Gildan Activewear Inc (GIL) 2004 Q3 法說會逐字稿

Good day, everyone and welcome to today's Gildan Activewear third-quarter 2004 results conference call. Just a reminder today's call is being recorded. Our speakers today are President and Chief Executive Officer Mr. Glenn Chamandy, and Executive Vice President and Chief Financial Officer Mr. Laurence Sellyn. Mr. Gregg Thomassin, Executive Vice President, Corporate Controller and Chief Information Officer is also participating on the call.

Before turning the meeting 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 and litigation reform act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which could 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 affect the Company's future results.

And now I would like to turn the conference over to Mr. Glenn Chamandy; please go ahead, sir.

Good morning. Welcome to our third-quarter conference call. I will discuss the press release covering the transition announced today that Greg Chamandy has stepped down from his role as chief executive officer, chairman of the board and chairman of the executive committee. Lawrence will then present the formal comments on our third-quarter results, then we'll proceed directly to respond to your questions. Greg has stepped down in order to pursue other business interests. On behalf of myself, the management team and the Board of Directors of Gildan, I wish to express our appreciation to Greg who is a co-founder and played a major role in building Gildan into a significant public company.

Robert Baylis, an independent director, will replace Greg as the first non-executive Chairman of the Board. Mr. Baylis serves on several U.S. public corporations and is a well-regarded director in the U.S. He has been a Director in Gildan since 1999 and a Lead Director since 2003. I will assume the sole responsibility for the chief executive officer role. I am committed both financially and personally. I have not sold any of my shares and remain 100 percent invested. My objective is to continue delivering 15 to 20 percent EPS growth per year, and to enhance shareholder value by implementing the next phase of our growth strategy.

The key elements of this plan are to expand our integrated offshore fabric manufacturing operations and to continue winning (ph) developing Gildan to be the No. 1 global low-cost producer. We will continue to focus on our leading position in the North American and international screenprint markets; at the same time develop Gildan as a major supplier to the mass-market retail channel. We will also in the process of further strengthening up our senior management team to support our continued growth.

I am pleased to report that we are progressing well with our global search for a new Executive Vice President for manufacturing to succeed Mr. Edmund Tisch and lead the strong manufacturing team we have developed, both at the corporate level and our offshore manufacturing hubs. We expect to appoint an outstanding individual in this position around the end of October. This transaction will complete the leadership transition announced back in February, leaving us with the management, the leadership and the Board to support and implement Gildan's business plan and take our Company to the next level.

Now Lawrence will present our formal comments on our third quarter results.

Good morning. We are pleased to report that our third-quarter earnings were an all-time record for any fiscal quarter. Our EPS was 88 cents U.S. per share up 20.5 percent from the third quarter of last year which included an extra week due to our floating year end. Our May guidance was for third-quarter EPS of U.S. 80 to 85 cents per share. So we exceeded our internal projections, as well as the analyst consensus estimate of U.S. 82 cents per share.

Our third quarter included approximately 3 cents U.S. of charges from the sale and write-down of the surplus yarn-spinning and textile equipments in Canada. It also included 1.5 cents of adjustments to depreciation expense arising from the upward revaluation of opening fixed assets at the beginning of the fiscal year due to our change to U.S. functional currency. The impact on cost of sales of the revaluation of opening inventories was fully absorbed in the first half of the fiscal year and no longer impacts comparative results.

Before the impact of the special charges and functional currency in the third quarter, diluted EPS amounted to 93 cents U.S. per share, up 27 percent from last year. EPS before charges and adjustments was in line with our original guidance before the reduced guidance in May.

Finally, the extra week in the third quarter of the prior year contributed an estimated 4 cents U.S. to diluted EPS a year ago, excluding this impact EPS was up by 27.5 percent after charges and adjustments and up by 34.8 percent before special items. Our stronger performance compared with our expectations for the quarter was primarily attributable to higher unit sales which were approximately 350,000 dozens or 4 percent higher than projected. As we have indicated, we continue to fully utilize our capacity which results in capacity constraints to our growth. However, in the third quarter we continued to exceed our production targets and in our Rio Nance facility and we also optimized utilization of our available inventory which is dispersed across a number of different geographic locations in a wide variety of SKUs.

In addition to the higher sales volumes, manufacturing efficiencies were also better than projected in the third quarter. Comparing our results to the third quarter of last year as opposed to comparing to our estimate, the drivers of our EPS growth were our strong growth in unit sales volumes, higher selling prices than last year as we limited our participation in promotional activity, and continuing manufacturing efficiencies as we complete the further expansion of Rio Nance. Rio Nance accounted for approximately 60 percent of overall production in the third quarter of this year versus approximately 35 percent in the third quarter a year ago. The current annualized running rate of Rio Nance is now approximately 70 million dozens of T-shirts.

These favorable variances compared with last year were partially offset by the increase in cotton cost together with higher SG&A and higher depreciation, the 3 cents of charges were reflected in SG&A and depreciation. Unit sales in the third quarter increased by 13.5 percent from the third quarter of last year, excluding the extra week from the third quarter a year ago, unit sales increased by approximately 22.5 percent. Our sales growth in the third quarter continued to reflect both the strength of overall market demand as well as our continuing growth in market share.

The value of the S.T.A.R.S. report which we use to capture our market to market share data for the U.S. distribution channel, has become less valuable as three of our main distributors have decided not to participate in the report. The report now captures an estimated 60 percent of the overall U.S. distributor population. For the present we are continuing to provide S.T.A.R.S. data in response to specific request from investors but will continue to monitor its value to ensure that it does not actually become (indiscernible). With this caveat overall industry unit sales of T-shirts from U.S. distributors to screen printers increased by 14.3 percent in the third quarter. Continuing the strong market demand we saw last year and in the March quarter of this year.

Guildan T-shirts through the channel increased by 35.9 percent and our market share was 29.6 percent, up from 28 percent a year ago. Total T-shirt inventories in the distributor channel were up by 7.9 percent compared with a 14.3 percent growth in industry shipments. And inventories in the channel continue to be in reasonable overall balance in our view. In the sport shirt category, overall industry shipments increased by 3.4 percent, continuing the stabilization of demand in this segment of the market due to the recovery of corporate promotional spending.

Gildan's shipments through the channel grew by 19.6 percent and our brand maintained the No. 1 market share position with the 23 percent share, up from 19.5 percent in the third quarter last year. Our shipments into the channel were lower than a year ago as we did not participate in quarter end promotions in this category and conserved our inventory in this product line. Our inventories of sport shirts in the distributor channel were up by 7.7 percent compared with the 19.6 percent in unit shipments of Gildan shirts by distributors.

Industry shipments of Fleece through the channel grew by 13.8 percent and unit sales for Gildan grew by 53.9 percent. Our market share was 16.4 percent, up from 12.1 percent in the third quarter last year.

We also announced that we are pleased to have added a major new distributor, one of the largest in the U.S., which has started carrying Gildan in the current -- that is the fourth fiscal quarter and is expected to contribute significantly to our unit sales growth in fiscal 2005.

We also achieved strong unit sales growth in Europe where our unit shipments increased by 43.7 percent over the third quarter last year and our unit shipments in Canada were up by 32.6 percent over a year ago. Gross margins were 30.3 percent in the third quarter compared with 30.7 percent in the third quarter of last year, and up significantly from 27.3 percent in the second quarter of fiscal 2004. Compared to last year, the positive margin impact of continuing manufacturing efficiencies and higher selling prices offset the effect of higher cotton costs. The improved gross margins compared sequentially with the second quarter of the current year were due lower participation and selling price promotional activity, and continuing manufacturing efficiencies as well as a higher proportion of Fleece sold in the third quarter of the fiscal year.

We continue to be very comfortable with our range of EPS guidance for the fourth quarter which we provided in May -- in U.S. 55 to 60 cents per diluted share, and are now guiding towards the top end of this range. Consequently, our full year guidance for EPS is now approximately $2.20 U.S. per share before functional currency adjustments, up from our May guidance of U.S. (technical difficulty) for the full fiscal year.

We have also announced a special charge of 10 cents per share U.S. to be recorded in the fourth quarter to reflect the Company's financial obligations to Greg Chamandy during the remaining life of his employment contract. Our strong operating earnings in the third quarter together with the impact of the reduction in inventories during the peak summer selling season, significantly exceeded our cash (technical difficulty). Consequently, we generated 34.7 million U.S. of free cash flow in the third quarter. We utilized 19 million U.S. of free cash flow for repayment of long-term debt including 17.5 million U.S. for the first of 4 scheduled annual installments to repay our U.S. Senior Notes.

The Company ended the quarter with cash and cash equivalents of 37.1 million U.S. and a net debt to total capitalization ratio of less than 1 percent. We also announced today that we have completed the purchase for approximately 5 million U.S. of land and two buildings in Nicaragua, and that we intend to immediately develop this site for a new facility for the production of Fleece to support our planned growth in both the wholesale and retail channels. This was a very opportunistic initiative to purchase a strategically located site with an excellent supply of water, good access to qualified labor and in close proximity to our sewing plant in Nicaragua. The total cost of this project, including the land and building, is estimated at approximately 60 million U.S., to be expended over the next 18 months.

The fact that the buildings have already been constructed will allow the new capacity to come on stream quickly. We expect to be in a position to produce 500,000 dozens of Fleece at this location in fiscal 2005 and be at an annual running rate of approximately 2.5 million dozens of Fleece entering fiscal 2006. The rate of which we will ramp up the capacity of the Nicaraguan facility will depend upon our rate of penetration in the retail channel. The ultimate overall capacity of the facility is expected to be in the range of 4 million dozens of Fleece annually.

Our new tech sell (ph) facility in the Dominican Republic is progressing very well and continues to be ahead of schedule. Production of greige fabric that is not yet dyed or bleached, will begin to be built up in the first quarter fiscal 2005 and the dye house is expected to begin production at the very beginning of the second quarter of fiscal 2005. Production of T-shirts is expected to amount to over 5 million dozens in fiscal 2005 and be running at an annualized production rate of 12 million dozens at the end of the fiscal year.

The timing and product mix of the contemplated second facility in the Dominican Republic site will continue to be evaluated based on the Company's ongoing sales plans and the success and pace of our entry into the retail channel. Including the cost of purchasing the Nicaragua property and the initial construction work at this location, the Company now intends to spend U.S. $65 to $70 million in capital expenditures in fiscal 2004, and expects to be essentially neutral in terms of free cash flow for the full fiscal year.

Capital expenditures in fiscal 2005 are anticipated to be in the range of 85 million U.S., and to be again fully financed out of the Company's internally generated cash flow. I would like to conclude by expressing my personal appreciation to Greg Chamandy who hired me into Gildan and with whom I worked closely together for five years. I now will be pleased to take questions.

(OPERATOR INSTRUCTIONS) Andrea MacReynolds with Sprott Securities.

Lawrence, just so you know you did cut out during the -- when you're talking about your guidance and a little bit on the cash flow. I don't know if you want to hit that -- I just have some specific questions. On the guidance the $1.95 for the year does that also, I know that includes the -- the 2.20 for the year that excludes the 10 cent charge for Greg and the functional currency impact, does it also exclude the 3 cents from the third quarter?

It is after absorbing the 3 cents for the quarter.

Okay. Could you maybe Glenn, talk a little bit about more specifically about the pricing environment? It seems that you guys had sufficient demand to be able to ignore some of the promotional activity. Has that still been as aggressive as what it was in Q2 but you guys just didn't participate? Where do you see it going in Q4, a little bit of color on that?

The price environment in our Q3 was roughly 3 percent better than it was in Q2. And the price increase that we announced back in January is in place and we just promoted less off of that price increase within this quarter. Going forward we anticipate additional promotional spending in our Q4 and probably in the neighborhood of roughly about 2 percent additional.

Okay. Just to clarify on the functional currency, Lawrence, the breakdown over the course of the year I think is about 16 cents impact you are expecting overall from functional currency, and about 10 percent came on the gross margin line and 6 on the depreciation line?

Correct.

That's all I have, and if you want to give some clarity on anything additionally you might have said on the guidance that was not in the press release.

Unfortunately I really don't know what I said was that we were now guiding to the top end of our range for the fourth quarter and because of the stronger results for the third quarter and our guidance for the fourth quarter, we were now looking at approximately $2.20 for the full year before the impact of the functional currency adjustments. So that compares with our prior guidance of 2.05 to 2.15. We were looking at approximately 2.05 for the full year; now after the functional currency adjustments and 1.95 after the special charge in the fourth quarter.

Okay. Thank you.

Ron Schwarz with CIBC World Markets.

Lawrence, Glenn, where did the, I guess the incremental capacity come from, I was a touch surprised at the volume growth that popped out in the quarter just given some of the constrained comments that were made last quarter. Was something, was there a little small bottleneck or something that you guys were able to kind of clear through?

We just managed our inventory as best we could and aligned it to maximize our sales. So as well as our production was on target and a little bit ahead of target and those two combinations allowed us to achieve additional 300,000 dozens of shipments.

On the new Nicaraguan Fleece facility, this is going to be brand-new incremental capacity. Should we be adding that potential capacity? I guess your previous kind of rollout or thought where even the fiscal -- would not count for fiscal '04 but fiscal '05 that you'd have productive capacity of about 32 million dozens, should we be thinking now 32.5?

It's going to be in that ballpark, understand when the facility is coming on its going to be roughly 500,000 dozens so it is not an insignificant amount over (indiscernible) production of the Company. The facility is really going to be built up to help support the demand of our Fleece which is basically our market share is grown dramatically in the wholesale channel, and as well as we penetrate the retail markets we are now currently limited in the capacity of our manufacturing Fleece so this will allow us to build up our capacity, it will help us to have additional sales towards the end of 2005 going to 2006 and we will build it up from that point. But overall, it will be roughly about 30 to 32.5 million dozens for next year's (indiscernible) production.

Just on that, given that you're building it down in Nicaragua, are there any expected, like how do you see the cost curve of that facility versus -- you're taking out capacity from existing facilities, is there a plus or minus there? Is there any particular effect that might be had on I guess the Fleece spinning facility you have in Canada?

This facility is to enhance our growth in both the wholesale channel and the retail channel. We will evaluate long-term overall strategy in terms of our manufacturing but right now we are in a position that we are (indiscernible) out our Fleece within our existing markets which are growing very rapidly. We need this to support our Fleece entree into retail. And the cost structure of this facility obviously will be in line with the same type of savings we've seen in our other facilities offshore relative to our more legacy cost structure in Canada.

Would you have even though the numbers were distorted, market share numbers for 100 percent cotton and then 50-50?

Yes, I would. For 100 percent cotton we are looking at 35.2, and for 50-50, 14.1.

Just last question, Lawrence, would you be able to maybe throw out a number as to how significant or material this new wholesaler might or might not be? From a volume perspective?

The wholesaler will obviously be significant to our overall forecast for next year. We feel comfortable with our forecast going forward. We would rather just not comment on the amount of dozens that we plan to sell.

Sara O'Brien with RBC.

Question on cotton prices, we have seen some pretty major deflation in the last couple of weeks in particular. Just wondering if you think this is going to impact sort of any pricing war play out in the future depending on which of your competitors are hedged at which cotton price for how long?

When you look at what's happened with the cotton market, it's come down significantly from the - - as high in the 80 cent range. We believe that the industry in general has been buying cotton up on the way down. People have been buying it as it's been coming down, so the prices have been dropping. However, we don't believe that there will be a significant impact in the short term based on raw material, as we believe that everybody has an average price of raw material, which is - - exceeds the current prices being traded at right now. As time goes on there could be some price pressure towards sometime in 2005 if cotton remains at this type of level.

Would your own cotton, would you sort of be able to take advantage of these lower prices for your own, going into '05, like latter half of '05?

The whole industry in general will have (indiscernible) to be able to take advantage of these prices as it's been coming down and (indiscernible) buying cotton and taking advantage of lower prices.

Okay, so you would say you are all on an even footing at this point?

We don't know that but we are taking the approach to continue buying as cotton has been decreasing. And averaging down our cost.

I was a little surprised with you were able to achieve some pricing increases, your competition was talking about pricing still being pretty competitive. Can you just talk a little bit about what you are seeing differently or what you're not selling into that other competitors are?

Well, we as an industry took the price increase ourselves and other competitors of ours took a price increase in January. From that price increase we have been discounting more aggressively in the first quarter, less aggressively in our second quarter, less aggressive this quarter, we plan to accelerate the amount of promotional activity in our fourth quarter. Just what is in the normal course of business facing that time of the year.

Just so I understand, you mean your pricing should come in Q4?

Pricing should come down slightly in Q4 which is typical for that time of the year. Based on the amounts of capacity we had available we promoted lesser products to yield our best return and best results. As capacity comes online we will continue to price more aggressively as the Nicaragua (indiscernible) and our new initiatives continue to bring capacity online.

Okay, so then we can assume that product mix played a role in the price increase overall as well?

Product mix was slight but most of the increase came from better pricing.

Also wondered for the El Progresso plant closure, do you expect additional costs just for redirecting, selling operations and how do you expect this to impact your inventory going into Q4?

We don't expect any significant costs from the closure of El Progresso. The whole cost of closing that facility roughly be about $400,000. The equipment is being reallocated and positioned in other facilities we have both in Haiti and Nicaragua. Our inventories are basically in line and will not be affected because we have overcapacity right now sewing and so until our textile capacity catches up with our sewing requirements. We are in a position right now that this is a non-event for us.

Just moving on to retail strategy, you are talking about Nicaragua being able to play into your strategy, have there been any major developments in the retail strategy, do you have customers coming online at this point or?

Like we mentioned back in December, we are in the process of making a full evaluation of our retail strategy; we've actually visited all the major retailers. And we feel that for next fiscal year we will sell roughly about 500 to 700,000 dozens of sales into the channel base our first year, that is our estimate.

So you would be starting with some of the smaller fish versus the massive fish getting into retail?

Rather not say but we will definitely be in a position to supply products and will have roughly sales in the neighborhood of 5 to $700,000 for the year. One last point, as we go forward our limitating factor right now and actually developing our whole retail strategy is our lack of capacity as we are capacity-restrained right now and we believe we will be capacity-restrained throughout 2005 until we really get the full effects of bringing on our Dominican Republic facility as well as our new Nicaraguan facility. So as these facilities come online we will more aggressively be able to respond to the requirements of retail and aggressively pursue that opportunity.

If I just look at the S.T.A.R.S. report data that is in your press release, would it suggest that there is some pretty significant pent-up demand for Gildan -- I mean if you look at unit growth its double-digits, way beyond the industry unit growth. Does that mean that there's -- you should expect some pretty nice double-digit growth going forward to replace that?

I am not sure if I understand the question, Sara, (multiple speakers) you are asking whether those growth rates in the industry will continue.

No, whether if, I guess maybe I am reading the report wrong. But if the S.T.A.R.S. report wholesalers sales to distributors -- sorry -- screen printers?

Yes, that is correct.

So then with your growth year-over-year looking at just T-shirts at 36 percent versus industry growth. It would suggest that your growth should continue in that kind of a double-digit -- to replenish that.

Our objective will be to continue to build in our market share position and increase our market share penetration as we bring on more low-cost capacity. So whatever the industry growth rate is we would have an objective of continuing to exceed the overall industry growth.

The upside being that the market continues to grow; last year the market grew 10 percent, this year the market is up 14 percent and that's on a much bigger base. That's really the upside that we can see that kind of growth which is really not forecasted in our own long-term planning.

Okay, fair enough. Can you also just talk about your largest customer, do you still see your largest customer representing about 30 percent of your business or would the add-on of the new distributor significantly reduce that?

We expect our largest customer to still be a very large customer of Gildan Activewear. Typically in the past as we bring on new distributors it was always been a function of our capacity and every year we broadened new distribution as we are able to grow our capacity. We do not believe that we are going to cannibalize any of our business from any of our existing Gildan distributors and just create overall more demand for our existing products within the channel.

Great, and also just on capital expenditures. It looks pretty low in Q3; was there a significant disposal in there or why was Q3 so low?

We had about 2.5 million of disposals but it's really just timing and clearly CapEx in the fourth quarter will be significantly higher to arrive at our overall full year CapEx of 65 to 70.

Excellent. Last question on your tax rate it is a little bit lower than I expected, 7 percent, is that what you expect going forward for the rest of '04 and '05?

Correct.

Excellent. Thank you very much.

(OPERATOR INSTRUCTIONS) Martin Goulet with National Bank Financial.

Can you break down the gross margin differential between the two, the two third quarters, please?

The gross margin between the two third quarters, yes, sure. There were looking at an increase of a decrease of half a percent in total, so we had favorable efficiencies contributed about 3 percent to gross margin, favorable selling prices also contributed about 3 percent for a total of 6. And then in the other direction cotton costs reduced margins, higher cotton costs reduced margins by about 6 percent and mix was slightly unfavorable half a percent, so 6.5 negative, 6 positive for a net minus of .5 percent.

Regarding wholesalers, have you added any recently overseas, Europe and now your initial shipments to Australia, can you comment on that?

Right now we are continuing to develop all of our international markets. We have roughly 30 distributors now in Europe and we are continuing to focus on our Australian sales initiatives which have gone quite well and our shipments this quarter were just under $500,000. We expect to improve our forecast next year as one of the opportunities we have in Australia is actually to be selling to Kmart Australia, their basic T-shirt program which is going to be part of our opportunities within 2005. We are going to continue to expand all of our geographical opportunities and potentially look at the Japanese market for next year as well.

Regarding the wholesale inventories, I missed a little part of that so can you comment on your inventories in the wholesale channel, up, down?

Inventories in the wholesale channel I said we thought were an overall good balance. The T-shirt inventories were up compared with June of a year ago by 8 percent compared with the 14.3 percent growth in shipments out of the channel.

Dave Pupo with Dundee Securities.

Everything has been answered. Thanks.

(OPERATOR INSTRUCTIONS) Andrea MacReynolds.

Just a follow-up on Europe, if you can comment on what you are seeing pricing do there, if its following similar trends as North America or if it is a bit stronger or what?

What we've done here is that the actual pricing environment there is I would say as aggressive as North America. And that's because of the differential between the higher currency, the Euro currency versus the U.S. dollar. And that's put a lot of price pressure within the marketplace. What we've done this year is we priced our product to market, and a lot of our sales increase right now has been focused on the European constants which is really starting to develop for us and we feel there is a large opportunity. So we priced our products in the manner where we needed to penetrate the market place and achieve the forecast as well as give us the ability to continue our momentum in the overall marketplace.

It sounds like you may have been fairly aggressive on pricing versus your competitors in Europe?

We are always, investment yields (indiscernible) we continue building market share by building our manufacturing, lowering manufacturing costs and passing the savings on to the customers in every single market in which we compete and Europe is just an offshoot of our success within the United States.

It sounds like in Q3 in North America you were a little less aggressive on pricing but you've kept it up in Europe?

No, Europe I think we were, our pricing was down year-over-year.

Have you seen, you talked about the unit growth in Europe being up 44 percent. Have you seen, can you talk about your market share? I know you don't get statistics like from S.T.A.R.S. but can you give us a sense of where you think you are at, how much market share you may have gained?

It's hard to say really because it is a very big market and we don't have the information readily available. We estimate ourselves probably today to be the third largest to the channel.

Richard Mercier from TAL Global Asset Management.

I would like to get a bit more detail about the plans on the Nicaragua and new Nicaragua facility?

Regarding what exactly?

Do you have any specific line of questioning, Richard?

Yes, just capacity and timing and timeline of buildings?

Perhaps that part of the presentation was where we lost contact. But we are looking at about half one million dozens being produced from this facility in here (ph) next year. We are able to start off very quickly because the building on the site is already completed for next year, we will have half one million dozens, by the end of next year we will add for next year at a running rate of about 2.5 million dozens of Fleece. And the rate at which we ramp up beyond that will really depend upon our success in penetrating the retail channel. But potentially we would have 4 million dozens of capacity available exiting 2006.

Is there any expansion availability there?

That would be the maximum capacity of the first building and there's also a second building on the site which we will evaluate as we go forward.

Sara O'Brien.

Just a follow-up question on that facility. The 60 million U.S. then is for building up to capacity of about 4 million?

Yes, that is right. Remember that Fleece uses much more textiles than T-shirts. So the production of the Fleece factory in dozens is much lower than for T-shirt factory.

Just looking at your inventories the days came down pretty significantly in Q3. Just wondering if you are expecting a pretty normalized -- say if we look back to '03 and your inventory days going forward, if you looked to that as sort of a guideline going forward? You are down at 117 days now from 141 last quarter. But you expect the trend to be more in the 120s in Q4?

There is a seasonality aspect if you are looking at quarters sequentially. Obviously we consume more inventory then we can build up during the third quarter which is a big summer selling season. But we always like to have more inventory to be able to support higher sales growth.

Okay, so it should just be growing with sales basically?

Yes.

Cynthia Rose-Martel with Jennings Capital.

Could you just give me the actual number of unit shipments in the quarter?

It was just under 8.5 million dozens.

Okay, thanks. You said that Rio Nance was exceeding production plans and running at 17 million dozen annualized. Where do you think you can get that to, can you go up much beyond that?

That is the maximum capacity (multiple speakers)

That is what I thought? Can you get it beyond that?

No, at this time, no.

Thanks very much.

If there are no more questions --

If there are no more questions, let's thank everybody very much for attending our conference call. We will speak to you soon and see you next quarter. Thank you.

That does conclude today's conference call. I would like to thank everyone for joining us today.