Springs Global Soldiers On

2008 Another Year of Transition

Brent Felgner, April 7, 2008

Springs Global Participaçoes will mostly stay the course despite a disquieting year in transition and decline in the U.S. economy that accelerated Springs' top- and bottom-line losses.

The manufacturer is preparing for a big relaunch of its signature Springmaid brand in September, with shipments to hit the shelves by February or March of 2009. The Cindy Crawford licensing deal will have bedding and bath products hitting next year, too. Wamsutta is slated for a 2010 relaunch.

Springs expects to enter Europe later this year and Asia next year. At the same time, it will further rationalize operations in the U.S., while realizing greater expense reductions in back-office and support functions.

But the short-term pain is palpable. Fourth quarter sales slid precipitously — down 32.4% to R$742.1 million, vs. R$1,097.7 million during the same period a year earlier, according to a presentation page initially posted on the company's website, then removed a short time later. Springs, which is now traded on the Brazilian Novo Mercado of the Bovespa exchange, is not required to break out fourth quarter results. Rather, it reports the first three quarters, then the full-year results.

Exchange rates in effect as of Dec. 31, 2007 (used throughout this article for comparison purposes) would have yielded 4Q sales of US$419.3 million.

"We are obviously very disappointed with the results," chairman Josué Christiano Gomes da Silva said on the call, "but they are a reflection of market conditions and the circumstances of the transition."

Springs expects "to come back to normal levels this year," said da Silva. "Obviously, the state of the economy in the U.S. is not tremendous right now. We still have a major part of our sales in the U.S. [But] the Brazil economy is really thriving, it's very strong right now; we're able to recover market share in Brazil from that."

For the full year, Springs, which lays claim to being the world's largest home textiles supplier, posted a net loss of R$429.1 million, or US$242.6 million — 42% greater than the previous year's net loss of R$302.2 million.

Net sales of R$3.55 billion, or US$2.00 billion, fell 25.6% from R$4.77 billion in FY2006.

Operating losses increased 57.5% to R$389.1 million, or US$219.8 million, compared to a loss from operations of R$246.9 million in 2006. Gross margins fell 283 basis points in FY2007 to 7.86%, Springs reported, from last year's 10.69%.

About R$100 million, or US$56.5 million, of those losses were in non-cash charges reflecting currency fluctuations and the investment in foreign subsidiaries, along with one-time charges in connection with eight U.S. plant closings and the shipping of that capacity to Brazil, Argentina and Mexico.

In 2007, Springs liquidated its retail business and sold off its creative, juvenile and infant divisions. The U.S. footprint has been reduced to three basic bedding facilities, two bath rug facilities and one towel plant, da Silva said.

He believes that a flexible U.S. monetary policy and the economic stimulus plan will provide some relief during the second half of this year: "So, we are very confident that we will come back to profitability and we are starting to look to the future."

"We do expect to reduce a little bit the participation of U.S. dollar sales in the sales of the company," he added, reflecting an increasing share of the total business being taken in other global markets. The U.S. share of Springs revenue remains about where it was in 2006, "nearly 70%."

"The U.S market is still the most important to us and we don't expect to shrink there," the chairman said in a telephone interview following the investors call. "On the contrary, we expect to expand there. I think the rate of expansion in other markets will be faster."

The company currently has several Letters of Intent in circulation involving potential deals in Europe, which it expects to close in time to become operational by late 2008, essentially creating Springs Global Europe. But its outlook in Asia is different — considerably different — than some of its competitors'.

"I'm not sure that Asia, because of the [economic] situation, is more important than it was before," da Silva said. "The costs in Asia are escalating very fast. So we don't look at Asia as an opportunity for sourcing — we look at Asia as an opportunity to sell product. A lot of our retailers are expanding in Asia, as you know. We expect this year to announce something and we do expect to be operational somewhere in Asia by sometime in 2009 — but also if necessary to source from our Asian footprint to Brazil or to the West or Europe."

Springs seems to have adopted a similar tack to WestPoint Home, in avoiding unprofitable retail business. While it hasn't overtly "walked away" from programs, as WestPoint reported, the difference may be only semantic.

"You go to where it's prudent to go, particularly in a world where commodity prices are going up," da Silva said in the interview.

"I think retailers are starting to realize that sometimes they get quotes that are unrealistic and probably are unsustainable. When we make a quote, it is a quote that we can live with; when we lose the business, it is because we have been prudent enough to give a quote that is sustainable and is profitable for the company.

"We are not running just to fill our plants."

"Again," da Silva emphasized, "our company is in a very privileged position in regard to its capital structure."

Springs' liquidity improved 139% to R$244.4 million, or US$138.1 million, in 2007. Net debt was cut by nearly 53%, to R$464.7 million, or US$252.6 million, from R$984.6 million, with improved rates, the company reported. Springs Global said it also reduced its selling, general and administrative costs during the year by 18.5%, to R$410.1 million, or US$231.7 million.

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