Springs CEO 'Confident' of 2009 Profit

Brent Felgner, April 27, 2009

Despite forecasting a continued weakening of its U.S. business in a "tough" economic environment, Springs Global Participações ceo Josue Gomes da Silva said he believes the company will be profitable this year and begin growing next.

"We are obviously cautious with regard to 2009, but confident that the company will be able to present positive results in 2009," he told investors in a year-end conference call earlier this month. "The company is with a very strong capital structure to pass through 2009 and really grow from 2010 on."

Gomes da Silva offered similar reassurances about Springs' strength and potential throughout the presentation — as he has numerous times in the past. But even with aggressive financial management, the company reported a deepening 2008 year-end net loss of R$342.4 million, compared to R$300.9 million in '07. The company's sales fell 18.9%, to R$2.88 billion, on U.S. market weakness bucked up some by double-digit top-line increases in Brazil.

One reason for Gomes da Silva's optimism for a profitable year: Springs absorbed a series of one-time charges associated with restructuring and plant closings in 2008 that will not repeat in 2009.

Based on a company-calculated average exchange rate of 1.833 Brazilian real to the dollar, Springs' 2008 net loss increased to about USD$196.0 million, compared to its year-earlier loss of about USD$168.2 million, based on a 2007 average exchange rate of 1.93.

Sales fell to roughly USD$1.65 billion in 2008, compared to 2007's USD $1.99 billion. (These reverse currency conversions are, at best, approximations.)

However, the company was able to swing from an operating loss of R$130.1 million in 2007 to a small operating profit in 2008 of R$20.2 million, before exchange rate variations. But that reversed with the exchange rates included, showing the company had an operating gain of R$48.8 million in 2007, against a loss of R$217.0 million in '08.

"The sales results were much below what we expected because the U.S. market was very, very tough during the entire 2008 and, of course, even worse for the last quarter of 2008," Gomes da Silva said.

"After September, the U.S. market collapsed and this impacted our sales level in the United States. Obviously, the outlook for the economy in 2009 — for the global economy — is not very promising."

While not discussing it directly, in 2008 Springs saw several key accounts liquidate and lost a significant amount of volume through the reduction of its Springmaid business at Walmart. On the flip side, JCPenney recently announced the Cindy Crawford Style line in home, for which Springs was quick to note that it produces the bedding and bath.

The company's losses would have been greater if not for the impact of growing sales in South America, still a smaller portion of its markets, and aggressive financial management in the United States that involved slashing costs, restructuring debt and a top-to-bottom realignment, including cuts, in its executive ranks and business segments.

Gross margins improved 430 basis points, from 7.9% in 2007 to 12.2% last year. Selling, general and administrative expenses (SG&A) fell 18.7%.

Net debt, excluding debentures subscribed to by controlling shareholder Coteminas, fell 49.1%, to R$211.9 million, largely attributable to an off-balance sheet restructuring of the U.S. business through its SABRE Securitization Program, which improved terms, the company said, by 120 basis points a year. However, short- term debt increased 58%, to R$306.0 million.

In connection with restructuring of its U.S. business, corporate cfo Flavio Barbosa has assumed additional responsibilities for shared services in North American and the company's Asian business. Included under his purview are IT, supply chain, sourcing and warehousing. In that capacity, he reports to evp Tom O'Connor.

Springs saw declines in most of its major business segments, most notably bath (-23.9%), fashion bedding (-20.3%), and utility bedding (-19.6%). Only its intermediate products and "other" segments, which combined produce less than 15% of its total sales volume, produced positive results.

Despite what he acknowledged were the challenges that lay ahead, Gomes da Silva still found reason to be optimistic.

"In North America, our [sales] budget for 2009 is a very conservative one, again with major decreases over last year because of the state of the economy," he said. "In the first quarter of this year, although it was still a very negative number compared with the first quarter of 2008, it was above budget, by a small margin. Maybe we have been too conservative, or maybe the economy stopped deteriorating, at least in the quarter."

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