Gildan Activewear Inc (GIL) 2003 Q4 法說會逐字稿

Good day everyone and welcome to the Gildan Activewear 2003 year end 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 Chamandy; President and Chief Operating Officer, Mr. Glenn Chamandy; Executive Vice President and Chief Financial Officer, Mr. Laurence Sellyn.

Before turning the call 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 statements involve known and unknown risks, uncertainties and other factors which may call 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 Authority for a discussion of the various factors that may affect the Company's future results. I would now like to turn the call over to Mr. Greg Chamandy.

Thank you. Good morning everyone and welcome to our fourth quarter and year end conference call. We are pleased to report net earnings of 19.8 million, or 60 cents per dilated share, for the quarter which reflects the top end of our most recent guidance. For the full year we achieved record earnings which were 77.3 million, or $2.60 per diluted share, which is up respectively 16.2 percent and 15 percent from 66.5 million and 2.26 per diluted share.

Despite the dramatic exchange impact due to the rapid appreciation of the Canadian dollar versus the U.S. dollar, the Company still achieved annual EPS growth of 15 percent. It should be noted that were it not for the effect of the exchange rate, the Company's annual EPS growth would have been in excess of 40 percent.

In order to mitigate the effect of changes in the U.S. dollar and to better reflect the reality of our business, the Company has made a decision to make the U.S. dollar its functional currency beginning with its fiscal 2004 year. As such, going forward not only will the Company adopt the U.S. dollar as its functional currency, but all of its financial reporting will be done in U.S. dollars.

On that note, the Company is projecting over 25 percent increase in EPS growth in U.S. dollars before the accounting changes resulting from the transition to U.S. functional currency. The projected EPS range is 2.25 to 2.30 per share. Including the impact of these accounting changes our planned growth in U.S. dollar EPS will be 17.5 to 20 percent, or 2.10 to 2.15 per share. Laurence will expand on these accounting changes during his presentation.

And last but not least, we are announcing today our marketing and manufacturing plans which will enable the Company to continue to build and focus on its core competencies and to deliver its financial performance objective of achieving a minimum of 15 percent EPS growth per annum for the next five-year period.

Based on extensive analysis of the imprinted sportswear market we anticipate that the projected unit growth for our existing products in our existing geographic markets and market channels will result in unit volume growth over the next five years to annual sales over 35 million dozen, which represents an increase of over 50 percent of fiscal 2003.

During the next five years our main focus will be to maximize our market penetration and overall cost structure in the wholesale imprinted sportswear market. Other incremental growth opportunities that we envision over the next five years include entry and penetration of new geographic markets for the imprinted sportswear, such as Australia and Japan, as well as the further development of our private label programs for imprinted sportswear brands, which we have already begun on an opportunistic basis.

To support our growth and cost reduction objectives over the next five years we have acquired an 18 million square foot site in the Dominican Republic where we plan to create our own free zone and to build a state-of-the-art vertically integrated textile production facility.

The land site we chose to practice was decided upon after extensive research, as we wanted to secure a location where we could not only build the state-of-the-art facility which we desired, but which could also provide us with enough wetlands whereby we could duplicate the cost effective and environmentally friendly eco-top (ph) water discharge system which we developed in Rio Nance.

As well, we wanted to secure attractive land which was large enough to support an additional textile producing facility in the future. This new facility will be built on the template of our very successful Rio Nance facility, however because of the experience and skill sets which we developed as a result of the Rio Nance experience, we believe that we can build this factory and ramp up its capacity faster than we did in Rio Nance. As such, we plan to complete construction of the Dominican Republic facility in the next twelve months and to ramp up to full capacity in 24 to 30 months.

All of the fabric manufactured in this facility will be sewn in the Dominican Republic and in Haiti, where we all already operate selling fronts and have established contractors.

In addition, during fiscal 2004 we plan to further expand our Honduras manufacturing hub. We will be increasing the production capacity and broaden the product mix capabilities of our Rio Nance facility, as well as start a new selling plant in Nicaragua to be managed as part of the Honduras hub. The total capital cost of the Dominican Republic and Honduras projects will be 16 million and $15 million respectively.

We believe that Gildan through past initiatives, as well as those amounts today, will be extremely well positioned to deliver on its commitment to its investors of delivering a minimum of 15 percent annual EPS growth for the next five years by means of maximizing its position in the wholesale channel of distribution, and by continuously driving down its costs.

However, to insure that Gildan's momentum and growth continue beyond the next five years, we have made the decision to plant the seeds for the Company's next generation of sales and earnings growth. Specifically we believe that the extension of the Gildan brand into the retail marketplace will represent the most attractive long-term strategy for us to leverage our existing manufacturing strength and core competencies and to insure our continued long-term growth and strategic development, and ultimately to create the maximum value for our shareholders.

Over the next five years we plan to manage our initial entry into the retail marketplace in a conservative and gradual manner, very much in the same vein as we did only first began selling Gildan products in the United States imprinted sportswear channel of distribution in 1992. We plan to sell the same products in the retail channel as we do in the wholesale channel so that we will be able to further leverage all of the Company's assets and core competencies. We plan to refine our detailed marketing and manufacturing plans for this program during fiscal 2004, and we plan to begin to penetrate the retail activewear market in fiscal 2005.

Although we do not need any incremental business from the retail marketplace to achieve our five-year plan, we believe that during the course of the next five years we can conservatively build a foundation in the retail marketplace which will provide a base upon which Gildan can build upon for years to come.

And now I would like to pass the mike over to Glenn, who will review the current market conditions and provide some additional insight into the details of our marketing and manufacturing plans which we announced today.

Thank you, Greg. I will be covering a market overview, a general overview of the five-year plan, the next growth opportunity which is entering the retail activewear market, a manufacturing update, and Laurence will be covering the market share in his presentation.

The wholesale channel remained very aggressive through the fourth quarter. Prices were down approximately 8 percent, excluding the exchange impact. Prices remained just as competitive in the first quarter of this year, however a price increase will go into effect on January 1st, 2004 of approximately 5 percent across all product categories. This will offset the higher costs of cotton going forward. Inventories remained in line with market growth, up 12 percent over last year. Our share of inventory is roughly 31 percent.

The general overview of the five-year plan. The Company has developed a five-year marketing and manufacturing plan that will leverage its existing product in its existing channel. This will result in unit growth over the next five years from 22.5 million dozen in 2003 to over 35 million dozens in 2008, an increase of approximately 50 percent.

This increase in unit growth, combined with a $100 million cost reduction program, will allow us to achieve our objectives of 50 percent EPS growth each year for the next five years. The capital investment in these fixed assets will be approximately 275 million U.S. over the five-year period.

Our future sales growth assumptions, we projected industry growth of approximately 3 percent. The average growth rate for the last five years has been running more in the 7 percent range. The potential growth opportunities are as follows, the 2003 base year, which is roughly 22.5 million dozens, we will increase our T-shirts production by roughly 6 million dozens -- or sales by 6 million dozens. We will increase our sport shirts and sweatshirt sales by 1 million dozens. We will increase our private label and screen print direct sales by 2.5 million dozens. And we will increase our Europe, Australia and Japan business by roughly 3 million dozens over the period, which will total approximately 35 million dozens with all of these initiatives.

Our T-shirts share will increase from roughly its current base of 30 percent to 36 percent. Our sports shirt share will increase from 20 to 30 percent, and our fleece share wil increase from 15 to 27 percent. These share targets remain conservative.

The next growth opportunity in which we will be entering the retail activewear market. Our plans to enter the retail activewear market over the next five years will be gradual and conservative, similar to our entry into the wholesale market. It took five years to develop an annual volume of 3 million dozens in the wholesale market. Once we have penetrated the market and developed a distribution, our sales went from 3 million to 6 million, 6 million to 10 million, and 10 million to 14 million, etc., etc.

This plan is to build a foundation for the next stage of our growth. The retail activewear market is in excess of $34 billion, not including Canada and Europe, which is five times larger than our current wholesale market. We will leverage our existing products currently being sold in the wholesale channel, and we will leverage the more than 400 million garments being sold each year bearing the Gildan logo.

A separate sales, marketing and customer service department will be located in Barbados and operate under the same tax structure as our wholesale operations. All products will be distributed through a third party logistics company, which has systems, flexibility and experience supplying retailers. This will also allow us to reduce and control our costs.

Our customer focus will be mainly mass merchandisers and price clubs in all of our existing markets. Our pricing strategy will be to leverage our low-cost manufacturing similar to the wholesale channel. The current price differences between wholesale and retail are significant. The retail price structure is at least 40 to 50 percent higher based on our initial buyer interviews.

Our advertising plans will be a combination of co-op advertising directly with the retailer, trade promotion, billboard and bus advertising in selective markets. The current market research program will validate all our marketing assumptions using focus groups and outside consultants. We will also validate our assumptions with retail management. The start up cost to develop and launch retail for fall 2005 will cost approximately 800,000 in 2004, which is factored into our current guidance.

On manufacturing, our further expansion into Rio Nance textile facility in Honduras will increase capacity by approximately 15 percent and broaden our color mix. This increased capacity will be sewn in a new sewing plant located in the Nicaragua, which will be managed by our Honduras regional hub.

The new Dominican Republic facility will be constructed in the next twelve months. Production will start in 2005, and the plant will be ramped up to full capacity by September 2006. The capacity of this facility will be comparable to Rio Nance. The fabric manufactured in the Dominican Republic will be sewn both in Haiti and in the Dominican Republic through integrated sewing plants and existing contractors.

The total capital cost of the Dominican Republic facility is estimated to be $60 million to be spent between fiscal 2004 and 2005. The cost structure at the Dominican Republic hub will be approximately 8 percent more competitive than that of Honduras. The cost reductions are due to lower cost of labor and lower cost of utilities.

Our Canadian textile capacity will be reduced to focus on low volume and more specialized products. The increase of new capacity will help rationalize and streamline our overall capacity, which will continue to reduce our overall cost structure. The overall production capacity will be in excess of 35 million dozens. This capacity will support our future growth opportunities and help -- or will rationalize our existing cost structure.

And with that, I will pass the mike over to Laurence for a review of the financials.

Good morning. I will recap our fourth quarter and full year results, then our transition to U.S. functional currency and how this flows into our financial projections for fiscal 2004, and finally review financial and financing considerations relating to our update of our business plan.

Starting with the fourth quarter, EPS in Canadian dollars was 66 cents per share, the same as the fourth quarter of last year, and at the top end of our most recent guidance. The fourth quarter reflects a 10.1 percent increase in unit sales and higher gross margins, as well as lower interest expense in the reduction of the Company's effective tax rate.

These positive factors were offset by lower selling prices and the impact of the weaker U.S. dollar, combined with higher depreciation expense. The negative impact of the lower U.S. dollar in our EPS for the quarter is estimated at approximately 15 cents per share. Our EPS in U.S. dollars increased by 11.6 percent to 48 cents per share, from 43 cents per share in the fourth quarter of last year.

Sales for the quarter were 150.8 million, down 5.7 percent from $159.9 in the fourth quarter of fiscal 2002. The lower sales reflected lower selling prices and the impact of the lower U.S. dollar, largely offset by the higher unit sales. The increase in unit sales reflect a 10.4 percent growth in overall industry sales of T-shirts in the U.S. distributor channel in the quarter, and an 11.8 percent increase in the fleece market, combined with continuing market share penetration in all categories.

As we continued to ramp up our new capacity at the Rio Nance facility, we were able to further increase our leading market share in the T-shirt category to 29.6 percent versus 28 percent a year ago, as well as support the overall growth in the market. We also improved our T-shirt product mix to reflect a higher proportion of colors.

We continued to achieve strong market share penetration in the sport shirt category, where our share increased to 20.7 percent versus 15 percent a year ago. And we achieved significant penetration on the fleece segment, where our share increased to 16.9 percent compared with 11.7 percent a year ago.

Gross margins in the fourth quarter were 30.4 percent compared with 28.1 percent in the fourth quarter last year. The impact of favorable manufacturing efficiencies primarily due to the impact of Rio Nance, together with more favorable product mix and more lower raw material costs, was largely offset by lower pricing.

EPS for the full year was $2.60 per share in Canadian dollars, up 15 percent from 2002 in spite of an estimated 65 cent per share reduction in earnings due to be impact of the decline in the U.S. dollar. In U.S. dollars, EPS for fiscal 2003 was 1.79 per share, up 23.4 percent from fiscal 2002.

The Company has determined that it will adopt the U.S. dollar as both its financial reporting, as well as its functional currency, with affect from the beginning of its 2004 fiscal year. This decision reflects the high proportion of the Company's sales, costs, capital expenditures and long-term debt, which were denominated in U.S. dollars. The change in functional currency is expected to minimize the impact of fluctuations in foreign exchange rates on the Company's earnings.

As we have indicated in our earnings release, historical financial information in U.S. dollars has been provided in the Investor Relations section of the Company's web site. We will continue to prepare our financial statements in accordance with Canadian GAAP.

As a result of adopting the U.S. dollar as our functional currency, Canadian and U.S. GAAP requires that all opening assets and liabilities are translated into U.S. dollars at the exchange rate prevailing at the time of giving effect to the change in functional currency. Accordingly, a onetime currency gain of US$23 million resulting from an upward re-evaluation of inventories and fixed assets has been reflected directly in the balance sheet as part of shareholders' equity.

The increase in opening assets values will have a corresponding offsetting negative impact on future earnings, as opening inventories are consumed and fixed assets are depreciated. The upward re-evaluation of opening inventories will result in lower gross margins in the first half of fiscal 2004 only, as opening inventories are consumed in cost of sales with an adverse effect on EPS in the first and second fiscal quarters of U.S. 6 cents and U.S. 4 cents respectively. In fiscal 2004, depreciation will also be increased by US$1.8 million after-tax, or 6 cents per share.

The combined impact of these factors will be to reduce EPS in fiscal 2004 by approximately U.S. 16 cents per share. The Company is projecting an EPS range of U.S. 2.25 to 2.30 for fiscal 2004, up 25.7 percent to 28.5 percent from fiscal 2003, before taking account of the estimated U.S. 16 cent per share impact as a result of revaluing inventories and fixed assets.

After reflecting the accounting changes resulting from the transition to U.S. functional currency, the Company expects to report EPS for fiscal 2004 of U.S. 2.10 to 2.15 per share, up 17.3 to 20.1 percent from fiscal 2003. These projections assume a 15 percent increase in unit sales volumes, as well as a slight increase in selling prices in fiscal 2004 over fiscal 2003, that Glenn mentioned, to reflect partial pass-through of significantly higher cotton costs.

Turning to cash flow, we generated 31.5 million Canadian of free cash flow for the full 2003 fiscal year after taking account of capital expenditures of $58.6 million and 1.1 million dozens of inventory rebuild. The Company ended the fiscal year with surplus cash reserves of $92.9 million and essentially zero net debt, while the book value of shareholders' equity increased to $353.8 million Canadian.

Glenn has updated you on our long-term marketing manufacturing plans. Based on these plans, we have developed detailed assumptions and financial projections for the next five years which support our objective to achieve minimum 15 percent annual growth in EPS. Our planned gradual entry into retail has no material impact on our projections during this time frame, as the main drivers of our EPS growth are expected to be further unit growth in our existing products and in our existing markets, together with the significant cost reduction from our planned capital expenditures and transitioning to a higher proportion of off shore manufacturing.

We are projecting capital expenditures of approximately US$275 million over the next five years to support our planned sales growth and cost reduction objectives, with US$60 million being budgeted in fiscal 2004. The primary uses of capital in fiscal 2004 will be for the Dominican Republic IET (ph) initiative and the further expansion of the Honduras hub, including the sewing plant in Nicaragua.

Over the five-year period, we plan to spend approximately US$135 million in textiles over U.S. 50 million on yarn spinning, and over U.S. 30 million on in-house sewing, with the balance being comprised of distribution, information technology and maintenance capital. As Glenn said, we are forecasting at least US$100 million of further annual cost reductions from this new phase of our manufacturing plan to be phased in over the five-year period.

Approximately $60 million of these savings are expected to come from our fabric manufacturing investments, approximately 20 million from sewing and transportation, and $20 million from yarn spinning. We expect to fund our capital expenditure program for the five-year plan full out of our internally generated cash flow.

We also plan to utilize a portion of our surplus cash reserves to repay our U.S. dollar long-term notes, which are high-cost in today's interest rate environment. These notes mature in four equal annual installments starting in June of 2004.

Apart from these uses of funds, we have decided to conserve and further build up our cash and our unused debt capacity to maximize our financing flexibility as we continue to pursue our growth strategy and insure that we're in a position to capitalize the many features strategic opportunities that may arise. For this reason we have decided not to utilize our cash flow to introduce a dividend at this time, a decision we will review with our Board on an annual basis.

Now we would like to invite questions from participants on the call. Operator?

(Operator Instructions). Dennis Rosenberg, Credit Suisse First Boston.

Actually it is Ed Kelly. How are you? First, I would like to say congratulations on a good quarter. I have a couple of questions both relating to your announcement on capacity expansion.

First one, what gives you the confidence that you will be able to grow volume in your existing channels of distribution by 50 percent over the next five years? And sort of within that context, could you discuss your view on the competitive landscape and where you expect market share gains to come from?

I will into that question. Glenn speaking. First of all if you look at our assumptions over the next five years, the increase in the overall unit growth is spread out in many different initiatives. I mean, from the expansion of our Europe, Australia and Japanese initiative, which is basically 3 million dozens, which we said we could increase our volume there by, which is a very conservative estimate in all of those three markets.

The screen print and private label area right now, we have only estimated 2.5 million dozens of additional growth, which is roughly about $50 million, which is insignificant to the $2.5 billion of potential private label business in the wholesale market alone.

And the penetration of each of the other categories in which we're currently selling to, we have been consistently able to raise our growth rate in T-shirts by in excess of 2 percent a year. And we conservatively have estimated only over 1, 1.5 percent increase in continued growth rate. And in each one of the other categories the growth rate that we're currently running at is much more aggressive than our target shares we have applied in our forecast of 35 million dozen.

Now typically, two things will happen, if you either look at the overall market growth itself, which we're projecting 3 million, 3 percent over the period of time, a chunk of the actual T-shirt growth is coming from that market increase. And then there will be -- some of it will come from some of the existing players that are currently selling in that market.

We also going to be continuing to look at leveraging our product offering into new styles that will generate some of this increased volume as well.

Okay. Could you elaborate on your plans to into the retail market? What categories would you be targeting first? What kind of long term timing? How do you go about taking a conservative approach in this market given the size of the retailers, and what are the risks?

Well we have tried to eliminate the risks completely by reducing the amount of investment we're actually looking at spending going into this retail initiative. And the main part of that risk function is by using a third party logistics company to outsource all of our distribution functions, which will reduce costs and also control our costs.

Our objective here is really to look at leveraging the existing products in which we currently are selling. You understand that every shirt that we actually sell today gets printed, and a lot of these get sold to retail. Roughly 40 percent of these products actually end up in retail. So at the end of the day, the type of products in which we sell, which is basic T-shirts, fleece and the overall product line of it -- pocket T's, shooter shirts.

I mean, all of these different styles in which we sell to the wholesale market are actually consistent with the product lines that every one of these major retailers offer. The difference being is that all of the products that we actually sell through the wholesale channel end up being screen printed at retail. And the products we're looking to sell directly to retail will be blank garments for sale.

Does that answer your question?

Yes. And last question, could you just elaborate a little bit more on what your strategy is with private label? What you're doing now and where do you see that going?

Our private label strategy is -- first of all, we're gone selectively after users that we feel that we can generate a long-term relationship with, and really look at building a foundation where those brands that actually sell product to retail -- and you understand the private label strategy is strictly a wholesale strategy. In other words, it is the exact same product through the exact same channel that we're currently selling into today. And those companies that have branded products that actually reprint product and actually ship it retail, that is really going to be our focus, similar to what we're currently doing now like Disney. We're producing a lot of the products that actually going to the Disney stores and theme parks. Then they get rescreenprinted and then shipped to the end user.

Claude Proulx, BMO Nesbitt Burns.

Thank you good morning. First question is still on that same subject of the retail expansion. Who are the big players in that market? Are they the same players that are in your existing market, and you will have to take market share away from them?

In certain cases there are the same players, but you understand the retail market is very large and fragmented. It is over $34 billion in actual sales in the overall market just in the United States. So it is very large, and a little bit not similar to the wholesale market where it is consolidated among three or four suppliers. So it is a whole universe of opportunity for us.

But I assume that you're looking at going after what I would suspect is the low end of the market. Who are the big players in the low end of the market?

The market consistent of -- first of all, the low end -- there is not really a low end to it. There is the mass merchandisers, which represent over 70 percent of the overall market today in North America, which provide high-quality, high-value garments. Basically, again, that whole market, there are existing competitors that sell in the wholesale channel that are catering to that marketplace, but there is also a whole slew of other manufacturers, and as well as retail private label programs that consists of that whole $34 billion potential marketplace.

Moving onto the pricing environment these days, I think it was supposed to be like a sizable price increase scheduled at the beginning of October. What happened to it? And I'm not sure if it went through, but if it did not go through, why are you confident that the one in January would go through?

First of all, the pricing environment in the first quarter, our first quarter, which is October through December, at the end of the day will be very similar to the pricing that was in place through our fourth quarter, basically after you take in all the promotional activity that took place.

The price increase that is going to be in effect on January 1st, basically all of our competitors have responded and have agreed or are planning to raise their prices on January 1st. So we think that everybody in our industry is faced with the same dilemma with higher raw material costs going forward. And these higher raw material costs are quite significantly higher next year, and are going to impact the cost structure of the whole industry. So typically in a case like this the price of raw material gets passed into selling prices in the future.

Lastly, one thing that comes back from time to time as a potential threat is some kind of invasion of cheap T-shirts coming from China. I think in January '05 there is going to be some change to quarters. Can you discuss that, and what you did in terms of looking at the different place to manufacture your product, and how you expect to be competitive when this supposedly flood of product will come in?

First of all, just to quantify what is supposed to happen, which is not 100 percent confirmed at this point. Basically in 2005 what is expected to happen is that quotas will be dropped around the world. But this is only a quota situation, it is not duty. So in other words, products coming from the Far East are going to be still dutible going into the United States basically, and depending on the country, into Canada and Europe. So that is the first thing.

The second thing is that we have built our whole manufacturing model in being able to support a low cost, which we feel we are lowest cost producers in the world. So we can supply product and manufacture it, we think, at a lower cost than even these countries that you mentioned, like China or let's say for example one of the other countries.

Third, what has happened to us is that in our industry it is not just the cost structure that is a key component of being able to sell your product. Service is a big fundamental factor. We inventory millions of dozens of product in our warehouse in our distribution centers to able to service our whole channel overall. So all of these things combined, we think we've put ourselves in a quite unique position.

And the fourth thing is that we actually sell to countries like Europe, and even in Canada today, where there is no quota or duties from most undeveloped countries basically like Bangladesh. So for example in Europe, we are competing today from our Honduras facilities supplying product to the European market, and our competition basically is Bangladesh where goods are coming in duty-free and quota free.

So we think we have our manufacturing in place, and with the expansion that we have announced by additionally increasing the amount of production being produced in our offshore operations, combined with the lower cost structure we're going to have in the Dominican Republic and Haiti, and we think that we will definitely reinforce our focus manufacturing position.

Susan Sansberry (ph), Maxim Group.

Susan Sansberry I'm still a little bit confused about what you're doing in the retail arena. Could you elaborate or explain why you're using the same brand name to enter the retail market? Typically most people segregate wholesale from retail in terms of branding strategies.

And the second question is, in terms of your focus on the price clubs and mass merchandisers, is your strategy basically to undercut Haines and Fruit of the Loom and other people who supply those channels currently? Or I'm getting a little bit confused here whether you're really -- this really is a private label effort?

First of all to answer your question is that there is definitely a correlation between our product, our label, today and the channel in which we want to sell Gildan products. So if for example today, if you walk into Wal-Mart, Kmart or Target or any of these mass merchandisers today, you will find Gildan garments with Gildan label hanging in their stores. That product is being sold through screen printers around the United States basically that are buying our product, printing it, and selling it into the retail environment. So we already have a retail presence under the Gildan brand in each one of these channels of distribution, okay?

Third -- your second question is -- our objective is to sell these mass merchants and these club stores. Now our objective is basically to not undercut somebody, or we're looking at any particular competitor, but our objective is basically to use our low cost manufacturing capacity to supply this channel. And that is really what our strength is, so definitely we -- obviously price is a factor, because we feel that we were the lowest cost producer in North America for sure. And we were going to leverage that to supply our products into the marketplace.

The last thing is I just want to reemphasize on the fact that Gildan and its growth potential is going to grow to an annualized volume just in this wholesale market -- within our wholesale market of over 400 million garments being sold mostly with the Gildan label.

Now every time we sell a Gildan garment that is another impression. For example, if you look at there is the groups like we always mention like S.T.A.R.S for example, but there is a company called NDP, which is a group that manages and follows marketing research, for example. And today, just as an example, if you look at it from a market research point of view, in Canada specifically we are already the third-largest brand in the Canadian market, believe it or not. And this by them calling up people and asking to verify the products in their cupboard and looking at the units that they have in their household.

So as we -- and obviously our Canadian business is a little bit more mature than our U.S. business, but as we continue to go from 22 to 26 to 30, as we keep putting more dozens on the marketplace, the brand recognition is going to continue snowball. And that is the thing you have got to understand.

And everything we're doing here is consistent of building a brand. And if you look back to the wholesale market, for example, back in 1992 we had a choice than as a manufacturer either to be a private label supplier or to develop a brand. And to be honest with you, it was much more difficult to build a brand in a wholesale channel. And it is not a brand like a consumer brand, but the printer is a very loyal purchaser. So we took a focus and a long-term approach. And that is the reason why we said that our production is going to go from 0 to 3 million, from 3 to 6, 6 to 10. That is going to happen in the wholesale market because we spend the energy and time to build that brand name.

The products we have here is that we have something to leverage off. Because when we entered the wholesale market, we had no experience whatsoever from a brand awareness point of view. And this now will help us to leverage, to build a foundation. And the most important thing to understand is that the foundation we are going to build now over the next three or four or five years will really take effect in the the 5th, 6th and 7th year as we keep bringing our products to market.

Cynthia Rose Marcel (ph).

Good morning everybody, a very nice quarter. Just on this retail thing, I'm sorry to keep harping on it. To the extent that your product is in retail, it is obviously gone through your wholesalers. Do you run a risk of alienating or upsetting your wholesale network by doing it this way, through a third party?

No, what we're going to be doing is basically we're selling directly to the wholesaler now in our wholesale market.

And he sells it to the screen printer?

He sells it to the screen printer. The screen printer -- it goes through two or three hands, eventually could and up at retail, okay? In the retail market basically we will sell directly to the retailer, but that the difference is being as all of the products we sell, almost 99 percent of the products being sold into wholesale actually gets printed. So there it is appliqué or printing or embroidery being applied to the garment before it ends in the end use.

At retail basically all of these products are being sold as blanks to the retailer. So it is really a different channel completely, and there is no conflict with our current wholesale channel.

Andrea McReynolds, Sprott Securities.

A couple of housekeeping questions. On the tax rate it has obviously been falling and will continue to do so as you go forward. Any sort of target rate that you think it will average for fiscal 2004?

For fiscal 2004, it would only be slightly below the level in the fourth quarter of this year, so around 7 percent.

Okay, and on the Dominican Republic facility, you said that it will be a similar level to Honduras. Did you mean today or Honduras after the $15 million expansion?

More like today actually.

So 16 million?

Yes, and just to quantify that, that is based on the actual fabric capacity that the plant will produce. But the dozens output will always be a function of the product mix and which styles, if it takes more fabric, less fabric, for example. But just to give you an idea of the size and scale of the capacity, it will be the same as the existing Rio Nance set up.

Okay. Then the implication there is you're going to have well over 35 million dozen in capacity when you include Canada, Dominican Republic and Honduras, so I think you indicated that Canada would be more specialized. Is there going to be a significant production in capacity at Canada?

We're clearly continuing to reduce our Canadian facilities in terms of its output. And not necessarily in the size of the facilities, but in the sense where we are making less white T-shirts now and making more color T-shirts. And we're utilizing the equipment that is there, but we're reducing the amount of output that is actually coming out as the facilities. So we're going to continue to reduce our capacity in Canada. We're going to focus on small runs and specialty products. And as our capacity increase offshore, we will continue to rationalize the opportunity to continue reducing our costs.

Okay, and just back to be private label business, first of all, you mentioned Disney. I was a little confused as to what you were -- when you talked about your strategy in the private label business and sort of who you are looking at partnering with, and could you just touch on that again?

Basically, because I just want to make sure I make the point clear between private label and which segments in which it is. Our objective of private label is actually to sell products in the existing wholesale market which is at $2.5 billion potential that we really currently are not selling into in any significant manner.

Those private label companies that buy product are usually branded suppliers to retail, like a Nike, a Reebok, a Disney, anybody that adds value, buys a product, prints it, puts their label on it, because they're considered to be a brand and they did not want a generic, or they don't want a Gildan label, they want their own identity. And they want to print those products and resell them to the retailer.

So that is really what the uniqueness is about private label. So really it is the same method in terms of how we supply our existing products, but just with a label that is required for the individual user so he can sell this products to retail.

Okay, so what you're saying today is they may be buying your product today but ripping out the label and putting their own versus you will supply it with a Nike label, for example?

Right. Some of the people that we currently sell to do that today, but our focus will be going after larger companies in which we can build a long-term relationship on the long-term to supply them product in a meaningful way.

Okay. And then on the retail side of the strategy, looking at the pricing, I guess, it just sort of -- the implication that you were saying about the differential between wholesale and retail prices, and it was about a 40 to 50 percent differential I thing. It seems to me that that is going to be a key part of your strategy -- is on the pricing side?

What I said before was our key is to continue our Company strategy both in wholesale, and we will continue in retail, is to leverage our low-cost manufacturing and pass those savings onto the end-user has always been our Company goal.

And also just to note another thing is that not only are we going to continue to lower our costs and pass those savings on, but also to look at adding more quality features and improving our garments as much as we can. And that has been our philosophy in the wholesale market from day one, and that will be our continuing policy as we go forward in any product, in any segment in which we cater to.

Okay, and the product that is sold into your retail right now, that Gildan product that comes from screen printers, you said it was about 40 percent of your product today? Is that all -- does all of that go in with Gildan?

No, that is 40 percent of the overall market gets sold to retail. The amount of our product that actually gets into retail we can't quantify how much it is, because we really don't know because of all different channel distributions and all different levels of where it goes. But all I can say to you, as you walk into Wal-Mart or our Kmart or one of these major retailers like a Target, you will see Gildan product hanging there printed by some other screen printer.

Ron Schwartz, CIBC World Markets.

Thank you. Glenn, you gave out, I guess, some marketshare targets at the beginning of the call that looked to be anywhere from 5 points to maybe 2 points better than original kind of target marketshares you guys would have set out, call it, a year ago or whatever. Would you be able to break down the T-shirt one into both 50-50 in cotton, 100 percent cotton?

Speaker: Roughly the T-shirt category will grow in just over 40 percent and the 50-50 category will be roughly around 20 percent.

You also mentioned, I guess you're going to be setting up sales marketing service down in Barbados. It is not a material investment, but if you were going to selling into the mass merchandisers don't you really need a presence, whether it be in Bentonville or what else “mont”? Because I guess my understanding would be that the selling process to the mass merchandiser is exceptionally different than the selling process to, let's say, one of your wholesale distributors in terms of methodology that needs to be used and the whole works?

First of all just to reemphasize on the Barbados thing is that the sales organization which we will sell to retail will be separate from our existing wholesale sales force, okay. So we're going to separate those individuals so that they are focused, and we do not mix the two divisions up.

Secondly, the marketing function, and the main marketing function will be located in Barbados. And basically all of the planning, customer service will be located in Barbados. And what we will have in the United States is key account executives that will be calling on these retailers. And the thing about the retail market you understand is that it is consolidated tremendously, and there is actually fewer doors to call on in the retail market than there actually is in the wholesale market. So it is going to be very similar to the way we approach our wholesale market is how we will set up this retail division.

Laurence, just two questions for you. I guess over the last two quarters you were able to give us a really great kind of gross margin evolution break down in terms of efficiencies coming from either Rio Nance or across the board in product mix, and then offset by pricing and FX. Would you be able to do that either on the year or for the fourth quarter for us?

I will give it to you for the fourth quarter as far as it impacts the margins. The overall margins increased by 2.3 percent. Efficiencies improved margins by about 10 percent. All of that what flow through into selling prices which negatively impacted margins by 10 percent. A more favorable mix improved margins by 1.5, and lower raw materials was just under 1. So that would add up to your 2.3 percent.

And you don't see an exchange impact there because exchange does not affect the percentages, it affects the dollars, but it impacts both the cost and the sales, but not the percentages. If you look at the same analysis relative to EPS, you're looking at 50 cents per share of manufacturing efficiencies positive. All of that flowed through into 50 cents negative. And lower selling prices, 15 cents for volume, 5 cents positive for mix, 15 negative for exchange, and the balance is SG&A and appreciation.

Okay. You gave us $60 million of, I guess, CapEx for the whole part being Dominican Republic, part for Honduras maintenance for '04. Would you be able to venture a stab at what '05 might look like? Like do you think there could be free cash flow in '05?

Yes, I do. We're looking at hopefully about 14 million of free cash flow in '05.

One last one for me. Back to you, Glenn, if you could. Clearly I guess the first quarter, your first fiscal quarter here, as you guys have been talking about was subject to a lot of promotional pricing and everything else. Have you seen any other either stabilization trend, let's say on the corporate side of golf shirts, or other areas in the wholesale market as we kind of move into the new calendar year?

Well, the golf shirt, corporate side, is still riding in terms of its share. I think the market was down for the quarter roughly around 10, just over 10 percent, or 10, 11 percent. It was down actually for the quarter 11 percent.

So that is still on a decline, but I think that the great news is that the fleece category has done exceptionally well this year for the first time. And I think that is relative to the pricing environment. Fleece for the month of -- I guess for the year to date is up almost 8 percent, and it is rolling up -- we figure it will end up around 10 percent up for the year. So fleece is keeping in track with the T-shirt, so that is a good sign. And that is partly because of, I think, some of the pricing and promotional activity has stimulated the fleece market to start growing again.

(Operator Instructions). Dave Pupal (ph), Dundee Securities.

What raw materials costs would have been down? Can you break that down a bit or not?

Could you repeat your question?

You cited lower raw material costs as part of the improvement in gross margin.

It was slightly lower cost for the fourth quarter of this year compared with the fourth quarter of the preceding year. Obviously we're looking at cotton increasing in '04 versus '03, but it was lower in '03 versus '02.

So it was just the cotton? You also have a pretty active hedging program? Can you give a dollar savings that you are hedging program, I guess, saved for you?

These costs that we have for this year are the result of having locked in our cotton for the year. And next year we have locked in our cotton for the year again at lower than -- significantly lower than current market prices.

Do you have a dollar cost in front of you that would have been a savings if you did not lock in?

No. I do not think the prices in the spot market deviated significantly from the prices we locked in through the course of this year.

Andrea McReynolds, Sprott Securities.

Just a follow-up on those market share numbers, the T-shirt's market share targets where you said it will go from to. I missed that one?

We said that we are going to go from roughly 30 to 36 in T-shirts.

Jessie Ham (ph), Desjardins Securities.

Can you elaborate a little bit on why the Dominican Republic as your next venture? You mentioned that you are going to start your own free zone. Does the country have similar advantages as Honduras in terms of the ZIP areas? And also if you can expand in terms of what products -- we know that Honduras is mainly T-shirts, are you going to move fleece, I guess, to the Dominican Republic. Maybe expand on the product that you expect to have out of the Dominican Republic?

The DR for a couple of reasons. First of all, the Dominican Republic as they have combined with Haiti, we feel is going to have a cost advantage versus our Honduras facilities of roughly 8 percent.

Secondly, the DR gives us a good diversification from Honduras, so we obviously don't have all of our eggs in one basket. We will operate in the DR under the same parameters we do in Honduras with ZIPs or free zones both in the DR and in Haiti in all of our facilities.

The products that we're going to be producing in the DR will primarily start with basic T-shirts. And what we're going to do is we're actually -- like we have three different qualities of T-shirts we are currently producing, two weights of cotton and one weight of 50-50. Our Honduras plant will be running just on one weight of fabric, one quality. So it is going to be totally streamlined at a huge high volume, which is our number one seller. And the DR facility will operate under two of our other product categories. And then at that point in time, we will evaluate the next step in opportunity for that facility once we reach that plateau.

Okay, thank you. And when you mentioned about starting a new sewing plant in Nicaragua, is this going to be third party or actually your own sewing plant?

No, it is going to be our own company-owned facility.

In terms of the capacity expansion, I am sorry, you may have mentioned that, but in Honduras what will your dozen level be after the capacity expansion is completed?

I think we will focus more then on the current capacity that we're producing there in terms of textiles will be increased by 15 percent. And the color -- we are also going to broaden our ability to make more colors in that facility. So that is really the key thing because again the capacity is a function of the weight of the fabric that we're producing there. So the heavier the weight the less dozens, the lighter the weight, the more dozens. But basically with the three sewing plants we have in Honduras and a new facility in Nicaragua, we will handle the full output of this plant as it gets ramped up and expanded.

Okay. The 35 million dozen target, I guess, over the next five years I believe this was the same target that you had in the past, and yet you're talking about penetrating retail. I guess are you just being conservatives or not including what you can get out of retail in this target?

Right. We're not including any retail sales in our target share of 35 percent. And the 35 million dozen has been the same 35 million dozen and we have sort of been talking about over the last year, and we have established as market targets now, which we have raised the bar now on each one of those different marketshares, and we will continue to monitor as we go forward.

We have always set targets that we thought were conservative that will when we achieve -- and the minute we achieve them, we try and raise the bar again. That has been the Company's policy. So we set targets we feel that are comfortable that we can achieve under a market that will only grow at 3 percent, which is consistently growing at 7 percent, so we have a very conservative outlook with our cost reductions we have enough to achieve our plan. Any retail that we do over the next five years will be incremental sales to the overall plan.

Susan Sansberry, Maxim Group

A question for you Laurence. When you talked about the EPS impact in the fourth quarter of these proficiencies and pricing and whatnot, I missed some of it. So it was 50 cents from efficiencies offset by 50 cents from pricing, and then could you elaborate on the next three?

Sure. Our volume was positive 15 cents, mix was positive 5 cents, and exchange was -15.

Okay 15 cents. The other question I have, the third party distributor that you are going to use for retail, can you reveal who it is?

First of all, it is not a distributor. What we are going to do is use a third party logistics company, which will provide the distribution and systems required to supply the retailers. And the reason for this is to isolate this from our existing infrastructure, as well as to have more control on the costs associated with going to retail.

At the same time, once we evaluate the opportunity at retail and we grow our business over time, we will evaluate looking at putting up our own in-house facility to accommodate retail once we feel comfortable with the growth opportunities.

So you're going to shift to this logistics Company distribution center. Does this company have a name?

I can't mention their name at this time.

And with no further questions, gentlemen, I turn it back over to you for any closing comments or remarks.

Okay, operator. Thank you very much. We would just like to thank everybody for attending today's call. And we would like to wish everybody the best of the upcoming holiday season. And as usual, any additional follow up questions, feel free to call Laurence Sellyn during the course of today. Thank you very much.

That will conclude today's conference. We think everyone for your participation.