Q4 2008 Unifi Earnings Conference Call - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

OPERATOR: Good morning. My name is Donald and I will be your conference operator today. At this time, I would like to welcome everyone to the Unifi Fourth Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS). Thank you.

It is now my pleasure to turn the floor over to your host, Ron Smith, Chief Financial Officer. Sir, you may begin your conference.

RON SMITH, CFO, UNIFI, INC.: 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 Fourth Quarter Conference Call link found on the homepage. I hope that you have the presentation available, as it will make it much easier to track through the information discussed on this call.

Before we begin, I need to also advise you that certain statements included herein may be forward-looking within the meaning of federal securities law. Management cautions that these statements are based on management's current expectations, estimates, and/or projections about the markets in which the company operates. Therefore, these statements are not guarantees of future performance and involve certain risks that are difficult to predict. Actual outcomes and results may differ materially from what is expressed, forecasted, or implied by these statements. I direct you to the disclosure in our 10-Qs and 10-Ks regarding various factors that may impact these results.

Before we review the financials for the quarter and our fiscal year, I'd like to turn the call over to Bill Jasper, who will provide a brief overview of the market conditions that impacted our results for the quarter, as well as an update on our strategies in China. Bill?

BILL JASPER, PRESIDENT, CEO, UNIFI, INC.: Thanks, Ron, and good morning, everyone. The economic news certainly hasn't gotten any better since our last call. Consumer Price Index for June was 5% higher than one year ago with the adjusted index for transportation increasing 12% and energy increasing nearly 25%. With household incomes stretched even thinner, June's Consumer Confidence Index was the fifth lowest reading ever, and the Expectations Index reached an all time low. As you can imagine, the ongoing troubles and uncertainty in the economy are taking their toll on many of our key business segments.

Existing home sales resumed its fall in June, declining 2.6% from May, and the June figure for existing home sales was the lowest pace recorded since the first quarter of 1998. With home sales down, sales of furniture declined 7.2% compared to the prior year, and sales of furnishings are off nearly 11% from last year.

US sales of cars and light trucks slid 18% in June, a selling pace that annualizes to 13.5 to 14 million bills, the weakest level in 15 years. Major auto consulting firms now expect full-year 2008 auto sales to fall 12% compared to last year.

Retail sales of apparel have been mixed with discounters seeing some relief as consumers were drawn by heavy discounts and their economic rebate checks. However, same-store sales for apparel-only stores declined approximately 1% in June, and same-store sales of apparel in department stores dropped nearly 4% year-over-year.

In synthetic apparel, year-to-date imports of synthetic apparel are down 2.5%. But on a positive note, imports from the CAFTA region continue to gain share. Imports from the region are up 12% as US brands and retailers continue to take advantage of the shorter lead times and competitiveness of the CAFTA region. That is especially positive for us, as the vast majority of garments made in this region use US fiber, and we see that trend continuing.

In addition to the challenges caused by softness in consumer demand across many of our segments, our business continues to be negatively impacted by rising raw materials and other petrochemical-driven costs. Polyester raw material prices increased by 11% from the beginning to the end of the quarter, and the average for the quarter was 17% higher than the prior-year June quarter. And in the nylon business, polymer prices have increased by nearly 12% since the beginning of the calendar year.

This rapid rise in the price of crude oil and the seasonal demand from summertime consumption in the US drove the increases throughout the quarter and suppliers of the key ingredients for our polyester are forecasting substantially higher prices in July and August, before costs may begin to turn down.

In summary, the company has faced an extremely difficult operating environment, driven by a faltering economy and unprecedented increases in the cost of raw materials, energy and freight. However, we have reacted decisively in dealing with these conditions. A combination of sales, price increases, cost containment, operational effectiveness, customer service, and an aggressive raw material sourcing strategy has enabled the company to mitigate much of this impact, as you will see when Ron reviews our results.

Before turning the floor back to Ron, I would like to quickly address China. As mentioned in our last conference call, we have been in the process of exploring strategic options with our joint-venture partner, with the ultimate goal of determining if there was a viable path to profitability for the JV. We have concluded that although we have successfully grown our position in high-value and premier value-added products, commodity sales will continue to be a large and unprofitable portion of the JV's business.

In addition, we found we have been focusing too much attention and energy on non-value-adding issues, detracting us from our primary PVA objectives. Based on these conclusions, we have decided to exit the JV and have tentatively agreed to sell our 50% interest back to our partner.

We expect to close the transaction in the second quarter of fiscal 2009, pending negotiation and execution of definitive agreements and Chinese regulatory approvals. However, there can be no assurances that this transaction will occur on this timetable or upon these terms.

While we appreciate the hard work and efforts of our partner and everyone involved with the JV, we believe that a fundamental change in our approach is required to maximize our earnings and growth opportunities in the Chinese market. Accordingly, the company plans to form Unifi Textiles Suzhou Company Limited, or UTSC. The focus of the new company will be to develop, source, sell and service PVA products in the Asia region, and to do so profitably.

UTSC will benefit the company by removing the challenges facing the joint venture in its commodity production, while providing greater flexibility, faster product innovation and enhanced service to customers in the growing high-value segments.

Under the new business model in China, Unifi will continue to market innovative, high-value and PVA products, and work with customers to grow in applications designed to meet ever-changing consumer demands, while ensuring high-quality production of these products.

Initially, our partner, Yizheng Chemical Fibers Company, will likely serve as the primary toll manufacturer for our PVA yarns, and we expect a seamless transition for our customers in the region. The new company may add other toll manufacturers as appropriate and we expect to quickly grow the portfolio of PVA yarns available in the region.

Ed Wickes, who is currently President of the …