Gildan Activewear Inc (GIL) 2003 Q3 法說會逐字稿

Good day, everyone and welcome to Gildan Activewear Third Quarter 2003 Results Conference Call. As a reminder, today's call is being recorded. Our speakers today are Chairman of the Board and Chief Executive Officer, Mr. Greg Charmandy, President and Chief Operating Officer, Mr. Glenn Charmandy and Executive Vice President of Finance and Chief Financial Officer, Mr. Lawrence Sellyn. Before turning the meeting over to management, please be advised that certain statements included in this conference may constitute forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Such forward-looking statement involve known and unknown risks, uncertainties and other factors which may cause actual results to differ materially from future results expressed or implied by such forward looking statements. We refer you to the company's filings with the U.S. Securities and Exchange Commission and Canadian Securities Regulatory Authorities for a discussion of the various factors that may effect the company's future results. I would now like to turn the call over to Mr. Greg Charmandy.

Good morning, everyone and welcome to our conference call. We are extremely pleased to report to you that we achieved an all-time record for quarterly net earnings for Gildan. Our net earning were 31.3 million or $1.05 per diluted share. Up respectively 13% and 11.7% from 27.7 million or 94 cents per diluted share in third quarter of fiscal 2002.

During the quarter, we maintained our market leadership position and the overall T-shirt category with a share of 28% versus 27.7% a year ago. This, despite being capacity constrained and we believe that we are on the way to achieving a similar leadership position in the sportswear category where our recently introduced line of fashion sports shirts have been extremely well accepted. Glenn will provide you with the market share statistics by product later in our presentation.

On the manufacturing side, we continue to ramp up capacity at our new fully integrated textile facility in Rio Nance, Honduras and we are pleased to achieve a higher proportion of colors in the facility than originally envisioned. As we have mentioned previously, we view this project as a great success not only because of the seamless start-up and excellent cost performance but because this project has created a template for us to use again in the future to create additional cost effective state-of-the-art facility in offshore locations.

In addition to being proud of the state-of-the-art manufacturing facilities which we have built in the Caribbean basin and in Mexico, we are equally proud of our unwavering corporate commitment to socially, ethical and responsible labor practices in all of our plants. As a testament to this commitment, Gildan was honored as a recipient of the award for excellence in corporate, social and ethical responsibility this year by Canada's International Development Agency which is known as CIDA. In addition to our own rigorous codes of conduct, Gildan is certified under the guidelines of the WRAP program, which is the acronym for Worldwide Responsible Apparel Production, for all of its offshore sewing facilities with the last one scheduled for completed certification, once it moves to its new location this upcoming December. WRAP is an international non-profit body that sets standards regarding working conditions, management practices and workers' rights.

In addition, we are in the process of completing our application for accreditation under a fram known as FLA, which is the acronym for the Fair Labor Association. FLA is also a widely recognized non-profit organization that promotes adherence to international labor standards.

Although we believe that having the WRAP certification at all of our sewing facilities make us an industry leader in the domain of social responsibility, we are pursuing this additional level of certification in order to have a comprehensive program which is highly regarded by the diverse universe of employees, shareholders, and stakeholders that Gildan has today.

Going forward, we will also continue to institute various programs that ensure rigid compliance to environmental standards and ecologically friendly practices throughout our operations to further emphasize our leadership as a responsible manufacturer. Information on all these innovations and corporate policies will, from now on. be made more available through ongoing communications throughout the year, announcing not only our financial results, but the very real strides we are making as a responsible corporate citizen. We at Gildan feel it is important that the public knows not only of our financial success but appreciate the excellent business practices that contribute to this success.

And lastly, on the corporate governance side, we are pleased to announce today the appointment of Mr. Robert M. Bayless as lead director on our board. He has served as a member of our board since 1999. Mr. Bayless is a very experienced corporate director who also sits on the board of four major U.S. public companies. Prior to his career as a professional director, he served as a Chairman and Chief Executive Officer of Credit Suisse First Boston Asia.

And now, I would like to pass the mike over to Lawrence Sellyn, our CFO, who will review our financial results and outlooks.

Good morning. EPS for the third quarter was $1.05 per share up 11.7% from the third quarter last year.

Our third quarter included an extra week compared with our normal fiscal quarter of 13 weeks. This extra week is required in one quarter every sixth year because our fiscal year is in a 52-week basis rather than 365 days. The extra week in every sixth year allows us to catch up and realign ourselves with the calendar year cycle. We include the extra week in the third quarter as this is our largest seasonal quarter and, as such, the distortion due to the extra week is less than it would be in the other fiscal quarters.

Our internal analysis is that the extra week contributed proximately 6 cents per share to EPS, so that, without the extra week, we would have achieved EPS of 99 cents per share compared with 94 cents last year and average analyst expectation for this quarter of approximately 95 cents per share.

The higher EPS compared with last year based on our actual reported EPS for this year of 1.05 per share is due to a 14% increase in unit sales and higher gross margins as well as lower SG&A expenses and lower interest expense. These positive factors were largely offset by lower selling prices and impact of the weaker U.S. dollar, combined with higher depreciation expense and impact of a temporary increase in our tax rate which I will cover later. The negative impact of the lower U.S. dollar on our EPS for the quarter is estimated at proximately 35 cents per share. Our EPS in U.S. dollars increased by 21.7% from the third quarter last year.

Sales were 204 million up 4.2% from 195.7 million in the third quarter of fiscal 2002. The increase in sales reflected higher unit sales largely offset by lower selling prices and impact of the lower U.S. dollar. The increase in unit sales reflected 11.6% growth in overall industry sales of T-shirts in the U.S. distributor channel. We fulfilled this growth in overall industry demand and also slightly increased our market share leadership position in spite capacity constraints pending the completion of the start-up of Rio Nance, which caused us to have to forego sales opportunities.

We continue to achieve strong market share penetration in the golf shirt category, where our share increased to 19.5% versus 13.8% a year ago. In the month of June, our share in golf shirts exceeded 20%.

Gross margins in the third quarter were 30.7% compared to 29.8% in the third quarter last year. The overall margin improvement of approximately 1% was the net result of several offsetting factors. Favorable manufacturing efficiencies, primarily due to our new textile manufacturing facility in Honduras, positively impacted margins by approximately 8.5%. Margins were also enhanced by favorable product mix, and by lower material cost which together increased margins by approximately 3%. These margins were offset by lower pricing which reduced pricing by 7% and by the timing in fact of the U.S. dollar being reflected in sales and cost of sales at different rates which reduced margins by 3 .5%.

Selling general and administrative expenses were slightly lower than the quarter of last year as last year's third quarter expenses were unusually high due to the timing of the provision for our results-based incentive compensation program. SG&A as a percentage of sales was was 9.2% in the third quarter of this year compared with 10% a year ago.

Depreciation expense was up last year due to our capital investment program. Our tax rate was also higher than last year at 12% compared to 10.2% in the third quarter and 8.4% in the second quarter of this year. This was a temporary issue that was a direct consequence of the significant reduction in the value of the U.S. dollar compared to the second quarter.

We generated an unrealized foreign exchange gain in the quarter from the revaluation of our U.S. denominated debt held within Gildan's legal entity, Gildan's Canadian legal entity. This gain was fully offset on a pre-tax basis, by exchange losses on the conversion of U.S. working capital held by foreign subsidiaries. However, as a result of above, a higher proportion of our overall income taxes were reflected at higher Canadian tax rates in the quarter. We expect our tax rates notice third quarter to be in the order of 7 to 8% provided thats U.S. dollar remains relatively stable.

We have reconfirmed in our press release that we continue to be comfortable with our full year forecast of 2.70 to 2.80 EPS. After reflecting the second quarter charge for the closure of the Montreal Sewing plant. We are guiding towards the higher end of this range on the basis of the U.S. dollar remains close to its present level. Our full year EPS guidance in U.S. dollars is 1.87 to 1.93, up 29 to 33% from last year.

We are currently evaluating the option of adopting the U.S. dollar as both our functional and reporting currency with the effect of the beginning of the 2004 fiscal year since the majority of our sales and costs, as well as our fixed asset expenditures are denominated in U.S. dollars.

If the U.S. dollar remains at its current level, we expect the full-year impact of the lower U.S. dollar on our Canadian dollar EPS including the temporary timing impact to be close to 60 cents per share in fiscal 2003. The fact that we have been able to maintain our full year guidance in spite of the currency impact is because this impact is assumed to be fully offset by manufacturing efficiencies and volume sales well in excess of our original target for full year.

Glenn will cover the status of the ramp up of Rio Nance.

We spent overall 13.6 million dollars in capital expenditures in the third quarter for 46.1 million dollars year-to-date. And we are still anticipating Cap Ex for the full year to be approximately 60 million dollars. Our Cap Ex will be fully financed out of our internally generated cash flow and we anticipate full year free cash flow after capital expenditures to be in the range of 20 million dollars.

We ended our third quarter with surplus cash reserves 68.5 million dollars, up from 33.6 million at the end of the second quarter, due to our free cash flow generated during the third quarter. We had no bank debt outstanding at the quarter end and our net debt to total capitalization ratio was 0.9 to 1. With our further cash flow forecast to be generated in the fourth quarter, we expect to end the year in a very strong capital position and with excellent liquidity to start to repay our U.S. notes in June of 2004.

As we said previously, we expect to be in a position by our December conference call to discuss long-term strategic business plan and resulting capital requirements. From a financing point of view, we believe that any cash requirements for future organic growth to support our long-term plans will continue to be satisfied by our internally generated free cash flow. In conjunction with our strategic plan update in December, we expect to be able to communicate our plan for the utilization of our surplus cash in order to communicate additional shareholder value.

Now Glenn will review market conditions and update you in our manufacturing plans and performance.

First, we'll review the market shares one more time and then we'll take you through some of the sales and marketing update and run you through the manufacturing.

Our market share for the market -- market in the month of June ending June quarter in T-shirt was up 11.6% for the quarter. 100% cotton category was up 13.3% and the 50/50 T-shirt category was down 1.6%. Gildan share within the overall market was 28% for the quarter up 10.4%. Our 100% cotton market share was 33.6% up 16.4% from last year. Our 50/50 share was 12.5% down 2% from last year. In the fleece category, the overall market was down 1.8% for the quarter; Gildan share was 12.1% up 7.3% for the quarter. In sports shirt category, the market was down again this quarter by 13 .1%. Gildan's market share in this category was 19.5%, up 22.2% for the quarter. And again we are the only company in this category to have any type of increase whatsoever. Once again, within the quarter.

Pricing remains very aggressive throughout the quarter. Pricing in our overall product mix was down roughly 7% compared to last year. However, in the basic T-shirts category, our prices were down in excess of 12%.

Demand remains very strong for the quarter. Unit sales were up 14% over last year. We believe orders unable to be filled in the quarter were approximately 750 to 1 million dozens.

Inventories -- T-shirt inventories at the end of June at the distributer for level were 57 days, up from 53 days last year. We believe that inventory levels remain in line with supply and demand balanced at the end of June.

Sales in Canada were weaker than anticipated due to the S.A.R.S. and the impact it had on the tourism market. However, we are continuing our growth in Europe which more than offset the lost dozens in Canada. In Europe, our new distribution center in the UK is fully functional and impacting our sales. We are on track to achieve a 40%-plus increase in 2003.

We continue to look for new opportunities to leverage our brand and, in 2004, we will begin selling products in Australia. Our sales staff and warehousing facilities are in place to launch our product line in 2004.

Also in 2004, we are continuing to leverage our brand into new product expansion. We are introducing a new 7 1/2 ounce fleece sweatshirt product line will allow us to be a full line supplier to the fleece channel and help us to penetrate market share more aggressively in 2004.

In the T-shirt and sweatshirt category, we continue to increase the amount of colors and sizes we offer and we are introducing three new styles for 2004. We continue to follow our product strategy which is the 80-20 roll which we will market 20% of those SKUs that generate 80% of the sales and add to every category in which we sell in.

We have locked in the majority of our cotton for 2004 at levels in which we are comfortable with in the context of today's market conditions. We feel that the higher cotton prices are likely to result in higher Activewear selling prices in 2004.

Rio Nance continues to build up its capacity to 60 million dozens annually by October 2003. This is based on the current planned investment level. However, we are currently reviewing further expansion plans at Rio Nance that will be presented as part of our business plan update in December.

All our spending integration and modernization plants are complete and running at 100% capacity. Our sewing capacity continues to grow with the build-up of our textiles as we aggressively pursue our expansion of our in-house sewing.

With that, I would like to pass the mike over to Greg for closing. Thank you.

In closing, we are pleased with our results of this past quarter and we continue to be comfortable with our previously announced EPS range for the full fiscal 2003 up 2.70 to 2.80 a share with the expectation that we will be at the higher end of the range if the value of the U.S. dollar remains at its current level. We continue to be excited about the progress and potential of our Rio Nance integrated textile facility will provide additional production capacity as well as allow us to significantly drive down our cost structure and position us to achieve our sales and EPS growth objectives in 2004. And lastly, not only do we believe that the manufacturing and marketing initiatives that we have undertaken have positioned us well against our current competitors, but we believe that we have positioned Gildan to be the most competitive producer on a global basis, as compared to any current or future competition for the markets that we serve for years to come.

Now, we would like to take any questions there may be.

Thank you, gentlemen. The question and answer session will be conducted electronically. Any participant wishing to ask a question, please press star 1 on your touch tone telephone. We'll take the questions in the order you call in and as many as time permits. We'll pause for just a moment. Our first question will come from Dennis Rosenberg of Credit Suisse First Boston.

Good morning and congratulations on another good quarter. Can you tell us your thoughts as to why the T-shirt market has been so strong?

Well, basically looking at it, I think that the market has come back off of its lows of 2001, first of all, where we saw a little bit of a decrease in the consumption of T-shirts. Secondly, we think that the pricing in the market and the cost structure of the industry today has changed somewhat and is driving volume in the market. In other words, T-shirt are priced today that are so promotional that we are creating a new end uses for the product as a promotional vehicle in business and other opportunities. Thirdly, we think that we are leveraging what we think is the marketplace where, right now, the end user, which is the screen printer can buy a product aggressively and go to people that are marketing T-shirts and supply them a finished product, both T-shirts printed and packed for less money than they can go source it for themselves before and that's creating additional demands, we think, in North America.

You said that you thought prices might firm next year given the higher cotton cost. Will that reverse some of these benefits and given the fact that the T-shirt market pricing has been down for -- it seems to me -- seven or eight years now, do you think that the industry would be disciplined enough to be able to raise prices with higher cotton costs?

Well, we think that the pricing in the market is still going to be aggressive going forward. The price of cotton basically is anywhere between 98 cents to $1.10 a dozen depending on how people look at it will be the actual increase in raw material, for example, for next year. So if you take the base where shirts are being sold today, first of all, they are being sold more aggressively in the United States than probably anywhere else in the world. Our wholesaling are wholesaling white T-shirt for about 75-85 cents. If you go anywhere else in the world and you buy a T-shirt, you are not going to buy it for less than $12 to 14 per dozen. We think pricing still remains aggressive but it will be aggressive based upon the cost structure that will be incurred by everybody and the bar will be raised a little bit.

And an update on the cost saving from Rio Nance and the modernization, what do you think the savings are turning out to be this year and how much additional savings next year and what's the impact of the higher proportion of colors?

Well, for Rio Nance, once they are fully ramped up, we are looking at cost savings from lower manufacturing conversion cost and lower transportation costs totaling notice order of $3 a dozen p so that will be close to 50 million dollars which we would expect to realize in full next year, maybe 20 million of that in the current fiscal year. And then as far as the yarn spinning, our modernization and upgrading of the two yarn spinning plants is complete and we are realizing the full benefits of these two investments now which total about 25 million dollars on a running rate basis.

And in actual dollars, what is the realization this year?

Of the 25?

Yes.

I would say around 20.

Okay. So it's mostly realized this year?

Yes.

And the impact of color?

The impact of color basically just a shift of our overall business. So basically the impact on our colors, we are selling more colors today than we used to sell before, which is I am packing our average selling price and helping our average selling price remain higher but part of the whole shift is basically a function of how we manufacture and where we are actually producing what styles and what products. So basically the impact there will be uniform amongst all of our manufacturing facilities so it's really hard to evaluate.

Thank you.

Moving on, we'll next hear from Claude Proulx of Nesbitt Burns.

Good morning. First question is, you know that 35 cents impact, if I'm calculating it right, there is about 10 cents, I guess, that come from lower sales and the rest is from the going through your inventories?

I would say about 20 cents is inventory timing component of that and about 15 is the straight change in the value of the U.S. currency.

Okay. The second question, I would like, if you could talk a little bit about the impact on your business of the consolidation going on among distributors in the U.S..

Well, right now, I mean the industry has been consolidating over the last three or four years. So this is not really new to our industry. I guess like every other industry, there is consolidation. However, our position is that we position ourselves really to be a low-cost producer within our industry and providing an equal and mutually beneficial product and service to our customers. So we feel that we are in a position, as far as the consolidation, if it continues and we are not sure exactly what will transpire as we see fit, but between our brand and cost position within the marketplace and what we have to offer to our customer, we think that we are very important aspect and mutually important to them as we are to us -- as they are to us.

And the last question, I mean, the golf shirt category keeps shrinking. I mean I know that you have introduced new products and your goal is to bring a more affordable product. Is it showing sign that it's going to -- or is it slowing down, the shrinking of this product category?

Where the category is being hurt is really still at the high end level, the very expensive fancy type golf shirts that we are selling for 10, 12, $13 apiece. Our category is obviously continuing to grow because our share is growing at levels of 25% a quarter. Right now, we think before the end of fiscal year, we will be the number 1 supplier to channel. So we know our theory is right and we are creating a value product that we think people can afford. And I think not only are we creating a value product, but we are actually doing is creating an opportunity. The market was built on the specialty side where people went to corporations and sold products at very expensive prices, you know, like, for example, if you had a corporate golf shirt type thing with your logo put on it. Today, we are trying to focus our products on basically the workwear market as well as the promotional golf shirts where if you have an event, you give a golf shirt away instead of just a T-shirt. We are looking to create new opportunities within the marketplace and that's the reason why we think our actual sales are growing in the category.

And do you think that it's going to stop the shrinking of this sector? I mean, is there a trend in like maybe less casual wear at work and that could explain why the golf shirt category is shrinking, for instance?

If you look at the golf shirt category in retail, it is growing. Every day you walk into a retail store today is selling more and more polo shirts. And so the answer is, I think golf shirts in general are growing. Our objective is to make sure that we bring the products that are priced properly to the marketplace and the answer to your question is I think that the category can continue to grow again but the function of how we market the products and bring the products to market sells. I believe that, over time, we will see the market stop contracting and again continue to grow. I think going into next year when the economy turns around, that's a big part of it as corporations, you know, this is probably the first thing that they look to cut out of their budget. As we see the economy turn and as well as our whole strategy, we think there is definitely growth opportunity.

If you would like to ask your question, please press star 1 to be placed in the queue. We'll here from Andrea McReynolds of Sprott Securities.

Just a quick question for Lawrence. On the SG&A line, I know that there was the year over year differential resulting from the accrual of your performance-based incentive. But it was down even on a sequential basis. Looking back to the second quarter, I think you had guided to sort of a higher number for the rest of this year and even for next year. Was there anything else that impacted that and is the trend going to be lower than you previously expected going forward?

The change from the second quarter to the third quarter was all timing. Not all the timing is expenses. Not the timing of the performance-based incentive program which was accrued more quickly this year and, therefore, impacted more in the second quarter compared with the second quarter of last year, also the timing of trade shows and professional fees that we incurred. So that was the way the timing worked out. I would see the fourth quarter SG&A being marginally higher than the third quarter.

Okay, that's it.

The next question comes from Ron Schwartz of CIBC World Markets.

Just a couple of quick questions on the - I guess - original market share targets. On the golf shirts, it looks like you had already reached our 15 to 20% targets for share where you wanted to be. Are those -- you know, do you think that those market shares could eventually move up to where you are in terms of 100% cotton T's?

Our objective is definitely to move up to that level for sure, yes.

And Lawrence, on the Rio Nance gross margin improvements, if you look at things over the past couple of quarters, you know, it's moved from, I guess at the end of fiscal '02 from a positive 250 basis points all the way up to 850 basis points here. Roughly doing the math, when the total amount of analyzed volumes really start to kick in, is this going to be a full 10-plus percentage point type of operations in terms of savings?

Sure. Although what you have to remember is that, typically, we have invested in capital expenditures and used the cost reductions that resulted from that to flow through and to lower prices. So as you well understand, you know, that does not correspondingly impact the bottom line. We use that more to drive the volume increases.

I know those offset but will you continue to use those continued efficiencies to drive, whether it be pricing or what not?

That's right. We are looking at 10% beginning to end by the time the project is complete.

I missed Glenn's comment as to where Rio Nance was going to annualize out in terms of dozens by fiscal year end?

It will be around 16 million dozens and I said that we are doing an evaluation process of looking to add additional capacity or make additional expansion that will bring to the market in December in our business update.

Where will you be in Canada, Glenn? Like if you add Rio Nance and plus the Canadian operation in total kind of dozen capacity wide.

Right now the run rate at the beginning of August is around 27 million dozen. We are building that capacity to 28 million dozens by September. Basically, our objective is that we will build it from that point on into next year probably in the neighborhoods of from 28 to around 33 1/2 to - sorry - to 32 million dozen. So that will be ultimately our capacity as we build and finalize all of our plans through 2004.

And that's, again, pre-strategic outline in December?

Yes.

Okay, great, thank you.

And moving on, we'll next hear from Martin Goulet of National Bank Financial.

I noticed that the 50-50 T-shirt category is having another difficult quarter. Is there any hope there or is that pretty much peaked following the introductions that you had there?

Well, first of all, the whole category is down because of the pressure on cotton T-shirt being priced so aggressively in the market. Basically, what's happened is that, you know, our share has not really grown there but we really have not made a huge effort in terms of actually pricing the product aggressively in the marketplace. And the reason being is that, with the price of white T-shirts being so competitive, we feel that it wasn't required and we are sort of in a position where we are letting this thing build on its own.

The other thing is that the buyer who buys a 50-50 T-shirt is not the same type of buyer who buys 100% cotton. The 100% cotton buyer is a much bigger consumer of products in terms of volume which goes to retail, for example. The 50-50 category is more of what we call a mom and pop type scenario where it's onesies and twosies. It is a different type of market conditions that it takes to develop the market.

Under the circumstances, the whole market going down, you know, we sort of are happy and feel pretty good where we are today. However, in the same tone, we definitely think this is the area of opportunity for us as we go forward. We definitely are not satisfied with our 12% share in the market and we will definitely continue to grow this as priority for the company in the years to come. We feel more in the 20% range is the target for where we need to be in this category.

Regarding your introduction of products into Australia, what type of sales or volume expectations do you realistically have initially in the 12 to 20 months hence?

We think that for the first year, very conservatively, anywhere between 250-400,000 dozen will be our first year scenario.

Lawrence, regarding the receivables year over year, they are down. I understand part of it is probably due to the currency but in terms of DSOs, do you stand at comfortable levels now?

We continually to bring down DSO. As you saw, we were at 43 days in this quarter which was down from, I believe, 46 days year ago. So we are still managing to -- I mean obviously, there is not significant further potential but we have marginally further improved our DSOs.

And regarding -- there have been more cash discountings or have your policies remained intact?

What do you mean by cash discounting?

Like paying on the spot rather than taking advantage of payments?

No, that's not a factor at all.

Okay. That's all for me, thank you.

Our next question will come from Patricia Baker of Merrill Lynch.

Good morning, everyone. Just a quick question on the products. You indicated on the discussion of T-shirt and sweatshirt side that you will be introducing three new styles in 2004. Can you tell us anything about what you are introducing and where you think -- what you are actually going after in the marketplace there?

Just repeat the last part of your question.

You know, which segment of the market are you really trying to grow share with the new styles?

Oh, okay. First of all, what we have done is we have introduced in both our golf shirt and T-shirt categories more colors in each one of the styles that we are offering, typically in the golf shirts. We are offering more than 25 collars in the basic P-K golf shirts. We have introduced bigger sizes. Is there a big movement in the marketplace to go to 4-5X in certain categories. Now we are making small to 5x in all the major categories. As far as the three new styles are concerned, we introduced a shirt called a shooter shirt, which is basically a sleeveless T-shirt, and as well we introduced a long sleeve and a youth shirt in what we call our 5.5 ounce category of 100% cotton. We typically only have one cotton long sleeve and one cotton youth shirt. Now, we have two in that category which is our biggest selling category. That's basically what we have done. The balance of your question was -- did I answer your question?

That pretty much answered my question, yes. Thank you very much. Thanks.

As a final reminder, if you would like to answer a question or make a comment, please press star 1. The last question we have at this point comes from John McLevine of Salomon Partners.

I want to follow up on some of Ron's questions there on capacity. By year end, we should have 28 million dozen capacity but sales will be in sort of like the 22 and a half range?

This year, we should end up in the 23 range.

23. Okay.

That capacity will be built for next year.

That capacity is the actual production for this year was roughly around 24.3 million dozens actually produced in the fiscal year. If you take the ramp up.

Okay. And then the rest is inventory.

A million 3 went into inventory. At the end of last year, inventories were very low.

The plan is to go to 32 million capacity by the end of '04?

Yes.

What will that cost, the extra [40] million?

We have given a total capital expenditure indication for Rio Nance to ramp it up to full capacity of 70 million, of which 60 has been spent so far.

Okay. So going to 32 is already included in the numbers and also the sustaining Cap Ex?

There is a little bit to flow into 2004.

What does the budget for '04 look like at this point?

We have said up now in the order of 50 million but that will be re-evaluated as we complete our business plan update and, you know, we will assess, like Glenn said earlier, further possible expansion of Rio Nance beyond that or other capacity expansion in support of our plan objective.

Thank you very much.

With no further questions, I will turn it back over to you for any closing comment or remarks.

We want to thank everybody for attending this conference call. Thank you very much.

That will conclude today's conference. We thank you for your participation.