Unifi Inc (UFI) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2011 Unifi earnings conference call. My name is Clarissa and I will be your operator for today. At this time all participants are in a listen only mode. Later we will conduct a question and answer session.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today's call, Mr. Ron Smith, CFO. Please proceed.

Thanks, operator, and good morning everyone. Joining me for the conference call today is Bill Jasper, our Chairman and Chief Executive Officer and Roger Berrier, the Company's President and Chief Operating Officer.

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 third quarter conference call link found on our home page.

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 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.

Before we get to the financial details, I'd like to turn the call over to Bill who will provide a brief overview of the quarter. Bill?

Thanks, Ron. Good morning, everyone. The net sales for the quarter continue to show improvement as a result of the ongoing recovery in the global economy and continued volume growth in the Americas region.

However, lower nylon volumes related primarily to inventory corrections at certain customers and significantly higher than expected increases in our polyester raw material prices put pressure on margins during the quarter and negatively impacted operating results by close to $4 million.

This margin erosion is temporary as we had certain quarterly pricing commitments, and we strategically chose to absorb a portion of the polyester raw material price increases for a short period of time. We have since regained most of the lost margin and anticipate more normal margins in the current quarter. Despite this temporary margin erosion, we believe our business fundamentals remain strong. On a fiscal year-to-date basis, our volumes are running approximately 10% ahead of the prior year and our operating profit is over 20% higher.

In the Central American market we continue to see demand growth. Our plant in El Salvador is running full and we are exploring the feasibility of adding additional texturing capacity there in the near future.

UTSC, our operation in China, continues to grow profitably and our operation in Brazil is performing ahead of budget for the year. In addition, our PVA business continues to grow on a global basis, and we are on track to double PVA sales in three years.

With that, I'll turn the floor over to Roger for some brief comments on key retail segments.

Thanks, Bill, and good morning, everyone. After a strong holiday season, retail sales of apparel continue to show strength. Year-over-year retail sales of apparel increased 4.3% in the March quarter and inventory levels remain low at approximately 70 days. While we remain optimistic that these retail sales trends will continue, we will closely monitor the potential impact that rising raw materials costs may have on apparel pricing and consumer demand.

Year-over-year retail sales of home furnishings edged up slightly in March and inventory remained steady. Existing home sales have risen in six of the last eight months, and we are expecting to see slow yet continued recovery in this segment as sales of new and existing homes are projected to increase for the year.

There is no doubt that long-term growth in our key market segments will be mixed with periods of short-term volatility, but we believe improvements in our operational efficiencies, continued growth in our PVA product sales, and anticipated volume growth in the North American region primarily driven from CAFTA have us well-positioned despite these periods of volatility.

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

Thanks for that update, guys. We'll now begin the review of our preliminary financial results for the March quarter which began on page three of the presentation. Net sales for the current quarter were $178 million, an increase of $23 million or 15% over the prior year March quarter. Quarter-over-quarter net sales for our domestic operations increased by approximately 8% as a result of improved volumes and higher pricing related to raw material costs.

In China and Central America, we saw volume improvements during the quarter while the growth in Brazil was related to pricing improvements and a currency translation impact.

The Company is reporting a net loss of $4 million or $0.20 per share for the quarter compared to net income of $800,000 or $0.04 per share for the prior year March quarter. The diminished results were primarily caused by a $2.2 million charge related to the early extinguishment of debt and the results from our equity affiliate investment, Parkdale America, and in our core business by lower demand in our nylon business related to seasonality and inventory reduction initiatives at two of our larger nylon customers and significantly higher raw material prices for the quarter in polyester.

During the December quarter, raw material costs increased by approximately 25% with an additional 30% increase occurring during the March quarter. The speed and intensity of these price increases over the last six months put significant pressure on our margins and was the primary driver of the 220 basis point decline in gross margin versus the prior year, the equivalent of approximately $4 million for the quarter.

Over the last six months, we have instituted multiple price increases but the timing and the severity of the month-over-month increases recently made it difficult for the supply chain to absorb all these changes.

Looking forward, we're starting to see stability in raw material pricing. And, as Bill mentioned earlier, we began the process of instituting the remaining price changes in April. We expect the programs to recoup lost margin as we move through the quarter with the increases fully in place by mid-May.

The quarter-over-prior year prices also included the one-time charge of $2.2 million related to the early extinguishment of debt and the write-off of [unamortized] debt issuance costs. Net income was also negatively impacted as we discussed earlier by Parkdale which had a $2.5 million loss during the quarter compared to $2 million worth of income in the prior year quarter. Total expenses for the quarter decreased by $900,000 compared to the prior year quarter, primarily as a result of lower variable compensation expense.

Turning to page four, net sales for the first nine months of fiscal 2011 were $513 million, an increase of $73 million or 17% from the prior year. Net sales from our domestic operations increased by approximately 10% and reflect the year-over-year retail improvements in our key segments Roger spoke about earlier.

Cumulatively, net sales from Brazil, China and Central America increased by 36% in the first nine months of fiscal 2011 compared to a year ago, reflecting the growth in the overall global economy and the startup of our operations in Central America.

Net income for the first nine months is $11.6 million or $0.58 per share compared to net income of $5.2 million or $0.26 per share for the prior year period. Year-over-year improvements in volumes, SG&A and interest, and the Company's share in earnings of equity affiliates on a year-to-date basis were partially offset by the 130 basis point decline in gross margins stemming from the previously noted increase in raw material costs over the last two quarters.

Looking at volume and pricing highlights on page five, quarter-over-prior year quarter volume increased 5% on a consolidated basis. The volume gains in polyester reflect the improving market conditions. And nylon was down compared to the prior year quarter, primarily as a result of the two large nylon customers pursuing inventory reduction programs. Both of these customers have considerably lowered their inventory levels over the last two quarters despite forecasted year-over-year revenue growth.

In addition, the prior year quarter had higher than normal shipments of textured nylon to meet the demand from the sock and performance knit markets as the economy began to exit the recession and retailers restocked supplies last year.

Quarter-over-prior year quarter pricing increases reflect the pricing adjustments taken by the Company in January and again in the March quarter to offset the increased raw materials. Compared to the December 2010 quarter, volume increased by 3.2% on a consolidated basis and pricing improved 7.6%.

As mentioned in our February earnings call, the average price of polyester declined in the December quarter as POY and chip volumes accounted for higher than normal percentage of domestic sales. So the quarter-over-trailing quarter increase in polyester pricing is partially mix-related and partially attributable to the previously mentioned selling price increases caused by raw materials.

Turning to our balance sheet highlights on page six, the Company is reporting $19 million of cash on hand, a decrease of $14 million from the December quarter. The primary contributors to cash during the quarter were $12.3 million of adjusted EBITDA, $1.8 million of dividends from equity affiliates and $38 million of borrowings under our revolving credit facility.

The primary uses of cash during the quarter were $33 million for the redemption of $30 million worth of 2014 senior secured notes and $24 million for working capital investment, $4 million worth of capital expenditures and $2 million worth of cash taxes, mostly in Brazil.

Net working capital in the March quarter increased $24 million as higher priced raw materials made their way into inventory and accounts payable and as the selling price increases we were able to achieve during the quarter resulted in higher receivables.

The increase in our accounts receivable balance also reflects approximately $8 million of increase related to the end of December accounts receivable balance being lower than normal as a result of the holiday shutdown periods. Despite these increases, our inventory and accounts receivable balance remain very healthy with improvements in inventory turns and our percentage of accounts receivable past due well below historic levels.

On a year-to-date basis, the Company has made a $35 million investment in working capital, which is approximately $26 million higher than forecasted at the beginning of the year. We originally forecasted a working capital increase of $9 million related to the recovery of demand and the startup of both Unifi Central America and the Repreve Recycling Centre during the year.

These expected increases combined with significantly higher raw material prices have taken our investment in working capital from $140 million as of the end of June 2010 to over $174 million as of the end of the March quarter.

As noted previously, we are expecting stability in raw material prices over the next few months. So during the quarter, we expect only a slight increase in working capital as we implement the remaining price increases and as the Repreve Recycling Centre comes online.

During the March quarter the Company completed the redemption of $30 million of its 11.5% senior secured notes due in 2014. The total aggregate redemption price was approximately $32.6 million including the call premium and approximately $900,000 worth of accrued interest. The Company financed the redemption through the borrowings under its revolving credit facility.

As of the end of the March quarter, total debt was $171.9 million, $133.7 of which is the remaining balance of the 2014 senior secured notes and $37.8 million of which represents borrowings outstanding under the Company's revolving credit facility. Our remaining availability on the facility as of the end of March was approximately $55 million.

As noted on the February earnings call, the Company expects to use excess operating cash and liquidity to call additional amounts of its 2014 notes as borrowings under the revolver are paid down utilizing operating cash flows. The call premium on such redemptions is currently 105.75 but as of May 15, 2011, the call price is reduced to 102.875 and in May 2012 the call price reduces to par.

Turning to page seven, the Company recorded a loss of $2 million from equity affiliate partners in the March quarter and net earnings of $12 million for the first nine months. The net loss from Parkdale during the March quarter was $2.5 million which compares to $2 million in earnings in the year-ago quarter.

We understand that Parkdale's loss in the quarter was primarily driven by the timing of a price index stipulated in a long-term supply contract with a large customer and the accounting for Parkdale's cotton hedging activity.

We further understand that in a normal operating environment, Parkdale America's customers typically enter into cotton contracts that fix price and availability of cotton out into the future. Thus the availability, price and customer demand is fixed. This arrangement qualifies for hedge accounting and changes to cotton pricing have no impact on the P&L during the periods.

However, with record high prices caused by cotton shortages, Parkdale America's customers have generally been reluctant to fix cotton out into the future at these high prices. As a result, Parkdale America has entered into futures contracts to ensure supply in order to keep the market price floating thereby not taking the market risks of a fixed price, Parkdale has generally entered into corresponding short positions.

Since the demand with the customer is not directly related to these future positions, they do not qualify for hedge accounting under Parkdale America's accounting policy. Therefore, losses on these future contracts or shorts go directly to the P&L while gains are deferred until the position is ultimately liquidated in the future.

As a result, Parkdale America believes much of the negative results in the quarter were timing-related and Parkdale America is still expecting overall results for the 2011 calendar quarter to be similar to the $62 million of net income earned in the 2010 calendar year.

Turning to page eight, the Company is reporting adjusted EBITDA of $12.3 million for the March quarter which is below the $14 million to $16 million estimate previously provided on the February earnings call as a result of the previously noted volume and raw materials cost issues encountered during the quarter.

Adjusted EBITDA for the first nine months of fiscal 2011 is $46.4 million, representing a $5 million improvement over the adjusted EBITDA for the prior year period despite the margin erosion difficulties experienced in the last two quarters.

Now, before I turn the call back over to Bill, I'd like to provide a brief update on some key dates for the June quarter. Our 10-Q for the March quarter is expected to be filed no later than Friday, May 6th and our quiet period for the June quarter will begin on June 28th and extend through our earnings conference call, which is tentatively scheduled for July 28th.

With that, I'd like to turn the call back over to Bill. Bill?

Thanks, Ron. We continue to see signs of economic growth around the world and we are well-positioned in those areas that are experiencing strong growth within the textile industry.

CAFTA countries continue to see volume growth coming from the cost and proximity advantages they offer today compared to other global suppliers including China which has seen significant increases in labor, power, transportation and capital costs recently.

This shift is evidenced by China losing share in the supply to the apparel in the US market during the March quarter, its first decline in share in more than 10 years. Over that same period, synthetic apparel imports from CAFTA increased 20% compared to a year ago. And we are currently estimating year-over-year volume growth from CAFTA to be in that range for the 2011 calendar year.

This makes Unifi Central America an important part of our global operations. And we believe we are well-positioned to supply demand into this growing market. On a related note, costs in China are rising. But it is still the largest supplier to the U.S. apparel market and has a large market of specialty and value-added product offerings.

From our operation in China, we continue to be pleased with our premier value-added product development pipeline with both existing and new customers. In addition to the growth of Repreve, we are starting to see domestic Chinese brands looking to us for value-added products for use in fabrics that are going to be designed, produced, marketed and consumed in the growing domestic Chinese markets.

While very early in this process, we're encouraged by the level of interest and the opportunities it could potentially bring in this high growth market. Our net sales from UTSC have doubled in the first nine months of the 2011 fiscal year compared to the prior year as the number of programs and customers in the region have grown.

And finally, we are continuing to invest in our growth strategy through strategic capital expenditures including the Repreve Recycling Centre which will officially open next week. The new center which houses the best mechanical recycling technology and equipment available in the world has been built with growth and flexibility in mind, and our customers are excited about our ability to grow our capacity as their demand for Repreve develops.

Now as I've stated earlier, we expect more normal polyester margins in the current quarter. We also expect some recovery in our nylon volumes as customers begin to reach target inventory levels.

Therefore, we expect month-over-month improvement in the June quarter resulting in adjusted EBITDA of $14 million to $16 million in this quarter. This level of adjusted EBITDA for the June quarter will result in adjusted EBITDA for the 2011 fiscal year in the low 60s, a decrease from our latest guidance in the high 60s, but in line with our original guidance of $60 million to $65 million, which we provided at the beginning of the fiscal year and prior to the run up of raw material prices.

As we look forward to fiscal 2012 our expectations are for improving operating results. As our continuous improvement efforts in operations continue to pick up momentum, our strategic capital expenditures to improve the PVA capabilities, flexibility and capacity become fully operational, and Unifi Central America capitalizes on its strength and capabilities in the growing Central American market.

We look forward to providing additional information related to fiscal 2012 in our next call in July, but with that I would like to now open the floor up to questions. Operator?

(Operator Instructions)

And your first question comes from the line of [Bryan Hunt]. Please proceed.

Good morning, this is Kevin McClure standing in for Bryan. Ron, could you walk us through the spread in pricing for texture polyester and imported yarns? I know there have been a lot of cost increases and taking out pricing in response, but what is the relative spread between the two?

I think the -- we don't talk a whole lot about specific pricing. I think relatively speaking what we've always said is we compete fine with imported yarns on a -- for yarns that are getting imported into this market. Our issues are around our supply chain, and as it goes further down the supply chain and you get more labor intensive, that's where the costs in Asia, the lower cost labor -- the lower labor cost in Asia gives those supply chains more of an advantage.

I think what we have seen over the last quarter, not only from a apparel full package standpoint, but also from a yarn standpoint, we have seen increases in cost of those products. It's power. It's labor. It's capital cost increases, and it's transportation cost increases. We've seen quite a bit of those, and I think what we said -- I believe we talked about it in the last earnings call -- kind of year-over-year on a product that -- nominal price for a textured polyester of $1.50.

And with that level of pricing we've seen about a $0.05 to $0.08 pickup in our competitiveness versus Asia as a result of those higher raw material prices at the supply chain level. So we are getting more competitive. It is a 4% or 5% pickup versus those Asian prices.

We have not seen a big volume pickup in our yarn business, but what we do see is the impact on Central America, and we're hearing lots and lots of more activity about garment and fabric infrastructure being relocated or being put into the region and programs being relocated into the regions.

Got it. And also, forgive me if you've already mentioned this, but how would you break down the price increases on a percentage and pound basis that you've taken recently? I know that you are instituting another one in April. Do you have plans for further increases beyond that?

Yes, I think the outlet, Bill and Roger answered a little bit of the specifics around the prices, but just to give you kind of level set, go back to that nominal, DTY is about a third of our -- polyester DTY is about a third of our business. It's the core part of our business. And a nominal price of $1.50 of DTY would be something you would work off of. Raw material costs coming into that, the raw material costs that we're talking about went from the low 50s up to $0.88 or $0.89.

So you had a $0.30 run up over six to eight months in a product -- in the raw material cost for a product that ultimately sells for about $1.50. So you had about a 20% price run up in those products. And from a pricing standpoint we caught up that first run up of prices in the December quarter, we caught that up in January. And then here in April we're going to catch that other bit up as we run through.

Yes, Ron, let me -- let me just give a little more color to that. Basically in January we had certain expectations for raw material pricing in polyester for the quarter, and we made verbal commitments primarily. We don't do many written contracts. We did verbal commitments to several customers around price increases in January, which we expected to cover the raw material increases during a quarter.

During the quarter, raw materials went up significantly more than we had anticipated, and we chose strategically to not break those verbal commitments with our customers as we've not in the past, with the understanding that when raw materials go back down our customers have typically held their part of the bargain too, and we were able to recapture with some of the margin on the way down.

So it was just a very difficult quarter in terms of the acceleration of raw material prices. This was really unprecedented. We've not seen prices go up this fast and this high in many, many years. And again, we've pretty much caught up in April. We have a few more commitments that we have through the beginning of May, but in May we should be back to normal margins in polyester.

Okay, fair enough. It sounds like you guys are very optimistic about the pace of the recovery even with commodity costs increasing. Could you describe the relative strength of the channels that you're selling into? Are some doing better than others?

Well, yes. If you look at the main channels we sell into, I mean, apparel and legwear and hosiery is roughly 70% of our business. Automotive is maybe 5% or 6% of our business. Both of them are showing considerable growth from the recession. We're certainly expecting that growth to continue.

Now, there's obviously issues around gas prices and certainly cotton-rich garments are going to see increases the second half of this year because cotton has gone up so much, certainly much more than synthetics. But if you look at automotive, it certainly has gotten much stronger. Apparel at retail continues to grow.

The one area that really hasn't grown much is upholstery, and that's really driven by the housing problems. Again, upholstery is probably 8% or 9% of our business. We continue to see very, very slow growth there. The remainder of our business, at least domestically, is primarily in industrial applications, and they continue to be pretty strong.

Now, where we're seeing growth, at least regionally, is in CAFTA. As Ron mentioned, we are seeing programs, some programs relocating back from Asia as CAFTA becomes more price competitive, and also as retailers realize that having close proximity to your supply chain gives you much more flexibility, especially when you're running lower than historic inventories, which we believe retailers are going to continue to do.

I mean, apparel inventory at retail had historically been in the low 80s in terms of days of inventory. It's been in the 70s -- or actually around 69 or 70 for the last two years, and our belief is it's going to stay there. And certainly our belief is that's an advantage for the CAFTA supply chain, because it's basically a four-week turnaround supply chain versus 12 to 16 weeks from Asia.

Thank you for your time.

(Operator Instructions)

And your next question comes from the line of Chris Pearson of Davenport & Co. Please proceed.

Hey guys, thanks for taking my question. I was just wondering if you could expand a little bit on the opportunity in PVA? I know you talk about doubling the mix over the next three years. I was just hoping you could give maybe a reference point, what type of mix we were looking at? Where we're expecting to get to, and what potential margin impact you could see as we deliver on that goal? Thanks.

Chris, this is Ron, I'll turn it to Roger here in a second, but generally speaking, when we came out in September, we said on a consolidated basis our PVA product offering was around 14% of our entire consolidated sales. And our goal was to double that over the next three years, so kind of a 25% compounded average growth rate.

And Roger could talk about the key programs that are driving that, but from my standpoint the other thing we've -- we don't spend a lot of time talking about margin of individual products, but generally what we've said was from a gross profit standpoint we have some very commodity products that are low single digit margins.

We have some specialty products that are kind of high single digit, low double digit, and then our PVA product margin. There's things that -- those can be anywhere from 10% to 15% to 18%, so it depends on what the product offering and the technical capability that we're providing in that product. And so that's the kind of range of the impact of that doubling as far as the programs themselves.

Yes. Hey Chris, this is Roger. In terms of the product lineup on our PVA, certainly Repreve continues to be one of the biggest drivers in our PVA growth segment. And we back that up with our investment in the Repreve Recycling Centre, and we're having our grand opening next week for our customer base that Bill mentioned. And Repreve is really starting -- or continuing to take off for us, and by opening up the center it's really gave us the scalability to produce more and more Repreve recycle pounds, and we're also seeing Repreve and our PVA portfolio grow in China.

As we do work with our downstream customers here in the US and also in Europe, they're making decisions to source some of those programs in CAFTA. They're also making decisions to source some of those programs in Asia. We've positioned our PVA portfolio very well now in Asia, so we're able to capture those programs with our China operations as well. So our PVA platform, as we talk about it, is very -- is a global platform, and we're experiencing that growth both here domestically and also in Brazil and in China.

Great, yes, and I guess just one more follow-up, you talked about some of the successes, the recent successes you've been having in China and the interest in the PVA product, and I guess we've been talking about doubling the PVA mix for some time. I guess I'm just wondering if, maybe given some of the recent success we think that that target could be somewhat conservative if we see things develop as they have been here recently?

No, I think we're excited because we set out an aggressive goal to double our PVA in three years, and I think we're very encouraged that we are on track to accomplish that.

Okay, thank you.

(Operator Instructions)

And you have a question from the line of [Everett Parraro]. Please proceed.

Good morning, gentlemen. My question is --

Good morning.

-- what hedging do you do at Unifi for your raw material costs?

We've looked into that multiple times and there's not really an effective hedge out there for us. What we typically try and do is use the buffer of inventory. We turn our inventory, say, nine times a year. So we have 30, 45 days worth of inventory on hand. Typically what we're doing is trying to use our inventory buffer there as a hedge in order to be able to pass those price increases along in a timely manner, because the way our pricing works on polyester, we actually don't know our settled price for the period until after the period is finished.

So we don't find out our new price on February 28th and then come out on March 1st with a price increase. We try to give the market a little bit of leeway. That works really well in a normal environment. I don't know that we stress enough how historic this run up was. $0.90 is the highest price on record for polyester, or $0.88 for the quarter is the highest price on record for raw material prices as we came out of the quarter.

So in environments like this we will have times when we get behind, but like Bill said, we're in strategic relationships with lots of our customers where they understand we're not going to -- if we make a pricing commitment we're going to live up to that pricing commitment. But as that price comes down we're going to hold that to recover that lost margin and allow them time to recover that with our customers.

We've been longtime holders, and so we've been around a couple years back when the last oil spike happened. We saw margins get squeezed and the P&L get really badly hit --

Right.

-- then, of course, looks like we're in that cycle again. Also with respect to your customers and the hand shake deals on pricing, really it seems like they've got the option when the pricing is coming down. You're hoping that they'll allow you -- or as you've experienced in the past, it'll allow you to keep your prices up and recoup your margin. But of course they've got the option at that point of finding an alternative supplier, don't they?

Yes, I mean typically that's -- we have sort of -- during that negotiation and agreement with the customers as prices are going up and we're sitting there negotiating with our customers, certainly that's part of the conversation is when we implement the new price increase and as we see some relief on pricing, our ability to hold that price for a couple months to make up what we've lost on the way up. We have those verbal conversations and agreements with our customers.

I think the other part about it is just our sheer size in the markets we typically operate in. If you're a large customer in this market you're dealing with us, maybe not on individual programs, but as some program as you go through that process. So again, I agree with your point. There is a risk there.

These are historic times. They went through the roof there for a short period of time, but I think from -- from all of our indications on a historical basis plus the order of magnitude of what Unifi is in the period or into the marketplace. We feel pretty comfortable we're going to be able to hold those for a period of time as they come back down.

Thank you. And at what point will you be comfortable giving guidance?

Giving guidance for 2012?

Or is full year guidance out there already for the current fiscal year?

Yes, we're fiscal June, so our guidance that Bill talked about there in the quarter was -- or I guess I talked about kind of 14 to 16 for the month -- for the quarter of June, which will take us into the low 60s for this year. And then typically on our July earnings call, which we talked about being scheduled for July 28th, we'll give full year guidance for what the next year is going to look like.

Okay great, great. Thank you.

And your next question comes from the line of Jonathan Sacks of Stonehill Capital Management. Please proceed.

Hi, just one follow-up question. You stated the desire to redeem additional bonds as operating cash flow allows you to pay down the revolver. Can you just discuss a little bit whether a refinancing deal or a new bond deal is still a possibility and something you're evaluating? And any sense of the economics of doing that in the current market? Thank you.

Thanks, Jonathan. I think that's always out there, and that's always something we're looking at. I think from a strategic -- and from a rate standpoint, I think, based on market conditions today there could be a significant savings in interest if we were to enter into a new, say, high yield instrument with a no call three or a no call four to it. I think the issue is from a strategic standpoint as we go through and evaluate the process.

And as we look at our next 12 and 24 and 36 months' worth of cash flow, our belief is we've gone through a level of higher strategic capital expenditures. That level will fall back off a little bit, and we see real strong cash flow generation going out over the next few years. In that environment, we're developing strategic plans around that, but we don't necessarily have uses for that cash flow. So going into a high yield instrument with a no call period, even though it would have a lower rate, would actually economically wind up costing us a little bit more money.

So our view is while we're where we're at from a strategic standpoint, we're going to pursue the debt reduction strategy kind of full bore. As we go through our normal strategic processes to the extent uses for that future cash flow comes up where we could -- we have something that would make sense to us, then we'll re-evaluate I guess at that point in time.

Okay, that's very helpful, thank you.

Thanks.

And there are no further questions. At this time I would like to turn the call back over to management for closing remarks.

Okay, thank you operator. As we've stated, our volumes remain very, very strong, and especially on the polyester side. Our nylon volumes are coming back, and frankly, our global operations are performing at least as well as we expected, and in all cases a little bit better than we expected.

We have stated before this is a transition year for us. We've spent more capital this fiscal year than we have in several fiscal years earlier, and we expect to start seeing the benefits of those capital expenditures beginning this quarter and certainly into next fiscal year. We've invested more in working capital than we had expected because of the raw material price run ups, but we're still very, very comfortable with our balance sheet and with our liquidity. And we look forward to improving performance as we move forward. And with that, I'll thank you all for joining in.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.