Frank Gamier, Division Vice President, Fieldcrest Cannon, Inc., Eleventh Annual EPS*" System Conference, Memphis, TN, June 1998

Good morning ladies and gentlemen. Thank you, Charles Chewning, for inviting me to the 11th Annual Engineered Fiber Selection System Conference. I have always considered it a privilege to attend and especially participate in these conferences.

I must give credit to Charles for selecting the title of my presentation. When he asked me several weeks ago to participate in the conference, I asked him what subject he would like me to address. He very astutely said, and I quote, "leave the statistics, market and economic research to the professionals. They have the wherewithal to do the research, make the slides, and use the professional jargon," so with that I yield to Dr. Mark Lang, Dawn McLaren, Mark Messura, and the infamous Jarrel Neeper. Charles went on to say they are professionals but are outside the industry looking in. Tell us what you see from the inside looking forward. This morning I am going to outline where I think the industry is now, where it is going, and some of the things that are happening that might detour our progress in the future.

I have been very fortunate to be part of this cotton fraternity for almost forty-nine years. God willing, in August of 1999 I will celebrate fifty years. My first job was a page at the New York Cotton Exchange. Admittedly, I was a very young teenager when I started.

A lot of changes have occurred in the raw cotton industry and textile manufacturing sector in a half century. When I began, large mill groups were moving from once powerful New England to the South. The growth of the conglomerates such as Burlington, J. P. Stevens, Lowenstein, Cone, West Point Pepperell, Cannon, Springs, Erwin, Indian Head, Riegel, and Mt. Vernon Mills was exerting tremendous influence on the cotton textile market. Most of these mills produced everything within their own facilities - yam, apparel fabric, industrials, and home furnishings (for example, towels, sheets, bedspreads, and blankets).

Attrition, consolidation, market conditions, and just plain bad management has rearranged or eliminated most of the above enterprises. A few have survived and continue to prosper, particularly those companies that have focused on a core product where they have large market share. For example, knitwear, sales yarn, towels, and sheets. They have not tried to do everything like their predecessors.

Improvements in the retail economy during 1997, coupled with the USDA's Step 2 payment, has certainly helped to improve earnings per share of the large cotton consuming mills. Here is an example. Chart No. 1 Profits are essential for industry to attract capital, modernize, and grow.

Unfortunately, as it has been illustrated many times, the market for U.S. manufactured textiles is a no-growth proposition. Individual companies have only grown through consolidation or just plain stealing market share from one another. Price cutting only has a short time effect. Innovative product introduction lasts longer. Look at Fieldcrest Cannon's Royal Velvet towel palette of colors and design as a prime example. Chart No. 2

The opportunity for real growth in a mature industry is world trade. U.S. textiles' track record for exports is not encouraging even though our productivity per employee ranks among the best in the world. Some of our related costs of manufacturing and transportation to Asian and European markets limit our ability to compete. Crandall Bowles, CEO of Springs Industries, astutely expressed these opinions at a recent North Carolina World Trade Association presentation: "The message of the 1990's is clear. We have no choice but to compete globally. Springs doesn't expect to gain substantial growth in direct export sales." Rather, she expects to build global sales through joint ventures and existing operations in Canada and Mexico. Also, a joint venture in Portugal will be an entry to the European market. This will allow them to service customers such as Wal-Mart that are expanding internationally.

A recent Wall Street Journal article said: "The blurring of international business culture into a global unified field has opened corporate executives to possibilities they and their investment bankers could barely imagine five years ago." The textile industry will surely compete in this arena. One example was an article that appeared in The Charlotte Observer last week. The same day we read the startling headline news of Germany's Daimler-Benz purchase of the Chrysler Corporation — the largest takeover ever of a U.S. industrial company — hidden in the back pages of the newspaper was a report of Glen Raven Mills, Glen Raven, North Carolina, buying a French textile firm and merging the French firm's outdoor fabric business with its own. This will give Glen Raven global access for its portfolio of awnings, casual furniture, and outdoor use fabrics. Another example was West Point Stevens' headline announcement in the May 18 issue of Home Textiles Today reporting at their recent shareholders meeting of their $500 million target for international sates within the next five years. "We are going to contract to manufacture offshore rather than put in brick and mortar," said Tom Ward. One advantage of local partners is their familiarity with the markets that they serve. Another is the opportunity to source products for the U.S. market as well. "We're bringing in products from twenty-five different countries right now," added Ward.

These consolidations and alignments will continue and accelerate as we go into the next century. Chart No. 3 This chart illustrates that mergers and acquisitions in the textile industry reached record levels in 1997, exceeding 1996 levels by 28 percent (41 closed transactions versus 32). U.S. textile mills will become fewer in number but financially stronger and more adapted to world conditions. Companies such as the Pillowtex Corporation will survive because we are marketers of product, not necessarily married to complex manufacturing facilities. Those companies that focus on a core product, outsource components, and are attuned to the world markets will continue to profit and provide excellent investment opportunities for their shareholders.

All of the positive things we have going for us now does not mean the path forward will be straight up. We can expect some setbacks. Import competition, both from finished fabric and yarn, is a major deterrent for increasing domestic cotton consumption.

Our friends at the American Yarn Spinners in Gastonia, North Carolina, a trade association that tracks yarn production from alt parts of the world, tell us for example that Pakistan, a country without U.S. import quotas for spun yarn, has increased its imports into the U.S. over 300 percent for the period January 1997 to January 1998. The experts tell us this trend will continue to increase.

I am also convinced that imports wilt increase from all Asian sources if their domestic economic situation continues to deteriorate. The U.S. market is the only hope for their survival. Just look at Indonesia.

Another disturbing situation is finished fabric. For example, men's shirting. Do you know that the import quota for this product already exceeds the market? More shirts can come in than we can sell. How about that number?

The May 11 issue of Home Textiles Today headlined an article "Towels Are Coming: Global Search Eases Shortage." Take a took at this chart. Chart No. 4.

According to the National Cotton Council's 1997 edition of Cotton Counts Its Customers, 1996 domestic consumption accounted for almost 900,000 bales of U.S. cotton that were used to produce towels - 8 percent of the U.S. crop. Remember, approximately 98 percent of all towels produced in the U.S. is 100 percent cotton.

We have always had some imports but now even the major U.S. producers have joined the import towel trade to supplement their U.S. production.

In conclusion, I may be a minority of one but I do not believe we can sustain 11.5 million bale U.S. cotton consumption into the year 2000 without some minor setbacks. Our industry is resilient, we are aware of the competition, our management is better attuned to world conditions, and we have had several years to put our financial house in order. A few of us will survive and prosper if we do our homework.