Gildan Activewear Inc (GIL) 2004 Q1 法說會逐字稿

Good day everyone and welcome to Gildan Activewear first-quarter 2004 results conference call. As a reminder, today's call is being recorded. Our speakers today are Chairman of the Board and co-Chief Executive Officer, Mr. Greg Chamandy; President and co-Chief Executive Officer Mr. Glenn Chamandy and 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 call 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 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 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 Greg Chamandy.

Thank you very much. Good afternoon everyone and welcome to our first quarter conference call. I would like to begin today's call by commenting on the corporate governance and organizational changes which we announced today and then Glenn will review the marketing and manufacturing aspects of our business and Laurence will comment on our financial results. On the organizational front, I'm very pleased to announce the appointment of Glenn Chamandy to the position of President and co-Chief Executive Officer. Glenn, as most of you know, was previously President and Chief Operating Officer. I in turn will assume the newly created role of Chairman of the Executive Committee in addition to continuing my responsibility as Chairman of the Board of Directors. In order to ensure a seamless transition in the overall role and responsibilities of the Chief Executive Officer position, I will also serve as co-Chief Executive Officer for a transition period currently contemplated as one year, after which Glen will become the Chief Executive Officer.

These changes follow our recent announcement of this past December in which we announced our long-term strategic business plans. The Company will now begin its five-year plan execution centered on organic growth, the expansion and ramp-up of its offshore manufacturing capacity and achievement of its five-year marketshare targets in the imprinted sportswear industry. I'm extremely proud of our achievement over the past five years since our IPO of building Gildan into a public company with a market capitalization well in excess of $1 billion and the leader in the imprinted sportswear industry. During this time, Glenn has been responsible for our marketing and manufacturing operations while I assumed responsibility for strategy development, corporate affairs and financing.

With the completion of the next phase of our strategy development having established a strong management team and one of the strongest balance sheets in the entire textile and apparel industry, I've decided to begin to hand over the role of Chief Executive Officer to Glenn. Through the new executive committee, I will remain deeply involved in monitoring key issues impacting the value of the Company in which I continue to have a significant investment. At the same time, however, I plan over the next five years to begin to divide my time between Gildan and other outside business interests that I wish to pursue.

On the governance side, we announced today that Glenn and I plan to collapse the multiple voting structure of our company and that all of our Class B multiple shares which hold eight votes will be converted into Class A subordinate voting shares on a one-to-one basis and without any cash or non-cash consideration. We made this decision as we believe that this is a logical one and appropriate initiative for the Company at this point in its corporate development. Additionally, we believe that this initiative is consistent with our commitment to strong corporate governance. In fact as a result of this initiative as well as those previously announced, such as the creation of the Lead Director position and the separation of the Chairman and CEO functions that Gildan is now at the leading edge of compliance with all governance benchmarks. Now I would like to pass the mike over to Glenn to take you through our manufacturing and marketing highlights.

Thank you. I'll just start out with market overview. T-shirt demand remained very strong throughout the quarter. For the first quarter ending December 31, the market was up 12.8 percent and for the last calendar twelve months, the market was up over 10 percent. In the T-shirts category -- sorry, those market numbers -- were the overall T-shirt category. Our marketshare within the teacher category at the end of December was 35.5 percent, up 10 percent over last year. In the 50-50 category, our marketshare was 11.5 percent, even with the share of last year. Our marketshare was marginally down, which reflected a decision to conserve our inventories for the height of the selling season and participate in the future price increases.

In the fleece category, the market was up 3.3 percent in the quarter. Our overall share was 14 percent, up 34 percent. In the 50-50 fleece segment, our share was 11.2 percent, up 47.1 percent. In the high-cotton category, our share is 24.2 percent, up 25.5 percent for the quarter. The golf shirt category remains too weak; it was down 11.2 percent for the quarter. Our share for the quarter was 19.8 percent, up roughly 24 percent. Our share in December however was 21.4 percent and it reached the number one position overall. The inventory in the channel at the end of December was up 21 percent over last year as distributors built inventory before the price increase. Our share of the inventory at the end of December was 31 percent of the total inventory which is in line with our marketshare.

On our European business, we are on track to support a 30 percent increase in shipments in 2004. We have opened up new distributors in three countries. We have begun to build distribution in both Australia and New Zealand and we have engaged in contracts in distribution and we will begin to ship product in our second quarter of fiscal 2004.

Selling prices were down by roughly 7.5 percent compared to the first quarter of last year, excluding the impact for product mix. The price increase went into effect of approximately 5 percent effective January 1st. However, promotional activities are still planned in the month of February. We believe that industry demand will continue to be strong. Also, higher cost of cotton will continue to bring stability and pricing to the marketplace in the second half of 2004.

On the manufacturing front, we have continued to expand our (indiscernible) textile facility and are planning to increase it by 15 percent and will be complete by September 15, 2004. The increase in capacity will be shown in our newly created sewing facility in Nicaragua, which is currently being ramped up. Our Dominican Republic textile facility, which is currently being constructed, is underway and on-time and the production is geared to start for January 2005. We are also commencing to build up our selling in both Haiti and the Dominican Republic so that as our new textile facility is ramped up, we will have the selling to support the textile production. Total cost of the Dominican Republic textile facility is estimated to be U.S. $60 million, of which we will spend $22 million on this project in 2004. Our overall textile capacity in Canada is being reduced and focused to specialize on more specialized added value products during 2004 and the overall production capacity in which we will produce in 2004 will be approximately 27.5 million (indiscernible). And with, that I would like to pass the mike over to Laurence to review the financials.

Good afternoon. Our EPS for the first quarter before the adjustments resulting from the upward evaluation of opening Adventure (ph) is the fixed asset due to the change to U.S. functional currency was U.S. 18 cents per share, up 38.5 percent from U.S. 13 cents per share in the first quarter a year ago. The improvement in EPS was due to three factors -- manufacturing efficiencies from the ramp-up of Rio Nance (ph) during the last year, increased unit sales volumes and more favorable product mix. These positive factors were partially offset by the impact of lower selling prices, as well as higher cotton costs, increased SG&A expenses although SG&A declined as a percentage of sales, and higher depreciation to reflect our continuing capital expenditure program.

Unit sales volumes increased by 21.9 percent over the first quarter of last year. The higher volumes reflected the strength of overall market demand as T-shirts sold by distributors to screen printers were up by 12.3 percent, compared with the first quarter of last year. In addition, shipments into the channel reflected pre-buying by distributors in advance of the January 2004 selling price increase. Unit sales were also positively impacted by our continuing marketshare penetration in both sport shirts and fleece.

Our marketshare in T-shirts at 30.5 percent was up from the fourth quarter, but marginally down as Glenn said from the first quarter of fiscal 2003 due to our decision which Glenn mentioned not to fully participate in major white T-shirt promotions during the quarter. Our product mix was more favorable due to a higher volume of product mix within all product categories, as well as a higher proportion of sportshirts and sweatshirts compared to T-shirts. Selling prices, excluding the impact of product mix, were down by approximately 7.5 percent compared to the first quarter of last year. We are continuing to project full year EPS of U.S. 225-230 per share before the adjustments to reflect the change in functional currency. Our outlook for the full year assumes that the selling price increase implemented in January is at least partially maintained during the balance of the year, notwithstanding the promotional pricing we're seeing in our (indiscernible). Our pricing assumptions of the balance of the year is based upon projected continuing positive demand growth and the upward pressure in pricing that will result as the industry starts to draw down inventories accumulated with significantly higher cotton costs.

The Company was a user of cash in the first quarter as we ramped up the capacity of Rio Nance and implemented our planned buildup of inventories to meet anticipated demand in the peak summer selling season. CapX amounted to U.S. $16.1 million in the quarter, mainly for our further ramp-up and expansion of Rio Nance and our investment in our yarn spinning joint venture with Frontier, which was announced last October. We are still tracking full-year capital expenditures of approximately U.S. $60 million, including approximately U.S. $25 million to be spent in the Dominican Republic and Haiti and the balance of the capital to complete the further expansion of Rio Nance and the startup of the Nicaragua sewing plant. We're projecting that we will generate U.S. $5-$10 million of free cash flow at after capital expenditures for the full year. As mentioned in the press release, we expect to satisfy our first scheduled repayment of our U.S. notes in June in the amount of U.S. $17.5 million. We expect that after meeting the debt repayment, our service cash position at the fiscal year end will amount to over U.S. $60 million. We will end the year with an extremely conservative balance sheet and significant unutilized debt capacity, including committed credit facilities in order to be able to take advantage of any strategic growth opportunities that may arise. And Greg will conclude our management comments.

Thank you. In closing, we're pleased with the results of this past quarter and we are proud of the proactive and positive governance initiatives which we announced today. Despite our best intentions and desires to be a first-class Company and corporate citizen, unfortunately we do get complaints from time to time. Most recently as we announced last week, one such complaint has been filed with the fair labor association by Toronto-based NGO Group, together with a Canadian labor group regarding alleged actions by Gildan to impede unionization at one of our Honduran sewing plants. Despite the fact that we refute these allegations, we have taken a proactive step and asked the FLA to conduct its own independent investigation. The result of this investigation will be publicly disclosed by Gildan in a timely manner once the SLA audit it is completed.

Pursuant to the role that we must adhere to as a participating member of the FLA, we are obliged to refrain from any further comment on this issue until their findings are made public. However, what we can say is that we are committed to transparency in dealing with these matters.

To further reinforce our commitment, we're introducing the Gildan stakeholder outreach program. This new program will provide a forum for dialogue and feedback on social responsibility issues for all interested parties, be it NGOs, student groups, local communities and governments, as well as other interested parties. The administration of this new program will be the responsibility of our newly hired director of social compliance and it should be developed and implemented throughout the balance of this year. As evidenced by our initiatives, we believe that socially responsible business is good business.

On a final note, I would like to state that Gildan is extremely well positioned for the future in every aspect of its business. The Company's conservative balance sheet, market leadership, product quality, corporate governance and management strength will allow Gildan to continue to be the leader in its industry. And lastly, I would like to emphasize that I have 100 percent confidence in Glenn with the support of our management team to successfully implement our business strategy and achieve continuing profitable growth in line with our stated financial targets. That concludes our presentation, and we will be happy to take your questions.

(Operator Instructions). Andrea McReynolds (ph), Sprott Securities.

Just a couple of questions first to clarify. Glenn, can you give the breakdown of the 100 percent cotton and 50/50 marketshare numbers for the T-shirts?

Our 100 percent cotton share was 35.55 percent, and our 50-50 was 11.5.

Then the manufacturing capacity for 2004m you said I think 27.5 million dozen -- was that the capacity or your actual expected run rate for '04?

No, that's what we're going to actually produce for this fiscal year.

On the inventory buildup at the distributor level in advance of the price increase, does that imply, based on your sense of market demand that you're going to see Q2 volumes weaker than normal, as they fill in the channel because of the price increase -- should we see a bit of reverse seasonality there?

What we are saying is that there is a slight increase in inventory in the channel, but we feel comfortable with the inventory levels. Basically, I would say there is a slight increase and those dozens will be flushed through going forward to next quarter and we still feel comfortable with our guidance that we have set forth for Q2.

And then the promotions that you see set for February, who is leading those promotions and in what product categories?

The promotions in February were basically planned in our assumptions basically in terms of where we saw the pricing in the marketplace, so we anticipated promotional activity which is consistent with years before, which is consistent with that time of the year, I would say. And typically, the promotions are driven to drive pricing going forward. We feel that the prices in the marketplace are on their way up right now, but there is a sort of like a stepping stone in terms of getting these prices up. And what happened is as the price increase in January was in effect, we've attained really the whole increase in price within the market. And in February, basically the pricing activity has taken place again. But that will stabilize as we go forward. So basically we feel comfortable as we go forward that the pricing will continue to stabilize. The pricing activity to answer your question was based on other competitors offering discounts and merchandise in the marketplace.

Was that primarily focused on the white T-shirts?

In this case, it is the promotion for the month of February will be in all categories.

Okay. Thank you very much.

Dennis Rosenberg, Credit Suisse First Boston.

Greg, you said the promotional activity is normal for this time of year. Is it the same rate of promotion as last February?

Yes.

How much of the price increase is being given back with this promotion?

I would say that for the month of February, the price increase will basically be mostly given away. But if you look at other factors in terms of other promotional dollars that were spent last year in terms of count, recounts and other types of promotional dollars being spent, I think that we're still slightly ahead.

And if I look at the inventory, was it all a build of inventory in anticipation of higher sales, or was part of it the grossing it up because of the switch in currency?

I don't understand the question. Our inventory --

The inventory -- part of the reason your gross margin was affected was because you had to write up your inventory at the end of the year when you changed the --

About one million was currency.

When do you think your inventories will be back to normal levels?

Right now at the end of December inventory peaked for the year and it will start coming down as we go forward into the year.

Last year by the second quarter, your inventory turn was 3.2 times. You think it will be that level at the end of the second quarter this year?

Were going to carry slightly a little bit more inventory this year obviously because of our capacity has increased, and we also -- we ended up last year with roughly about 1 million dozens more inventory at year end because the prior year, we did not have enough inventory to service our customers, so our inventories will be up a little bit higher relative to that time last year, I would say.

I would say inventories at the end of the second quarter will be pretty flat form where they are today and then come down by say $25 million in the last half of the year.

And you say you're comfortable with prior guidance. We were basically looking at a nominal increase in the second quarter earnings after the expense of the currency related changes?

We're looking at on the order of 50 cents after the impact of the currency in the second quarter.

Okay, thanks.

(Operator Instructions) Jessie Hamm (ph), Desjardins Securities.

Thank you. Good afternoon, gentlemen. Just a question with regards to the increase in sales. Can you quantify how much of the sale increase was due to that particular buildup of inventory in anticipation of the price increase?

We would say about 150,000 dozen was due to the prebuying in advance of the price increase.

Okay. In dollar sales that, would roughly --

That would be about $3 million.

Okay. And if you could possibly break down I guess the gross margin in terms of the increase in terms of efficiencies, favorable mix and so on?

I will do that. In terms of margins, after you back out the impact of functional currency, we're looking net at about half a percent improvement in gross margins. On the positive side, manufacturing efficiencies contributed about 10 percent to margins and favorable products mix contributed about 3 percent for a positive 13. And then going the other way, cotton was negative 3, selling prices reduced margins by about 8 percent, an exchange of the negative impact of about 1.5. So the net of these is the positive of half a percent increase in margins.

Thank you. With regards to particularly the increase in depreciation again due to the conversion to the U.S. dollar, how much of an increase was it in Q1, meaning if you were trying to --

The impact of the evaluation of fixed assets was about 1.5 to 2 cents for the first quarter of EPS.

Okay. Thank you. Could you give us I guess Glenn, the increase in your unit shipments employees in fleece and T-shirts? I believe you mentioned it in your release for the sportshirts, but not for the other two categories?

Say that again?

Fleece and T-shirts in Q1, the increase in unit shipments?

In unit shipments, fleece was about 230,000 dozen (indiscernible) this quarter and what was the other one?

T-shirts -- I guess a percentage increase would be fine as well.

Teacher was about 3.6 million dozen.

Do I understand correctly I guess with regards to the conversion of your shares that you are basically converting to one class stock?

Correct.

One last question from me. On the stakeholder, can you expand on that? What exactly are you -- the last comment that Greg had?

It's going to be in a form that is to be made available to interested parties that will have a direct contact in the Company, which is our director of social compliance who is an expert who we recruited who has extensive experience working in this field. And she will be running this program and it will provide a forum for anybody who wants to discuss question, have responses on anything and everything that has to do with social responsibility on our company, and we're also going to have the information posted on our website as well.

Okay thank you. One final actually. On the Dominican Republic, you have actually started construction and everything is on track from what I understand from your comments?

Yes. We've started construction and we're on track and we will start production by January 2005.

Great. Thank you very much.

Ron Schwartz, CIBC World Markets.

Two questions for me. Laurence, can you discuss maybe a little about cotton hedging strategies for fiscal '05, because I think you guys are more or less covered where you needed to be for '04. But what are your preliminary thoughts looking at next year, given where cotton futures are?

We have covered ourselves for 2004, and right now, we'd rather not comment on our strategy for 2005; it's a little bit premature.

Glenn, lastly on pricing strategy as well. I guess Delta (ph) talked about 8-11 percent price increases, and it sounded like from your comments, some people gave all of that back in the month of February. You guys continue to be kind of the low-cost provider here. Any thoughts on how you might strike the balance between price increases and continued market share gains leveraging your infrastructure?

We're going to continue to be the price leader as we set forth. Basically in our whole model, we have only incorporated about 1.5 percent price increase in our model for next year, which is only a slight increase as we keep passing through all of our manufacturing efficiencies. And as we continue to see the price of raw materials affecting peoples' inventories and our cost of goods sold as we go forward, we feel that is also going to put additional price pressure that will probably support price increases as we go forward.

So was there any key rationale then to allow some of the other players -- you dropped a little bit of market share, which is no big deal because you decided not to participate in some of that promotional stuff. Could there have been the argument where you would have participated to continue to drive some of those competitors that is closer to the brink of whatever financial means or what else?

I don't think that is the case. We're in the position where we have been out of white inventory through our whole fourth quarter. We just brought our inventories back into shape and we did not feel it prudent to basically sell those inventories at reduced and ridiculous prices and be short in a couple of months as we get to the height of the season. So primarily, if you look and analyze our whole market share, really where we did not grow our share in the quarter basically was primarily just in one category, which is white opening price T-shirts. But if you look at where we actually significantly grew, it was in all of the other categories, the mix of colors, long sleeves, pocket Tees, all of the core competencies that really make a brand within our industry is where we focus our energies on. And as we going into the height of the season, we feel we have enough inventory to support demand as we go forward now.

Thanks, Glenn, and congratulations on the new role.

Thank you.

Claude Proulx, BMO Nesbitt Burns.

Thank you, good afternoon. First question -- I know it's very early, you announced it in December, but can you give a little update on what's going on with you retail strategy, if you had meetings or if you have seen some of the retailers -- if you start to building your team that will (indiscernible) retail (indiscernible)?

We're in the process like we said. We've announced in December our retail strategy, which again, is for the future strategic growth of the Company, which is going to be something that's going to take us to the next evolution and will only commence in 2005. However, we're in the process right now of building this strategy. We are recruiting salespeople and putting them into place and we're doing all of the due diligence right now to -- as far as the product, marketing and distribution requirements that we will need to build this division in our company. And right now, we are on track with that. And as we get closer towards the end of this calendar year, I think we can give you and provide you with a much more detailed update.

The second one is -- as you move into the CEO job, would you be looking at replacing, having a COO working under you down the road?

Right now, as far as we're concerned right now, we have been infrastructure in terms of manufacturing people and operational people that are currently in place we feel to support the ongoing operations of the Company. So at this point in time, the answer is no.

Okay, thank you.

Roland Kiper (ph), Clearwater Capital.

Good afternoon. Laurence, what gives rise to the revaluation of the balance sheet line items by changing over to U.S. dollar reporting? If you take me through the steps, I would just assume you have a U.S. dollar balance (indiscernible) a Canadian dollar balance and you flip it over at the FX rate at the beginning of the period, so I don't follow what leads to a revaluation?

This goes back to when we changed over to U.S. functional currency at the beginning of the fiscal year. We had to convert our assets at our Canadian fixed assets inventories have been accumulated at historical rates at the rate opening date and the difference was taken straight to opening shareholders equity.

When will the transitional effect that affect inventory and cost of goods sold, will that be run through by this quarter?

That will be finished being consumed in the second quarter, and then there will be an inventory, and there will be a depreciation impact that will continue for the life of the assets, which will be about 6 cents a year. But it won't affect year-over-year comparisons after this year.

The price competition in white in February -- do you have any sense that someone is just running for liquidity within the marketplace and doing something goofy on a profitability basis that is affecting pricing?

I think -- the pricing is based on I would say different factors in the marketplace. And what we believe is that our competitors don't have the cost structure to compete, even at the prices we are currently selling at within our industry today. And sometimes, there is irrational thinking I think in terms of pricing strategies. But overall, we think that the (indiscernible) pricing is also a function of bringing pricing up in the marketing. You have to understand is that white T-shirts were selling at 75 or 85 cents wholesale in the last six months, and I think that from a consumer point of view, the prices will continue to go up. And prices right now are selling at around $1.15 and then going back to $1, but there is still an upward trend right on the overall pricing within the marketplace based on the wholesale price of T-shirts given all of the types of promotions that have taken into account.

All right, thank you.

(Operator Instructions). Peter Harrison, Montrusco (ph).

(indiscernible). Congratulations on the results and for the governance decisions. And my question will be on the corporate governance decision. I would like you guys to maybe you walk us through the decision process for the conversion of the multiple voting shares into single voting. And are there any particular reasons, or it is that entirely for corporate governance? Thank you.

No, it is strictly for corporate governance reasons. And the decision-making process was that when we started the Company, we were effectively a microcap family-owned and operated Company, very thinly traded. And so at that point in time, the opportunity to have a dual class share structure in our mind gave us the peace of mind that as we're growing the business, we would have the peace of mind that we could execute the plan that we had set forth, and we went public and we promised the people that we would deliver without having to worry about some abnormalities in the marketplace and somebody taking advantage of opportunistic purchase of the Company. So having said that, we feel that now our company has matured. We are at a point in our development where we view that the Company is ready to go to the next level. And as such, we have decided to convert into the single voting class and ultimately to continue to grow the Company to be a widely held ultimately TSE 60 Company.

Do you have anything further Mr. Harrison?

No. Thank you for the answer.

Andrea McReynolds.

Earlier, you had responded the inventory, the FX currency related impact was -- I think you said it was a million, was that right, a million dozen?

No, $1 million.

Okay, thank you.

(Operator Instructions). Gentlemen, there are no further questions. Mr. Chamandy, I will hand the conference call back to you for closing comments.

I'd like to thank everybody for attending. We'll speak to you on the next call.

That does conclude our conference call.