Q4 2004 Unifi Earnings Conference Call - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

OPERATOR: Good morning, and welcome to the Unifi Incorporated sponsored fourth quarter earnings conference call. At this time, all participants have been placed on a listen-only mode, and the floor will be open for questions following the presentation.

It is now my pleasure to turn the floor over to your host, Mr. Bill Lowe, Unifi's Chief Operating Officer and CFO. Sir, the floor is yours.

BILL LOWE, COO AND CFO, UNIFI INCORPORATED: Thank you, [Carrie], and good morning. Joining me on the conference call today is Brian Parke, our Chairman and CEO for Unifi, as well.

Before we begin, I need to first advise you that certain statement included herein may be forward-looking statements within the meaning of federal security 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 10-Qs and 10-Ks regarding various factors that may impact these results.

During this call, we will be referencing presentation materials that can be found on our Web site at www.unifi-inc.com. The presentation can be accessed by clicking the fourth quarter conference call link from the home page. I hope that you have the presentation available, as it will make it much easier to track through some of the information that we're going to discuss on this call.

I'll first comment on our fourth quarter fiscal performance, and then turn to the results for the 2004 fiscal year. If you're following along from the Web site presentation, I'll begin my comments on slide three.

Although net sales of 191.7m for the current June quarter are down 7% versus the prior year June quarter, we did see a second straight period of quarter-over-quarter increases and net sales, indicating that volumes and prices have both picked up in the first part of the calendar year. I am also pleased to report that we posted a small operating profit in the quarter, the first operating profit since our June 2003 quarter. We've accomplished this based in part on the reduction of our SG&A expenses, which were 5.6% of sales for the current June quarter compared to 6.8% for the prior year June quarter, and down from 7% for the quarter ended this past December. We expect to continue to rein in our SG&A expenses as we continue into our next fiscal year, realizing the benefits of our efforts earlier in this calendar year.

We are reporting a net after-tax loss of $11m for the current June quarter. The net net income for the current quarter was negatively impacted by a pre-tax charge of 7m, or 12 cents per share, associated primarily with the restructuring of the company's operations base in Altamahaw, North Carolina, that we discussed back in March during our restructuring call. This compares to a net loss of 30.5m, or 57 cents per share for the prior June quarter, and net income for this prior period was also-- also included some restructuring and other charges of 30.8m, or 50 cents per share.

Also included in the results for the current June quarter is a pre-tax benefit, including the cost of sales of 11.4m generated by the company's Manufacturing Alliance now with Koch industries, which was previously DuPont. As announced on July 26thf this month, the Manufacturing Alliance, as well as all related provisions, including arbitration claims between Unifi and Invista, will be terminated after the company's acquisition of the Invista polyester manufacturing assets located in Kinston, North Carolina.

In terms of our fiscal 2004 results, the company reported net sales of 746.5m, or a decrease of 12.1% from fiscal 2003 net sales of 849.1m. The company also reported a net loss of 74.8m, or $1.43 per share, compared to a net loss of 27.2m, or 51 cents per share, for the prior period. Net income for the full 2004 fiscal year was negatively impacted by pre-tax charges of 67.3m, or 96 cents per share, associated with the facility closures and asset impairment charges from the company's broad restructuring announced on March 2nd of this year. The prior fiscal year results also included pre-tax charges for restructuring and arbitration-related charges of 36.1m, or 61 cents per share. Net income for the 2004 fiscal year was also negatively impacted by a pre-tax loss of 7.1m stemming from the company's share of income or losses from its equity affiliates. This pre-tax loss compares to pre-tax income in the prior period of 10.6m.

Turning now to slide four, in terms of our balance sheet, which continues to be a strategic focus for the company, we ended the June quarter with 65.2m in cash on hand, which is an increase of 5.5m over the March quarter. Net working capital, which is also a strategic focus for the company, improved over the previous March quarter as we resolved some of our systems issues, but not all of them, resulting in a small reduction in accounts receivables. We have more work to do in this area, and a portion of this issue in this area is that, in the past, we've given some of our customers longer than customary terms. While these customers are current in their receivables balances, it has negatively affected our working capital on our balance sheet. We are reviewing terms in addition to focusing on past dues. The company ended the June quarter with working capital as a percentage of sales of 22.4%, which compares to 23.6% at the end of the previous March quarter, and 19.8% at the end of the prior year June quarter. We do anticipate continued improvement in net working capital going forward.

Turning to slide five, EBITDA for the quarter was 14.1m, up from the previous quarter and turning in the right direction. As required, we have provided on slide six a reconciliation of EBITDA to pre-tax income. This slide will provide you with the components of our calculation.

That includes my formal remarks on the financial statements, and I'll turn the call to Brian Parke for an update on our China initiatives. Brian?

BRIAN PARKE, CHAIRMAN AND CEO, UNIFI INCORPORATED: Thank you, Bill, and good morning.

As we told you some time ago, after we terminated discussions on the Kaiping transaction in April, we returned to China with the idea of establishing a Wholly-Known Foreign Entity, or WOFE, on a Greenfield site. During this exploration for a suitable site, we were approached by several other Chinese companies about Unifi's interest in establishing a joint venture with them for their existing texturing operations. And after looking at these operations, we identified one particular company that looked like a good fit for us, and we have spent considerable time during the last couple of months discussing a joint-- a JV with them.

We're currently working on finalizing the terms of the non-binding letter of intent with this company and, in fact, I'm leaving for China in the morning. And if we finalize-- sign the LOI, , we will let you know the identity and the details of this Chinese company. As you know, there are many issues that have to be worked out and agreed to by the parties before a transaction like this can [inaudible] and, while the Invista deal for Kinston is a very positive thing for this company, it does raise some interesting questions about proceeding with the Chinese transaction at this time.

The company will be employing much of its resources to people and free cash in the near future to integrate the Kinston business should the Invista deal close. The deal should make Unifi a much stronger company in the long-term, and this undoubtedly will be beneficial to our potential Chinese partner in the new JV company. But, the logical question then, based upon these short-term challenges, is how will the China transaction be impacted, and how will we fund any such venture?

As we announced to you this morning, the company has decided to exit its manufacturing operations in Ireland. Our plan for the liquidation of this facility will generate most of the assets, including land that is sold, is expected to create a cash value of somewhere between 20 and $25m. While it will take some months to actually turn these tangible assets to cash, it will also take some months to actually consummate a transaction culminating in a closing of the joint venture in China. We're still working on a spring 2005 deadline, but the actual timing would be predicated on our ability to generate the cash in this time period. And of course, we have to sign an LOI in the next few weeks.

In any event, we're committed to China and developing our business there. We believe we have identified a good, solid partner, and that this is a better course of action than a Greenfield side at this time. However, we will do it in a prudent manner that protects our balance sheet and our liquidity.

Now, I'll turn the call back to Bill for review of the Kinston transaction and some comments on Ireland. Bill?

BILL LOWE: Thanks, Brian.

I will comment first on Kinston. As you know, we signed an agreement on July 26th to purchase our alliance partner's assets in Kinston, North Carolina. The purchase price, which will be financed by the seller, is approximately 21m. I say approximately because the purchase price is subject to final inventory valuation at the closing date. The seller is taking back a five-year note at the rate of 10%, collateral-wise, by the receivables and inventory of the Kinston facility. Payments are …