Unifi Inc (UFI) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2011 Unifi earnings conference call. My name is Gina and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Mr. Ron Smith, CFO, Chief Financial Officer. Please go ahead.

Thanks, Gina. Good morning, everyone. Joining me for the conference call today is Bill Jasper, our President and CEO. During this call, we will be referencing a webcast presentation that can be found at Unifi.com. The presentation can be accessed by clicking the second-quarter conference call link found on our homepage.

Before we begin, I need to 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 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 disclosures filed with the SEC in our Form 10-Qs and 10-Ks regarding various factors that may impact these results.

Now, before we get to the financial details, I'd like to turn the call over to Bill, who will provide you with an overview of the quarter. Bill?

Thanks, Ron, and good morning, everyone. We had a good December quarter as the effects of an improving economy, our strong market share, and our improving manufacturing efficiency offset rising raw material costs and the effects of the industry's normal holiday shutdowns. The majority of our businesses continued on an improving trend and contributed positively to our results.

A few key highlights for the quarter include the following. In addition to strong volumes in our domestic polyester businesses, our operations in China and Central America grew as well, making up approximately 8% of our consolidated net sales. Our average gross margin remained strong as improvements in operational efficiencies and the growth of our PVA product sales helped offset increasing energy and raw material costs. And lastly, adjusted EBITDA for the quarter was $15.7 million, a $2.4 million improvement on a year-over-year basis.

Turning to conditions in our key markets, the momentum set by the back-to-school season carried into the holidays, with year-over-year retail sales of apparel increasing by 6.4% during the December quarter. Inventory levels are at 68 days, which is better than the 72 days from last December and much better than the 83 days two years ago. Assuming customer confidence continues to improve, the supply chain should see benefit from these lower retail inventories as we begin the new calendar year.

The recovery in retail sales of home furnishings continues to be very gradual, with year-over-year retail sales increasing slightly and inventory remaining at approximately 112 days.

There were small improvements in both housing starts and existing home sales in the fourth quarter of calendar 2010. But we expect the recovery of this segment will continue to lag apparel and be more sensitive to changes in overall economic conditions.

The automotive segment continues to improve, with calendar 2011 sales projected at nearly 13 million units, a 6.5% improvement over 2010. Our sales into this segment have grown accordingly, especially in our beamed yarn and POY sales businesses.

Ultimately, our projections and plans are based on a modest but sustained recovery in the US economy and continued strength in the Americas region. We are closely monitoring raw material costs and the potential impact that they may have on consumer demand as rising costs work their way through all supply chains.

The cost of polyester raw materials increased throughout the past quarter, in part due to the price of crude oil but mostly because of tight supply of key polyester ingredients, caused by high demand as well as an increase in customers looking to substitute polyester for cotton-based products on their concerns over cotton availability and pricing.

While the high cost of raw materials will put pressure on our margins in the March quarter, as we and our customers pass these cost increases through the downstream supply chain, we see opportunity in the fact that costs of production and transportation in Asia have increased substantially, and the gap on polyester -- on polymer pricing between the US and Asia continues to shrink, nearing par.

This shift, coupled with the significant amount of investment going into the Central America region, should help promote relocation of global apparel sourcing toward the Americas region.

With that as a backdrop, I'll turn the call back over to Ron, who will take you through our preliminary results for the December quarter.

Thanks, Bill. We'll begin the review of our preliminary financial results for the December quarter on page 3 of the presentation. Net sales for the current quarter were $161 million, an increase of $19 million, or 13%, over the prior-year December quarter.

Quarter-over-quarter net sales for our operations in the US and Brazil increased by approximately 7% each. And the recent growth trends from our operations in China and Central America continued.

The Company is reporting net income of $5.4 million, or $0.27 per share, for the quarter, compared to net income of $2 million, or $0.10 per share, for the prior-year December quarter.

Pressure from raw material cost increases during the quarter were offset by improved volumes, mix enrichment, and ongoing operational improvements, resulting in a 150-basis-point increase in domestic gross margins.

The quarter-over-prior-year-quarter results also include a $2.7 million improvement in the Company's share of earnings in Parkdale America, which had another good quarter.

Improvements in net income for the quarter were partially offset by $1.2 million in restructuring costs associated with asset relocation and optimization of our facilities in El Salvador and Yadkinville, North Carolina.

Total SG&A expense for the quarter decreased $1.4 million compared to the prior-year quarter, as a result of reductions in employee-related expenses and a decrease in amortization expense.

Turning to page 4, net sales for the first half of fiscal 2011 were $335 million, an increase of $50 million, or 17%, from the prior year. Net sales from our domestic operations increased 12% and reflect the year-over-year retail sales improvements in our key market segments Bill spoke of earlier.

The remainder of our operations -- net sales in Brazil grew by 10%, while our operation in China continues to grow rapidly, and Unifi Central America became fully operational during the period.

Net income for the first six months is $15.6 million, or $0.78 per share, compared to net income of $4.4 million, or $0.22 per share, for the prior-year period. Net income for the first half of fiscal 2011 were positively impacted by a year-over-year gain of $10.3 million in the Company's share in earnings of its equity affiliate partners. Also contributing to the year-over-year performance was a 160-basis-point increase in domestic gross margins, which reflect the impact of higher volumes and our continued focus on process improvement and mix enrichment.

Looking at our volume and pricing highlights on page 5, quarter-over-prior-year-quarter volume increased 11.5% on a consolidated basis, driven by the previously noted gains across each of our primary business and the startup of Unifi Central America.

The 7.1% decline in quarter-over-quarter nylon pricing, mix related, as volume for textured nylon improved, while certain customers reduced demand for higher-valued covered yarns in an effort to adjust inventory levels. Compared to the September 2010 quarter, volume decreased by 3.1% on a consolidated basis, due to the holiday shutdown and the reduced demand in portions of our nylon business.

During the December quarter, two of our larger nylon customers utilized the holiday shutdown period, decreased inventory levels, negatively impacting demand for covered nylon yarns during the quarter. We expect this volume decline to be temporary, with the volume for these nylon products returning as we move through the March quarter, based on retail demand and our customers' projections.

Quarter-over-trailing-quarter decreases in polyester pricing is primarily mix related, as POY and Chip volume accounted for a higher percentage than normal of our domestic sales during the December quarter.

Turning to our balance sheet highlights on page 6, the Company is reporting $33.2 million of cash on hand, an increase of $6.9 million from September. The Company improved cash on hand in a quarter where we made $7.8 million in capital expenditures to support our strategic growth initiatives, and made a $9.4 million semi-annual interest payment.

Net working capital in the December quarter decreased slightly, as a decrease in accounts receivable, related to the holiday shutdown, was offset by an increase in inventory and timing decreases in accounts payable and accrued expenses.

For the year to date, the Company has made a $10.5 million investment in working capital, driven primarily by increases in raw material cost and yarn selling price, inventory related to the startup of our Central American operations, and a buildup of inventory in anticipation of starting up our recycling center.

In the March quarter, we expect our investment in working capital to increase further, as accounts receivable returns to a more normal level after the shutdowns and we begin to feel the impact on working capital of higher raw material prices.

As of the end of the December quarter, total debt remained at $164 million, substantially all of which is the remaining balance of our 2014 senior secured notes. At the end of December, we had no outstanding borrowings on the Company's revolver, and our availability was approximately $78 million.

With regards to long-term debt, on January 11 the Company terminated its cash tender offer for all of its outstanding 11.5% senior secured notes due 2014. The Company had initiated the offer to opportunistically take advantage of market rates that were among the lowest in recent years. After commencing the tender offer, conditions changed and the Company determined that the savings generated from such financing would not be sufficient enough to warrant the cost of the transaction. Therefore, we terminated the offer.

Concurrently, the Company decided to begin using some of its existing liquidity to begin paying down portions of the $163.7 million of 11.5% senior secured notes outstanding. The Company has confidence in its operating strategies and expects the performance of the business going forward will generate significant cash flow to allow for a significant reduction in debt levels and fixed carrying costs.

To implement this strategy, the Company expects to use a portion of its availability on its revolving credit facility and any excess operating cash to call in blocks of the 2014 notes over the next couple of years.

The first of these calls was initiated on January 11, when the Company announced the redemption of notes and an aggregate principal amount of $30 million. This redemption is expected to result in a one-time pre-tax charge for the early extinguishment of debt in the Company's fiscal 2011 third quarter of $2.2 million, related to the write-off of unamortized discount cost and the 5.57% call premium. Annual savings from the call is expected to be $2.5 million to $3 million.

Turning to page 7, the Company recorded net earnings of $5 million from equity affiliate partners in the December quarter, and $14 million for the first six months.

The earnings from Parkdale America during the December quarter were $4.4 million, which compares to $1.7 million in earnings in the year-ago quarter. For the six-month period, Parkdale earnings were $13.1 million, approximately $4.6 million of which were due to the timing of qualified capital expenditures and their related impact on the recognition of deferred EAP benefit.

During the quarter, Parkdale also began seeing the effects of reduced cotton availability and significant increases in raw material cost. In order to mitigate the impact of such swings in cotton pricing, Parkdale has a sophisticated cotton hedging operation and works closely with its customer base to anticipate and pass along changes to cotton pricing on a timely manner.

Turning to page 8, the Company is reporting adjusted EBITDA of $15.7 million for the December quarter, which is in excess of the $13 million to $15 million estimate for the quarter provided on our October earnings call. Adjusted EBITDA for the first half of fiscal 2011, $34.1 million, a $6 million improvement over the year-ago period.

Now, before I turn the call back over to Bill, I'd like to provide a brief update on some key dates for the March quarter. Our 10-Q for the March quarter is expected to be filed tomorrow, February 4. And our quiet period for the March quarter will begin on March 25, extending through our next earnings conference call. With that, I'd like to turn the call back over to Bill. Bill?

Thanks, Ron. We are entering the second half of the 2011 fiscal year with improving financial performance and the confidence that our strategies will continue to drive positive results for the Company.

With the improvements in retail sales of apparel, the Company has picked up several new adoptions and commercial placements for our premium value-added products. Given our current projections, we are expecting continued growth for our PVA portfolio, and we are progressing towards our goal of doubling PVA sales in the next three years.

The official opening of our recycling center in May will significantly increase our product development capabilities and capacity for Repreve recycled products, which continues to be an extremely strong and popular product line for us. We continue to invest in R&D and have several new PVA products in the pipeline.

The growth in our global operations also gives us reason to be optimistic about the second half of this fiscal year. The competitiveness of the Central America region is improving compared to Asia, which has resulted in an increased CAFTA production of apparel using synthetic fibers.

According to US government and textile industry sources, US imports of synthetic apparel from CAFTA increased by about 25% in annual year 2010, as retail sales recovered and CAFTA countries are taking advantage of low labor costs, proximity to the US, and rising manufacturing and transportation costs in China.

We are already driving considerable sales volume into the region through Unifi Central America, which celebrated its grand opening on December 2. UCA is now fully operational, and our DTYs that's there are already being fully utilized. UCA allows us to maintain our market share in the region while also positioning the Company for additional volume opportunities as programs continue to move to the CAFTA region from Asia.

Although we anticipate programs are returning to this region from Asia, China still remains the largest apparel supplier into the US market. For the first six months of this fiscal year, our results from our operations in China are well ahead of budget, as much of the development activity from the past 12 to 18 months is beginning to result in new orders.

Our level of development activity remains high and is accelerating, and we continue to see strong interest in demand for our PVA products there, especially Repreve. At this point, we expect UTSC to exceed budget expectations and continue to grow profitably through the next several years.

As we look to the future, we will continue to stay focused on the key strategies that have served us well the last several quarters -- an unrelenting focus on continuous improvement of all business processes, market share, and cash generation; growing in the strategic global markets of Brazil, China, and Central America; and enriching our product mix by growing our PVA business through investments in capital, marketing, and R&D.

From a financial perspective, while we are somewhat concerned about inflation as it relates to our raw materials and operating costs, we are committed to passing along these impacts to the supply chain in a timely but responsible manner.

That said, we expect continued strength in our operating results. For the March quarter, we expect the adjusted EBITDA to be $14 million to $16 million. And for the 2011 fiscal year, we expect adjusted EBITDA to be in the high 60s, which is an increase over our previous guidance.

With that, we will now turn the floor over to questions. Operator?

Thank you. (Operator Instructions). And your first question comes from the line of Bryan Hunt, Wells Fargo. Please go ahead.

Good morning.

Hey, Bryan.

Morning, Bryan.

I was wondering if you could just give us an idea what type of price increases you'll have to take on a percentage basis in poly and nylon, to overcome raw material input increases you're seeing today.

Yes, in the next few months, on the polyester side, roughly 10%, and on the nylon side, 5% to 7%.

And have you announced price increases for the current quarter or --

Yes, we have.

Okay. So those are in place in the marketplace.

They're going in place in early February.

All right, great. And then with regards to the substitution effect that you mentioned on poly for cotton, is there any way to quantify that in terms of percentage move, or pounds, or tons?

It's very, very difficult to do that. Now, I do want to make the point that the majority of the substitutions of polyester for cotton will be in the staple part of the business, which we don't participate in except for Repreve staple. But there is still some opportunity, though it's going to be very hard to quantify, until it actually happens, how much filament yarn will go into the cotton supply chain.

One of the other things is, as you think through that substitution, on a global basis, 30% has already shifted to where -- the global basis is more like 30% cotton, 70% synthetic filament. So, much of that shift has already happened over the last 20, 30 years. But as the shift happens, like Bill said, the immediate drop-in switches will be around staple, because you can change mixes and you can move stuff around. For us to see the benefit of that substitution, it'll be a true development process that we work through with the brands and retailers. But over the long term, we think it'll have a positive impact.

And I think the other point of that, too, is some of the raw material prices we're seeing over the short term are based on the substitution of the staple side. That's putting some additional pressure on demand, and we're seeing that as driving part of our raw material pricing.

Historically, when you all have seen, or at least the textile value chain has seen, significant increases in prices like we're seeing today, there's been a contraction in safety stock. Now, are you seeing that throughout the value chain today? Are you seeing your fabric and your garment customers start to squeeze down on safety stocks in anticipation of prices coming back down at some point in the future?

Yes, we certainly saw that over the November, December, and even into January timeframes. And it's difficult to say when that contraction's going to stop and inventories are going to be at lowest levels that they can be before things have to start picking up. But yes, we've seen quite a bit of that, and certainly that's to be expected.

It also shows up in inventory retail. You talked about it in your part of the presentation, the 68 days --

Yes, that's the lowest we've seen in a long time.

So once demand -- once that -- the inventory is very lean, and so we'll see that coming back fairly quickly as the demand starts to continue to grow.

Okay. When you look at your North American facility basically running full, could you talk about the volume and/or the sales contribution? And do you believe that has cannibalized any of your sales from the US region?

Talking about Central America?

He's talking about --

Yes.

-- Central America.

Yes, just while Bill's -- what we did was we took eight machines out of our existing business and moved it down into Central America, machines that were already running, servicing that market, on the DTY side. And then we replaced those eight machines with some mothball machinery we have.

Where we're at today is, basically all of those machines, both the ones in Central America and the one -- as of -- as we moved through the quarter there and had the December grand opening, the machines in Central America are running full and the machines we have up here are running full. So yes, we shifted business from here to there, but the 17%, I think it was, year-over-year increase in sales -- that showed up and filled up those other eight machines we put in.

And Ron, the one thing I'd add to that is, if you look at the eight additional machines of production we've picked up, I think there's two main reasons for that. One is the improvement in the economy and certainly retail sales getting better. The second is, imported textured yarn has gotten considerably more expensive than it has been in the past. And we're seeing more share gain of domestic yarns taking business from imported yarns because that price is so high, and availability is not very good.

And just like, Bill, we were talking about in Bill's comments around apparel programs coming back into Central America because of the higher costs of production and transportation, that's also -- that's significantly helped our competitiveness (multiple speakers) --

Yes, I think we'll see more growth from that in the future than we have in the past six months.

Could you remind us the cost to build the recycled yarn facility? And will that have the capacity to supply all your needs on Repreve in the near term?

Well, first and foremost, it'll certainly have all the capacity we need, with some additional capacity which we expect to grow into. And the cost of that facility, I forget -- what we've said in the past is around $6 million to $8 million.

Yes, what we've said in the past is, this year was going to be a transition year. Our normal kind of CapEx run rate is in that $8 million to $10 million. We're spending an extra $14 million, $15 million worth of CapEx this year on strategic projects, and that is by far the biggest one in that $6 million to $8 million range. Other than that, you've got the incremental CapEx -- we didn't -- we already had the machines in Central America, but the incremental CapEx going into Central America, plus some improvements we're making in Brazil.

Do you have an idea what the payback period will be on that -- your recycled CapEx?

Say it again?

The payback period. Can you give us some idea what that's going to be on the new recycle facility?

Yes, what we said on all three of those -- that whole $15 million is, our view on those -- they're quick-payback projects, somewhere in the three years or less, [AO], going back and integrating backwards in the Repreve, as well as Central America, and as well as the project we're doing to increase flexibility.

And then lastly, with the strong results out of Parkdale, are you anticipating a larger distribution this year from them?

We have difficulty forecasting distributions out of that business. I think we're anticipating -- there were very strong results, and that business continues to perform very well. I think the issue they're facing right now is with cotton going up. Where we've had a 10% increase in polyester over this quarter, they're seeing 50%, 60%, 100% increases in cotton. So their working capital investment has gone up pretty significantly, so I would not -- we don't have any planned distributions coming. And from my standpoint, I think during the -- over the next six months, digesting that additional working capital is going to be [most] on their mind. But yes, we're very optimistic about the performance of that [business's] future cash flow.

Great. I appreciate your time this morning.

Thanks, Brian.

Thanks, Ron.

(Operator Instructions). And your next question is from the line of Allen Zwickler from First Manhattan. Please go ahead.

Hello. It's Allen Zwickler. I think that's what it sounded like. Anyway, how are you guys?

Hey, Al. Good, how you doing?

Okay. I've been with you for quite a while, and I must congratulate you for certainly doing well here. And I just would like, if possible, to take a one- or two-minute walk down this quarter and understand, relative to your guidance, which you mentioned earlier, when you look at what you've earned, what you earned for the quarter, income before operations of $7.2 million, of which $5 million came from Parkdale, one would just say that you earned $2 million on the operating line. And of course, we could put back in the restructuring charge, which -- did you -- by the way, was that in your original guidance when you talked at the beginning of the year?

Yes, it was.

Okay, so my question to you is what -- at $160 million of sales, give or take, which is what you had this quarter, you earned $2 million. I mean, again, I'm talking about Unifi now, not the equity and earnings. Or maybe $3 million pre-tax, if you put the restructuring in. How does one look at that number, if you follow what I'm trying to get at, relative to all the changes you've made, all the restructurings you've taken, etc., etc.? I mean, what should that number be? I don't want to use normalized because I don't even understand what that means, but it would seem that you should be able to earn more than $3 million on the operating line, if you don't mind me just saying that. And could you maybe explain, if it's fair, why it isn't more than that?

Yes, I've got -- I think the -- one thing, going through the math, as here on the call, $7.239 million of our income before income taxes, take away the $5.039 million, is $2.2 million.

Right.

There's two things I would add back in there. I would add back the $1.2 million --

Sure, I understand that.

-- restructuring fee, so that --

Right. That takes you to $3 million, so that's a 2% margin, right? I know we have interest in there, but interest is in there. So what I'm trying to ask -- and I'm not belittling it. I'm just trying to ask that, after all this time, I would've expected you to do a little bit better on the operating line, again, putting interest aside. So what do you think -- what were the factors -- and if I'm wrong, please tell me, but what were the factors that would seem to indicate that you should do a little better there? Or maybe I'm just being too pushy.

I think there's a couple things. One is, when you add back Parkdale, you add back the $1.2 million -- or, yeah, you add back the $1.2 million.

Right.

You can say there's also $450,000 related to the tender we went through that we [weren't successful in]--

Okay.

That came through the quarter. So you're adding $450,000 -- you're $3.9 million there. I think at that point in time, where I would go is -- what we've said all along, and the reason we talk about EBITDA instead of talking about pre-tax income in this business -- if you go back into the late '90s, we spent over $1 billion on CapEx.

Oh, I know that. (laughter) I was with you then, but yes, I appreciate that.

But let me walk through it. And that $1 billion in CapEx results in $26 million, $28 million worth of depreciation coming through our P&L --

Right.

-- the number you're talking about here. And what I said earlier, before the question came up, was our normal CapEx run rate is in that $8 million to $10 million level. You want to kind of normalize what true depreciation -- what our true cash flow to the business is, you have to take that $28 million less $10 million, $18 million. When you divide that by 4, that's another $4.5 million.

So we really -- on that $160 million, you made close to $8.5 million, divided by $160.802 million. So you're looking at a 5.2% pre-tax income on [the consolidated] business, which is -- that's the level we think it's going to run at. I mean, I think the -- our guidance -- and I'm going to switch off of earnings there for a second and go over to EBITDA. Our guidance is for improved guidance as we move through the year, getting up into the high 60s. I think the improvement programs we've got in place are going to continue to improve that number. The CapEx we are spending this year is going to continue to improve that number. And then the raw material costs. Where we're at -- that 10% raw material cost takes us to an all-time high in polyester raw material pricing, so --

So that's hurting you a bit, to be fair, the raw material prices, until they catch up, right?

That was definitely a headwind during the quarter. Or, I would say, rather than "until they catch up," until they normalize. I mean, I --

Well, I don't know -- like I said, I don't know what normalize means, because it could keep going. Who knows, right? So if one were to look at your EBIT number of 60, which is what you're projecting, give or take, right? And back out the depreciation and amortization of, what, about $25 million or so?

I think $27 million, $28 million --

Okay, so $28 million. So that would be $32 million of operating income before that, right? I mean, I'm just trying to back into this to understand what your run rate is, if you don't mind me asking it that way. Because, again, I'm trying to look at what the business is capable of, given all the changes that have been made, if that's a fair question. That's all.

I agree. I think two things when you talk about that. One is, that number of 60, the number we gave was high 60s, so --

Okay, so whatever. I'm not trying to pin you down to a number. You know what I'm getting at. I'm trying to understand, when all the stuff sorts out, where this company should be running or what your expectation is as a business over the next couple of years, just to give us a view, because we can't expect Parkdale to keep throwing off these kind of numbers. I mean, those are wonderful, but who knows, right?

Right. Yes, I think the -- there's two schools of thought there. There's the EBITDA school of thought that takes into account that depreciation difference, because you also have to take depreciation out of that. When you come to that EBITDA number -- and I just want to make sure we mention this. When you come to that high-60s EBITDA number for this year, that doesn't have any value at all for Parkdale in that, so --

I understand that.

-- you would have to add theirs, so that's kind of the EBITDA school of thought.

When you go over to the earnings school of thought, the pre-tax earnings school of thought, because of that excess depreciation, you really have to normalize that. And if you look at the $19.9 million we did for the six-month period, you take out Parkdale, that's $6 million, $7 million once you take all that out. Take out another $9 million of that excess depreciation, so you're up in that kind of $15 million, $16 million range, based on what the run rate we have right now for six months. Again, that still doesn't include Parkdale. If you value that, if you take that, double it to $32 million, and value that, whatever that value is, you still, on top of that, have to come back and say -- there is this valuable Parkdale asset --

Oh, I don't disagree. All I'm trying to ask is that, where are you -- if we were in a baseball game, where are you relative to running the operation, whether it be China or Latin America or the United States? Are you at a position, after you've made these big cap investments this year, where, if we look a year from now, we're going to see a true picture of what this company is capable of doing? Do you see what I'm getting at? Because there's been so many changes. I just want to try to model in my head what this business -- you talk about excess depreciation, and to be fair, that's what your depreciation is, right? It's not going to change, and in fact it may go up because you're spending all this CapEx, right?

Yes, but CapEx is (multiple speakers) --

Yes, that -- it's why we keep talking about this year is a transition year --

No, I mean, but your depreciation is high but will stay high, is all I'm saying.

No, I mean, that depreciation is based on $1 billion worth of investment. We're investing $10 million to $15 million to $20 million a year now, so --

No, but I'm saying, for the next three to five years, that number is not going down.

I agree with that.

Okay, so therefore, it's built in, so it's not temporary. So all I'm asking is, if one were to try to model this out -- and I don't want to jeopardize this call. But if one were to model out and leave the depreciation where it is, are you saying that that 5% number that we just went through, ballpark, is a number that you're comfortable with given the changes you've made in the business? Do you see what I'm trying to get at? I just want to try to model this thing without all the noise.

And I think -- and I'll let Bill talk in a second, but I think, from my perspective, we're not giving future long-term guidance. And I hear what you're doing, and I appreciate what you're doing, but from our perspective, the guidance we've given is basically we're going to continue to have solid results for this year. If you look at -- we did $34 million of EBITDA, and we're saying high 60s. I mean, we're basically saying we're going to double that over this 12-month time period. When you leave this year and move into next year, the only guidance we've talked about is kind of the improvements in the --

Yes. Look, I mean, we're going to be improving our growth in the global regions that are growing. We're going to continue to grow our PVA products, which have better margins than our existing business. We still have substantial improvements that we can continue to make in our operations. Even though we've made over $10 million worth of cost improvements in our operations, there's still a heck of a lot more to go get. It's just going to be more gradual and take more time. So we expect there's going to be continued improvement in these numbers. I'm not going to give you a number how much we're going to improve, but I would expect these numbers are going to continue to improve for the next few years. I'm not --

I'm only -- as I said, as a percentage of sales. You understand, I'm not looking for the exact number. I just wanted to understand directionally whether the cost cutting, whatever, is pretty much done, and we got to be more sensitive to the economy.

No, the cost cutting is not done. There's going to be -- there's more to be done, so if you want a trend in the future, our expectation is it's going to improve.

Right, and I'll add to that, if the -- I would say we're kind of seventh inning. I think the -- we have adjusted our size of our business to the size of the market. What we're seeing in the marketplace is stability in our regional market here, with the potential for some growth. So the consolidations are done. Those big, huge, big consolidations, in our view, are done over this three- to five-year window you're talking about. It's more the -- from here, it's the blocking and tackling of everyday process improvement, mix enrichment, and incremental growth is where --

Right, and --

That's where we're moving --

And, again --

Okay. I'm sorry to jeopardize, but I think everybody would -- appreciates the clarity. Thank you.

Thanks.

Your next question comes from the line of Vincent Staunton from Wedbush. Please go ahead.

Hi, guys.

Hey.

I just have a quick question regarding Parkdale. Can you elaborate a little on how much the price of cotton is impacting Parkdale, and how do you think it'll affect the distributions in the future?

Yes, I think the cotton pricing is an issue that they're facing -- like we said in our comments, they do have a hedging program and they're working closely with their customers as they go through that process. I don't have a number or guidance to give you on that. I think as far as how it'll affect distribution in the future, I think -- like we talked about earlier from Bryan's comment, I do think they're going to have to -- obviously, they're going to have to fund their working capital growth, as cotton went from $0.60 to $0.70, to $1.40 to $1.50. That's some significant working capital growth that they've had to fund as a part of that business, in addition to the HBI acquisition that they did back last October -- October '09, sorry. So yes, I don't expect distributions in the first half of this calendar year. But as we move out of that, with strong operating results, there should be cash flow there.

Okay. Thanks, guys.

Your next question comes from the line of David Schechter, Perspective Capital. Please go ahead.

Good morning and congratulations. So Ron, last time we spoke -- again, I have sort of a Parkdale question -- you thought that their normalized EBITDA might be $23 million over the year ended June 11 timeframe. Given the results this quarter and what everybody else has been asking about, is that still a reasonable number? Would it be a little less, a little better? How do you look at that?

I think the -- when we went through that presentation there on the road -- on the -- back in September on the road show, that number was a whole lot higher. I was trying to think of exact -- I don't have that presentation in front of me now, but I think, generally speaking, if you just took our nine-month -- the problem with -- let me try to get back into that mindset for a second.

The problem with doing any kind of annualization around Parkdale right now is that, back in October '09, they did have that HBI acquisition, which substantially increased the size of their business. That acquisition really kicked in kind of the March 2010 quarter. So you had a nine-month period, and if you look at the results that we have in our Q, all the information's there to kind of walk through what their EBITDA results look like.

I think for that nine-month period, I think you're looking at something more like -- hang on one second. Let me do the -- you're looking at more like kind of a $65 million for the nine-month period, so when you annualize that out -- if you were just to do simple math and annualize that out, it gets to a significantly higher number. I think then, from there, you have to back off and say -- but in this period, they had an extra $13 million, $14 million worth of EAP benefits. So you take that back down, and when you normalize that number, somewhere kind of in the mid-60s would be more what the last results that we gave you guys (multiple speakers) --

Right, right. So your share, your third of the number, as we talked about it, was about $23 million, so call that $69 million last time we talked. So I'm saying, based on whatever's happening in the cotton market and your perception of the demand and everything else -- I mean, when we heard them at Ken's little soiree in New York, they were kind of hoping for higher cotton prices and that they stuck and that maybe we'd get a turn in the cotton business so that we wouldn't stay in this long-term downturn in cotton prices. Maybe some of these prices would stick, and maybe not -- they'd come back, but not come all the way back, and that that would actually give them opportunity to improve their profit and their margins. So --

I think --

-- I'm just saying we're another 90 days past, and I'm wondering, is that, quote-unquote, $69 million, $70 million number still look like the kind of number that they can do? Does that actually look better, or does that actually look worse?

From a normalized number --

Yes, normalized.

Sorry, Allen. I said normalized, but yes, I think from a normalized number -- you can see 90 days later -- and I'm trying to get to what's public information here. Yes, you can see, 90 days later, they had a very strong quarter. You can also see that if you look at HBI and some of the other large cotton consumers in the region, yes, they're giving strong guidance for next year, and they're also saying we're seeing raw material price increases and we're passing those raw material price increases along. And we will be passing them along all the way through the summer. So, I mean, I think at the end of the day, the higher raw material prices, ultimately it's going to be how do they get passed along through the supply chain, and the ultimate impact on consumer demand is going to tell the tale.

Yes. Yes, the anecdote that he said that really stuck in my head was the call from Wal-Mart saying -- we're getting screwed by our suppliers in Asia, and help us. And Parkdale having to say -- look, we've got our own customers to sell to. The market is sold out. I mean, I don't know how you do better than that, so --

Yes, I --

-- I'd say they've got a hell of a good business. And the fact that raw material prices are going up actually gives them more opportunity, not worse.

Yes, I think they've definitely got a strong business, and that's a -- they had a strong quarter this past quarter. The reason we don't provide guidance on Parkdale, it's a private company, and we don't have a process to create forecasting and guidance for those guys.

Sure.

It's a strong business with a strong company. I think at the end of the day, higher raw material prices and how they impact demand and across the supply chain is an issue that we face the same way they face, and it certainly creates challenges.

So that's terrific, and I'm real glad to hear about you raising the guidance a bit for the year ended June. And I wonder, does that have implications for the following year? I would guess that the excess cash flow is going to continue, as you said, to be used to pay down this high-interest-rate debt, which also adds to future cash flows. So I would imagine that that's additive in the future years; it's not a one-time deal.

That's correct.

Okay. Well, I'm a happy shareholder, and I appreciate you guys working so hard.

Thanks, we appreciate it.

Thank you.

(Operator Instructions). Your next question comes from the line of Joe Phillips from Kellner DiLeo & Company. Please go ahead.

Good morning. I noted your comments regarding raw materials costs in the quarter being offset by mix and efficiency effects and that also you had implemented price increases to go into effect in early February. Can we expect that, given the lag of that hitting your books and the fact that raw material costs are already rising in your face, that we'll see some softness in gross margin in the current quarter? Are you already facing that?

Yes, and I think you can tell that when you think of our guidance, since you've been around -- I know you've been around with us for a while. Yes, March is typically our second-strongest quarter, followed by June. Having guidance of kind of $14 million to $16 million, when we just came off a $15.7 million quarter, would be less than what I would typically expect. And those raw material prices that raised in the September quarter as well as are raising again in the March quarter is the headwind that's getting created as a result of that.

That's correct.

Do you think that you'll go into the following quarter pretty much where you want to be gross-margin-wise? You'll have raw materials offset by price increases and back to what you normally expect?

Yes. Well, I mean, of course, that certainly depends on what raw materials do in April/May/June timeframe. But our expectation is we will be caught up sometime middle of this quarter. And if you make the assumption that raw materials flatten out, then we would have probably be caught up toward the late end of this quarter, and certainly going into next quarter. And if you do the math, obviously we're expecting a fairly strong fourth quarter.

Right. Okay, thanks very much.

Thanks.

Your last question in the queue is from the line of [Gus Masri], private investor. Please go ahead.

Hi. I'm just curious. You guys had a great quarter. Can you comment a little bit on Repreve renewables and the Miscanthus business? Is that going to be a big business over the next couple of years?

Yes, I think the -- we talked about that, I can't remember, two quarters ago, the investment we made in that. We're going through the commercialization process with that business. We're very encouraged by the results that we've seen so far in the marketplace, as well as the opportunities that are being provided, some of the incentives that are out there to encourage development of energy crops.

So we're very encouraged. We're going through a planting season right now, where we're digging up and we're processing and we're replanting. So we're very encouraged by it, but it's still -- the way we've always talked about it to investors is, there's a unique opportunity there that has good potential, and we're going through the commercialization process. And we'll kind of let you know to the extent we ultimately get to the point where we really believe we have something. But we're still very optimistic about where it's at and where it's headed.

Excellent. Thank you.

There are no other questions in queue at this time.

Okay. Well, we just want to thank everybody for being on the call, and have a good day. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.