Most of that or a large majority of that is going to be here domestically as we finish up the [flexibility] project around (inaudible) spending. But yet from a Cap Ex standpoint $3.9 million is that number. We do expect some working capital pick ups, but right now with the state of flux around raw materials, we're looking real hard and making sure we understand exactly what the most opportune time to purchase around that is. But we're not quantifying a number. But I will tell you it's not going to $10 million. I mean, it's going to be -- we are expecting working capital pick ups. But we're not sure, based on where raw materials are going to be what that's going to be right now.

Yes, that makes sense. Okay. Thank you.

Thank you. Our next question is from the line of Eric [Vesario] with Regency Group.

Good morning. Could you elaborate more on the tender offer that was done on the senior secured notes? You just touched on it there, [about] the $10 million threshold when you're required to do a tender offer. So, I think my question is why was the tender offer done last quarter? It sounds like you don't intend to do tender offers going forward and what is that market price of your debt?

Okay. I'll be glad to. The way the indenture works is when we sell -- there's two types of sales basically. One is the sale of collateral and one is the sale of non-collateral. In China the $9 million, that explanation I gave was around 410B, which is it's sales of other than collateral. The restricted cash was a 410A, or a sale of collateral, an asset sale of collateral. And what happens there, over the last two or three years we had sold assets that were here domestically that were collateralized under the agreement. When you sell an asset that's collateral, the proceeds of that go into a restricted cash account at the trustee. And then we get to draw those out to reimburse ourselves for making Cap Ex. Of if we did some type of transaction here where we added more collateral, we bought a business that had collateral, we could use those proceeds for that. But what we used it for was for Cap Ex, replacing collateral.

And the way that worked is, we put -- it was $19 million or $20 million in there at one point. But you've got 360 days to use those restricted cash proceeds for Cap Ex, which we did. At the end of the 360 days those dollars are no longer available to you to reimburse you for spending. The only thing they're available to, they get locked into an excess collateral proceeds basket. And they're physically separated from us. They physically stay at the trustee but they're no longer available to use to reimburse our expenses. And what happens is, like the other one, if that basket, if that excess collateral proceeds basket gets above $10 million, you have a requirement to buy back bonds at par. If it never gets above $10 million, you leave it in that account and it earns 25 basis points of interest through the life of the note. It's completely locked up. So our choice was leave it there gaining interest, a small amount of interest through the life of the note, or go ahead and do the tender for par, even though we didn't have -- we weren't required to do the tender. But we could go get 11.5% by doing the tender.

And so the reason we went ahead and did that was because we think we're at the end of the restricted cash numbers. We don't expect anything else to go fall in there. And there's no need to leave it in there gaining 0.5% of interest when we can go ahead and do a tender and bring it in at 11.5%.

So with any excess cash you're planning to go into the market and buy back these senior secured notes?

Yes. I'm sorry. That was your other question. To the extent -- like we said in the comments, as volume and as economic conditions improve further, we're expecting to be back into the market buying back notes at market price. I think the average for the March quarter was about $0.55 on the dollar. I saw some trades in the mid-40's to upper 40's. So, that's kind of where the market has been and we'll see where we go from there.

Thank you for explaining.

Thank you. Our next question is from the line of Allen Zwickler with First Manhattan.

Hi. Good morning. I may have missed this but what would you say your sales are of the Repreve or the, I'm going to say combo, environmentally friendly products in the quarter? I know you once broke that out a couple of quarters ago. Do you have sort of a sense for what that is?

Well, we don't typically break those out. I guess what I could say is the sales are down somewhat over what we may have talked about in the past. But we typically don't break those sales out.

Okay. --

The color we've given in the past, Allen, is that Repreve has become our largest PVA product. And I think we gave you some percentages for Repreve that said Repreve is basically 10% of our sales and that were expecting that to grow significantly. I think the only color we're prepared to give here today is that Repreve is still our most valuable PVA product. It's the product where we're adding on. Our next two launches, the FR and the staple, are going under the Repreve umbrella. I mean, that green initiative is something that, although brands and retailers right now have been a little hesitant to develop that next product, they're focused on cutting inventory and moving inventory that's in their warehouses today. They've been a little bit hesitant. But like we've said in our comments, the decline rate there is nowhere near the decline rate we're seeing across the rest of our business.

And on a different topic, the new agreement with Hanes, or the updated agreement, how would you say it differs from the old in a general sense? I mean, I've known you a long time and you've always had them as a customer. So, how would you categorize the new agreement? Have you had to take significant price declines? Is it kind of similar? Is it more volume? I mean, could you just put a little bit of color on that since it's so significant?

Well, first of all, the agreement hasn't been completed so I can't comment on what the final agreement would look like. But I guess I could fairly say that it's reasonably the same as what we had had in the past.

Okay. And is it volume driven or is it amount of years? I mean, when you say a contract, what does that mean exactly, for getting the numbers?

Allen, the way we got into this originally was we enticed them out of their --

Right. I remember that. I remember that.

And we entered into a long term contract. And I think what we've done here; the relationship has developed very strongly over the last probably six to nine months. We feel like we've gotten close to those guys. We understand a whole lot more about their strategy. I think their strategy -- they've moved a lot of cotton around the world. They're still going to focus on this hemisphere as a place where they're going to make the synthetic filament because of the duty advantages and the time advantages. So, I mean, I think the partnership is stronger. But quite frankly, we haven't gotten a final agreement and we don't want to go out and preannounce on something for competitive reasons on this.

No. I understand that. But when you say an agreement and long term, is that two years, 10 years? I mean, I just want to understand what long term means to you guys, on what the prior deal --you could certainly talk about what the prior deal was.

Yes. The prior deal was a five-year agreement. And we're working on similar terms to make sure we -- the gist of this is we're in a long term partnership. We're doing a lot of development together. We're bringing a lot of stuff to the table. They're bringing a lot of stuff to the table. We really are excited about where it's at and where it's headed. And it is not a six-month agreement. It's a long term agreement that we're both linking up our supply chains together. They're moving some assets based on the arrangements that we're making. One of the reasons we're looking at Central America is they've got a significant amount of production down there which would help justify any investment that we're making down there. So, but, other than that I don't think we can go much further without getting --

Okay. That's fine. I just wanted to understand what kind of position you were in overall. Thank you so much.

Thank you. Our next question is from the line of Todd Cohen with MTC.

Good morning and thanks for taking the call. Just a couple questions. As it relates to the restricted cash, could you define what that figure is today, subsequent to the tender?

The domestic restricted cash is zero. We used every bit of the $8.8 million we had on the slide there. The domestic cash in Brazil, that $7 million, it will go down pretty much on a pro-rata basis. I don't have the live figure on that one. But it will go down pretty much on a pro-rata basis over the next 15 months. And for those of you guys that haven't heard it, that ICMS program in Brazil is basically a tax incentive. You can borrow your VAT or a significant portion of your VAT at a discounted rate at say 6%. Well, the way you collateralize -- but you need to collateralize that loan. If you collateralize that loan with cash, they pay almost 13% on that loan, on the collateral. So, it's a tax incentive where you borrow money and put it in the bank and the delta between those two, that 6% is a ICMS reduction and it goes for two years. That program stopped in June, 2007 -- June 2008, sorry. So between now and June 2010, all of these loans will mature on a monthly basis and that cash will be used to pay off those loans. So, I mean, to think about Brazil, that net is just zero. The debt sits down there and the cash sits down there. So the restricted cash in Brazil that was $7.2 million, I'm sure it's something less than that today. But it will come out pretty much pro-rata over the next 15 months.

So, basically your restricted cash is in the range of $7 million to $8 million now?

Yes.

And did you also say that unless it's above $10 million you would not be forced to buy more bonds?

That restricted -- there's two types of restricted cash. There is the domestic restricted cash which was $8.8 million that we did the tender for. There is no more in that basket today. We don't expect anymore to go in that basket here in the near term. And that's the only basket that drives the $10 million requirement to go repurchase bonds at par.

Got you. And then back to the question regarding Hanes. Could you just highlight a little bit, define a little bit the previous engagement with Hanes, what that entailed?

Certainly. Yes, I'd be glad to. Probably five or six years ago we went through and we enticed them out of their yarn operation, which is what we do. And they closed their operation and in exchange we entered into a long term supply agreement with some fixed pricing for them, for a significant portion of what we sell to those guys. And in addition to that, we had some business that we sold on the open market to those guys. So, that agreement expired April 23rd and we're working with those guys I guess to finalize that agreement. But we feel pretty good about where we're at and where we're headed with that.

Right.

And then could you just take a moment and talk a little bit about this UTSC situation in China? And what the opportunity is there and kind of where that's going and how big that can be?

Sure. Well, today it's essentially a marketing and sales organization. We are producing -- today our PVA products here in the US are exporting into China and they're being sold into the Chinese market. We will eventually be producing in China through one or several different commission producers. Today the business is fairly small. We do expect to see growth there, certainly as our Repreve product begins to take -- to gain some traction in the Chinese market. I can't talk today about what the volume is. But we expect to see substantial increases over the next two to three years. Our only costs there are the cost of the people and the marketing and the A&P. And again, as I had stated earlier, we believe it's near breakeven today with very, very low volumes and we expect it to be profitable going forward.

So basically it's a conduit for goods that are produced here? You just are selling them in China?

Well, it's a conduit for goods produced both here and in China. Ultimately all of the goods would be produced in China most likely.

But you don't have -- didn't you just say you don't have manufacturing in China now?

Yes. I said we would be using commission producers in China to produce our PVA products and then we would sell them into the market.

Okay. So you'd just make a margin there?

Yes.

There's no manufacturing risk?

That is correct.

Okay. And then just I guess the last question would be on slide 4, Ron, you went through a lot of extraordinary items. Is there a way to break that down? And I missed part of the tail end of the call. Can you break out some of that so that we can get to kind of an operating number there?

Yes. I think the --

Because there were no footnotes there.

Yes. And that's probably a good idea. We'll try to do that next time on the slides. Whatever comments we put in the script we'll try to put it on the slides. But in the loss from continuing operations there is $18.5 million related to the impairment of the Dillon goodwill -- $18.6 million. In addition to that we said there was another $1.5 million of cost related to the impairment of the JV in China. Basically what happened, back in July when we took the original impairment charge and we impaired it down to $10 million. But in the December quarter we took another impairment charge of about $1 million and we had some disputed fees in there of another $500,000. So that $1.5 million of disputed fees was what was also included in that number. And the --

Okay, that gets us to $20 million now.

The third number we pointed out was about $3.5 million of asset consolidation and optimization expense. Bill told you we've been going through a lot of asset consolidation to make our productive capacity meet where we're at, where we think the business is going to settle back to and where we think we're headed forward. That $3.5 million is also in that number. And I think those are the big ones.

All right. Thank you.

Thank you. There are no further questions at this time.

Great. That concludes the call, Operator. Thank you.

Thank you.

Thank you. This concludes today's conference call. You may now disconnect.