Gildan Activewear Inc (GIL) 2005 Q2 法說會逐字稿

Good day everyone, and welcome to today’s Gildan Activewear Second Quarter 2005 Results Conference Call. As a reminder, today’s call is being recorded.

Our speakers today are President and Chief Executive Officer, Mr. Glen Chamandy and Executive Vice President Finance and Chief Financial Officer, Mr. Laurence Sellyn.

Before turning the meeting over to the 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 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. and 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 I would now like to turn the call over to Mr. Glen Chamandy. Please go ahead, sir.

Thank you, good morning. Welcome to our Second Quarter Conference Call. I will begin by providing an update on our capacity expansion as well as our retail strategy. Laurence will then cover the press release related to our second quarter earnings and full-year outlook. Following Laurence’s comments, we will answer your questions.

We have increased the production targets for the Dominican Republic facility for 2006. With the increased production, the Company expects to have sufficient capacity to support its projected sales growth and planned entry into the retail channel for fiscal 2006 without proceeding immediately to develop a new facility in Nicaragua. The addition ramp-up of the Dominican Republic facility will allow us to free up capacity and increase our fleece production in Canada. Overall, we believe our capacity will be sufficient to support our sales projection for fiscal 2006 with another major offshore facility being required to be on stream for 2007.

Although we continue to view Nicaragua’s site as a strategic long-term asset for further capacity expansion, we have also purchased additional land in Honduras for the purpose of future capacity expansion at a site adjacent to the Rio Nance textile facility.

We are also committed to add capacity at the lowest possible cost structure. We are therefore seriously evaluating the potential to build a new fleece facility at Rio Nance which will leverage our existing infrastructure in Honduras, including management, waste water, and potential co-generation electric plant. A decision on this option will be finalized at a time for our third quarter conference call in August. The overall capacity run rate at the end of 2005 will be approximately 37 million dozen. As we ramp up additional capacity in the DR, our capacity will be close to 40 million dozen in the year 2006, which includes reducing capacity in our Canadian facilities.

We will still exit 2006 with an annual run rate close to 45 million dozen with a new fleece facility coming on stream for 2007. The DR facility is fully operational this quarter and on track to produce 2 million dozen in fiscal 2005, and exit this year at approximately 8 million dozen at the end of September 2005 as an annual run rate. The DR is now planned to produce 50 million dozen next year, and exit fiscal 2006 with an annualized production of approximately 20 million dozen.

We have completed the expansion of our distribution center in North Carolina and have successfully implemented a new warehouse management system at the beginning of April to support our retail initiatives. Our retail product development including a full line of underwear is complete and will begin production in the DR to support our entry into the mass market retail channel in fiscal 2006. We remain confident in our retail sales objectives of approximately 1.5 million dozen for next year.

Laurence will now proceed to review the second quarter earnings and full-year outlook.

Good morning. Excluding the yarn-spinning charge, our second quarter earnings reported this morning were U.S. $0.74 per share, a record for the second quarter of a fiscal year. EPS were 42.3% above strong comparative results in Q2 last year and 40% above the top end of our guidance of U.S. $0.60 to $0.65 per share given at the end of the first quarter.

Compared with our previous guidance range, our higher earnings were primarily due to more favorable selling prices. Pricing for Gildan’s products in the second quarter was up approximately 3.5% from last year and was more favorable than had been anticipated. We were capacity constrained and were successful in maximizing the value of our available production. We reduced promotional activity in the quarter and focused as far as practical on higher value product lines. At the same time, we achieved our targets in the quarter for unit sales volume growth and market share increases in all product categories.

As a result of these factors, sales for the quarter at U.S. $165.3 million were up 17% from last year. While the information supplied to STARS is incomplete due to the non-participation of certain major distributors, the STARS Report shows continuing strong market share penetration for the Gildan brand. In T-shirts our leading share increased to 36.3% from 31.2% in the second quarter last year. We are now solidly the leading brand in golf shirts with a market share of 33.1% versus 24.4% in the second quarter last year, and we are achieving significant market share penetration in sweat shirts where our share is now 23.9% up from 14.3% in the second quarter a year ago.

The favorable selling prices and reduced promotional activity together with our higher value product mix resulted in gross margins increasing to 30.1% compared to 27.3% a year ago after increasing last year’s margins to reverse the negative impact of the functional currency adjustment on cost of sales. The higher selling price realization together with continuing manufacturing efficiencies more than offset the negative margin impact of higher costs in energy and transportation costs, and inefficiencies resulting from the reduced capacity utilization of the Canadian yarn-spinning operations.

The positive EPS impact of our growth in unit sales and expansion of gross margins over last year was partially offset by higher SG&A expenses, as well as higher depreciation. SG&A increased to U.S. $18.3 million, or 11.1% of sales compared with U.S. $15.2 million or 10.7% of sales in the second quarter of last year. The higher SG&A expenses reflected higher distribution costs and increase in our provision for performance-related compensation expenses, the strong Canadian dollar, and the cost of Sarbanes-Oxley compliance in addition to ongoing organizational enhancement costs.

The special charge for the yarn-spinning closures amounted to U.S. $0.26 per share after tax as indicated in Bevary [ph] when we announced our intention to close our 2 Canadian yarn-spinning facilities. The plants were closed in March, and the majority of equipment is now in the process of being reinstalled at our new joint venture facility in Clarkton, North Carolina, which is expected to be ramped up to full production during the fourth quarter of fiscal 2005. As a result of the special charge, the financial results for the second quarter include an income tax recovery of U.S. $2.7 million. Excluding this recovery, the tax rate in the quarter was 5.9% compared to 6.8% in the second quarter of fiscal 2004.

At the same time that we raised our EPS estimate for the second quarter on April 6, we also increased our full-year guidance for fiscal 2005 to approximately U.S. $2.80 per share versus approximately U.S. $2.60 per share excluding the yarn-spinning charge.

Overall industry conditions continue to be favorable, with supply, demand, and inventories in good balance. Therefore, we continue to feel comfortable with our rapidly-revised full-year guidance, which reflects 25% year-over-year IPS growth over fiscal 2004, excluding special items in both years. We are projecting EPS of approximately U.S. $1.00 per share in the third quarter versus U.S. $0.88 in the third quarter a year ago.

Our full-year guidance assumes sequentially lower net selling pricing for the second half of the fiscal year reflecting the flow through of lower industry costs for cotton. We utilized U.S. $27.4 million of cash in the second quarter primarily to finance cash requirements for accounts receivable and capital expenditures. The increase in accounts receivable reflected the seasonal increase in sales together with an increase in days’ sales outstanding from the abnormally low level at the end of the first quarter back to our target DSO of 45 days of sales outstanding.

The main capital expenditure projects requiring cash during the quarter were the construction of the Dominican Republic facility and the expansion of the U.S. distribution center in Eden, North Carolina to prepare for our entry into retail.

We ended the second quarter with cash of U.S. $30 million. Glen has reviewed the changes in our capacity expansion plans. We are still projecting capital expenditures for the full fiscal year of approximately U.S. $85 million including 100% of the yarn-spinning investments for the Clarkson project being made by Gildan’s joint venture company with Frontier Spinning Mills, which are now being fully consolidated in Gildan’s financial statement. Frontier’s 50% share of capital investments made by the joint venture is reflected in our consolidated cash flow statement as a source of financing. Our free cash flow in fiscal 2005 is expected to be approximately U.S. $10 million after capital expenditures.

After the payments in June of the next principal installment of our U.S. Senior Notes amounting to U.S. $17.5 million, we expect to end the fiscal year with cash and cash equivalents of approximately U.S. $65 million.

Finally, we announced today that we are implementing a two-for-one soft split. Management and the Board have affected the split because we believe it will improve liquidity and facilitate trading in our shares. Gildan’s shares are expected to begin trading on a post-split basis on May 18, 2005 on the TSX and June 1 on the New York Stock Exchange. The difference in dates between the two exchanges is because the TSX sets the ex-dividend date two days before the dates of record for the dividend, which is May 20, while the New York Stock Exchange goes ex-dividend one day after the mailing of the share certificates, which is expected to be on May 31.

And now Operator, we are pleased to take questions.

(OPERATOR INSTRUCTIONS).

Jessy Hayem, Desjardins Securities.

Good morning Laurence, Glen. Just wondering I guess a bit more color on what was behind the decision to defer the Nicaragua project and increase the DR production instead.

Well, first of all the Nicaraguan facility was really going to be insignificant in our overall projections for 2006. It was originally going to represent roughly about 2 million dozen of production, so that’s a start there okay? So what we’re doing is we’re increasing the Dominican Republic facility quicker to offset the loss of the timing between that and the time we plan to put on a new facility for 2007. And basically the criteria of which we were to originally build the Nicaraguan facility was to build additional fleece capacity, which we have been able to bring up our Canadian factory significantly to cover the requirements for 2006 allowing us now then to look at alternative capacity expansions. And this is something that’s been in review for the Company for the last 2 months and was approved at our Board Meeting this week.

And the idea of going to potentially Honduras to build a third site we believe will allow us to have a much lower cost structure than versus running those 3 sites at the get-go. We will leverage our infrastructure, our waste water treatment, and as well as, more important looking at the possibility of bringing in a co-generation system which would significantly reduce our cost of the utilities in Honduras. And we still view Nicaragua as a strategic long-term opportunity for us but we just believe right now that even though we have delayed construction slightly, with the ability for us from a managerial point of view and an infrastructure point of view, we think the ramp-up could actually be quicker particularly in Honduras if we go that route, and at the same time have a much lower cost structure. And overall we believe that will position our Company to be more competitive in the coming years.

So Glen, if I understand correctly then the purchased land that you were talking about in Honduras, this is for a third facility.

Correct.

Okay, and then you would favor building the fleece in Honduras first as opposed to going to Nicaragua.

Correct, and just to, we have also additional capacity available to us even though the plant that we built in the DR, just for your reference is 30% larger than the one we currently have in Rio Nance. So the idea here is that we really looked at that and said, “Look, let’s maximize that capacity inside that building to really get the optimum cost structure.” But even with that, we have, when we build that facility we have also enough land in the DR to also put additional facilities up. So we’re not concerned about the overall amount of capacity that we can bring on. What drives us is basically looking at how we’re going to maximize our cost structure and give the best return to our shareholders.

Okay, so then on the fleece, my understanding was that was kind of key for you to retain entry. Would you be looking at building a second facility in Honduras faster?

Well, we’ve expanded the facility, as we’re reducing our capacity now in basic T-shirts in Canada, we’ve expanded the Canadian facilities for 2006. They’ll be providing us probably about 50% more fleece than we’re currently -- actually a little bit more than that -- fleece than we’re actually producing today. So we have sufficient capacity to service our requirements for both our wholesale and our entry into retail for 2006. And as we ramp up additional capacity in 2007, that will keep the growth rate going forward for us as we, and when we do opt to go to Honduras for a third factory.

Okay, and how ahead were you in Nicaragua, I mean in terms of the construction? Is there anything that could be written off or you’re not doing anything on that end?

Well right now what we’ve done is we’ve basically bought a piece of land and we’ve graded the property. We’ve spent probably about $500,000 of preparations for the site in this fiscal year. But we believe that this is still a future opportunity for us in Nicaragua. It’s a great spot, and we believe that this is still going to be a strategic long-term asset. We just believe in the short-run rate right now that we better serve our cost structure and our resources to potentially go to Honduras first.

Okay, and the exit capacity that would have been expected from Nicaragua I understand is going to be coming through Canada then.

The fleece portion is going to come through Canada, but the overall increase of the capacity will be coming through the DR as we ramp it up. So we’re just sort of shuffling a little bit, but the overall net-net capacity is in. And what I said before is that although we still feel we have enough sufficient capacity to exit or to produce next year 40 million dozen and exit next year over 45 million dozen, but the reality is even with that we’re reducing our Canadian overall production. So we have sufficient capacity. I mean, our objective is to try and deliver the lowest possible cost capacity, and that’s what we’re trying to do.

Okay.

Jessy the capacity increase in DR would allow us to produce more fleece in Canada.

I see, and I guess on the retail strategy, the update, you’re still on line for a half-a-million dozen this year. But in terms of everything else that has to be put in place, recruiting sales people, etc., can you give us an update on that?

Yes, well we’re now planning to go on the market. We feel we have achieved and we will achieve our half-a-million dozen for this fiscal year. We fell very confident on our forecast next year of 1.5 million dozen. And just to refresh everybody’s memory where our plan is to go slow and organic and basically just continue to drive this process. So it’s very conservative 1.5 million dozen is very conservative and achievable, and the caveat is that as part of our retail strategy we plan to start producing and launching a line of underwear, which we will bring to the marketplace and which we will produce in our Dominican Republic facility as we start ramping it up. We will build inventory and we will begin to solicit retailers in the next coming months basically, and we will be able to provide a more in-depth update at our August meeting.

And the half-a-million dozen right now is pretty much I assume at a large retailer that’s kind of a test, or how exactly?

It’s a little bit of private label business to be perfectly honest with you. And it’s nothing of significant size, but it’s still representative of what’s required for us to support the overall channel as we go forward.

Okay, thanks and I guess just in terms of the pricing going into the second half, Laurence are you still expecting to pass on some of the lower cotton costs going forward, and are you assuming there’s lower pricing based on that?

Yes, that’s right, we’re assuming sequentially lower prices in both the third and the fourth quarters which reflects lower industry costs for cotton.

And what was pricing this past quarter, the second quarter? Was it up? How much was it up if you can?

It was up 3.5% compared with last year, and we’re looking at sequentially pricing being 2% to 3% lower in the second half of the year than it is in the second quarter.

And the 3.5% that’s for all types of garments, so there is a mix in there right?

No, that’s factoring out mix.

Okay, great. I’ll get back in queue for more questions. Thank you.

Dennis Rosenberg, DSR Consulting.

Good morning, a couple of questions, on the retail the 1.5 million for next year, does that include underwear or is that just fleece.

No that would include underwear as well.

Okay, and how does it split between the underwear and fleece?

I’d say right now Dennis, because first of all it’s a very small number and for conservative reasons, I’d rather not commit to that number right now.

Okay, and could you talk at all about how big you think that could get in fiscal ’07?

We’re not hearing you very well Dennis.

Could you talk at all about how big that could become in fiscal ’07?

Well our projection for fiscal ’07 is roughly about 3 million dozen for the retail market, again which is still a conservative number, which we believe is still very conservative. But the more important thing I think is to look at what the potential is of the whole market. And the underwear category in the United States in is excess of 100 million dozen, and the overall Activewear basically is roughly we believe in our universe, roughly in about the 30 million dozen range. So it’s a much significant opportunity for us in terms of unit volume going forward.

Okay, and what is the pricing in the retail market relative to your current pricing?

Well, the retail market is we believe less competitively-priced today than what our wholesale market is. And that’s really where we see the opportunity because we can believe that we take our existing cost structure, which we’re comfortable with in the wholesale market and apply that same type of pricing strategy in the retail market, we would be anywhere between 40% less expensive than what products are being sold at today, which would give us we believe an opportunity to penetrate market share.

Would you look to have pricing similar to gain market share, or would you pick up gross margin as well?

Our plans right now are to try and generate market share.

Okay, and talk about the pricing being down 2% to 3% sequentially. How would that be relative to [inaudible]?

To what? I missed the last part.

How would that be relative to a year ago?

Prices increased in the third and fourth quarters of last year, so from that base we’re looking at our prices being about 4% below the second half of last year.

Okay, thank you.

Monica Logani, Foresight Research Solutions.

Thank you. First of all, congratulations on a very solid first quarter.

Louder Monica please.

Oh, you can’t hear me? Is this better? Could you just review, and you may have said this but I just want to make sure I have the right numbers in terms of your capacity that you expect this year and next year.

Well, this year we’re producing approximately 32 million dozen in season this year. Next year we’ll exit this year on an annual run rate of roughly about 37 million dozen, and next year we’ll have capacity end-year of 40 million dozen and exit next year roughly 45 million dozen capacity.

Okay, so in terms of this year and next year, are you going up to your capacity in terms of what you are expecting, or is there some leeway in case capacity doesn’t come online as quick?

Well, we’re expending our capacity on track, but we’re also reducing our Canadian capacity which would theoretically give us additional capacity if we required it. But that’s, we’re just managing our overall capacity in consistency with what we feel our sales projections are. But we actually have additional capacity because of the reduction in Canada.

Okay, so you have a little bit of extra if demand is a lot stronger than anticipated.

Correct, and our focus for next year for Canada is roughly about 6 million dozen, and our current run rate this year will be roughly about 11 million just to give you, or 10 to 11 million just to give you an idea of the excess capacity.

Okay, good, now in terms of just retail that you are talking about half-a-million this year and 1.5 million next year, what is the most possible that you could actually even sell in the retail market given your capacity?

We’d rather not speculate, but we feel comfortable with these numbers. Anything that we can achieve over this forecast would be upside for us. But we’re just getting going, and you have to go back to when we were in the wholesale market, it took us 5 years to build up to our first 3 million, and the we went from 3 to 6, 6 to 10, 10 to 14, and so forth. So we’re planning to be very conservative in our initial entry, but yet we believe there’s lots of potential in terms of the future of our retail strategy.

And in terms of going into retail, are there some extra SG&A costs that we have to consider? And what are the margins going to be looking like in the incremental retail?

In our forecast going forward, we believe that we’ll maintain our SG&A at relatively the same level as it is today. And we also are planning to utilize the same type of margin structure that we’re currently providing in the wholesale market into retail.

So that means you would obviously undercut everybody else by a long shot?

Well, I wouldn’t say that, but I would say that right now I think the wholesale market is much more competitive than the retail market, and therefore the pricing would be less in retail, yes.

Right, okay, but there’s no extra, I mean basically all the incremental costs to go into retail you are basically putting into place right now in terms of increased capacity, getting this distribution center up and going in North Carolina, that kind of stuff. Those are kind of the incremental costs, correct?

Correct, most of those costs are actually factored into our cost structure today as the expansion in North Carolina for example, our new management warehouse system we just put in, all the product development to support the retail, and all the market surveys and studies we’ve done to support our assumptions. And the only thing that we’ve hired sales representation; we might add a couple more people as we go forward, but that’s insignificant to the overall cost structure of our Company today. So the bulk of it is factored in, and it will incrementally go up as we start to do business basically.

Okay, and then in terms of are there any new wholesalers that you added on the wholesale front?

Well, this year we added one new wholesaler, and one new wholesaler we added at the end of fiscal 2004.

Okay, but that’s not in this quarter, that was earlier in the year.

It was earlier in the year, yes.

Okay, okay and finally just in terms of looking at the numbers in terms of sport shirt, the year-over-year decline in the sport shirt industry, what’s the reason for that?

Well, that’s an overall industry decline.

Right.

But Gildan continues to penetrate market share, and where the market is declining is in the higher-end fashion garments. And the products that we sell basically are more of a T-shirt with a collar, they’re all tubular golf shirts used to service what we think the uniform market, the pizza deliveryman for example. We’re not selling products going to the golf shops for example, which are all higher-end high golf shirts. And that part of the segment has declined, and our segment has actually we believe we are positioned to continue growing.

Okay, so that’s good to hear. It’s not in your side of the market.

Correct.

Okay, and then just finally in terms of on the fleece front, I know that you have added a lot of SKUs in the last few quarters. How are fleece sales going? I mean, obviously I can see that you’ve had great growth, but just in terms of any color that you can give us.

Well, not just that we’ve had great growth, but we actually missed a lot of opportunity in the marketplace. I mean, we’ve been sold out. Typically you end the fleece season and your inventories are back in shape come January-February, but we’re still tight for inventory right now, and what we see going forward is a very successful fleece year. We’re trying to ramp it up as quick as we possibly can. And as we bring on the DR, like I said earlier we’re going to expand in Canada our Canadian fleece capacity. We’re starting to bring that on a little bit faster now because we are anticipating a great fleece year. So the combination of us being in all of those 3 categories and our product expansion has allowed us now to really be a full-line supplier to the fleece channel, and that’s resulted in significant market share. And we believe that we’re looking forward to a great season.

Okay, great. Well thanks for answering my questions, and congratulations on the prior quarter.

Andrea McReynolds, Sprott Securities.

Hi, just to get back to the capacity issue and the changes that you guys are contemplating, can you give us, you did say the Canadian production for ’05 and ’06, but could you just give us a breakdown by facility what you’re expecting for fiscal ’05 and then for fiscal ’06?

Okay, well ’05 you want to know what we made in-season or do you want to know out?

What you’re at, what your in-season.

In-season, okay so for Honduras is roughly about 19.5 million dozen; DR would be roughly about 2 million dozen; and 11 million dozen in Canada.

Okay, and then for fiscal ’06?

And for ’06 we will be 18 million in Honduras; 15 million in DR; and 6 million in Canada.

Okay, and then can you just talk a little bit about the Canada fleece ramp-up? Obviously, from a labor perspective alone Canada is going to be a higher-cost base than Nicaragua, in which the labor rates as I understand it are even lower than Honduras. Can you just talk about the competitiveness on pricing, manufacturing fleece out of Canada versus Nicaragua or another alternative offshore location?

Okay, well first of all fleece has been made always traditionally in Canada and is one of our most profitable product margins in our line. We’ve been able to generate market share last year from 14% to almost 24%, and as we stated as we continue to drive higher value-added products, this is one of them.

Secondly, our Canadian fleece is all produced in Mexico where we found our NAFTA, so we still have a very good cost structure in our Canadian textile facility. I mean, that’s the reason why we’ve had these great returns over the last couple of year.

Now, as we go forward, we are going to downsize our Canadian operations basically to continue to grow our offshore production, and as you see Canada being a smaller portion of our volume next year, it’s going to enhance our margins and still streamline our Canadian facilities to service our NAFTA-oriented. We will take our fleece production from where it is now and have enough capacity to service our 2006 forecast. But as we ramp up our third facility, which will most likely be in Rio Nance now, we believe that we will continue to drive future fleece sales, and ultimately continue to reduce our cost structure further.

Okay, so as you, assuming that you go ahead with Rio Nance too, as you ramp up production of that is the plan that it will be a dedicated fleece facility, or will it be a split between fleece and regular Ts?

It’s going to be able to make both, and depending on our ability to expand into the fleece category, we’ll have an option to either do Ts or do fleece, and that will be a function of our sales.

Okay, okay and then could you just speak a little bit more, in the press release you talked about supply shortages in some products, and then you just mentioned that Gildan has had supply shortages within fleece. Have the supply shortages been across the industry or was it specific to Gildan and was it just within fleece?

I think right now for the last 2 quarters, I would say that the overall market, Gildan was tighter than the overall market. I would say that as we entered the third quarter, the overall market has tightened up consistently the way we have been up until now I would say. So the market conditions in all categories I think are relatively tight. And we believe that this will probably catch itself up basically, because let’s say for example the market is tight now and will remain relatively tight through June. And as we move out of season, let’s say in the fourth quarter and into the first quarter, obviously capacities will be readily available.

However, there is still promotional -- and this is the thing I think we need to point out -- how do you relate to pricing with the tightness of inventory in the market? There is still promotional activity out in the marketplace. We had our white T-shirts on sale for the month of April in response to competitors who had promotional pricing. So despite the fact that the industry conditions probably have not been tighter in the last 3 or 4 years, some of our competitors are consistently promoting their products within the marketplace.

Okay, and is that promotion mostly on their whites?

It’s on whites, it’s on golf shirts, and believe it or not it’s even on the fleece.

Okay, Laurence you usually give a breakdown on the gross margin as the magnitude of the various causes of negative influences. Can you give that again?

Sure, so compared with last year after adjusting for the functional currency adjustment last year, we have a base of 27.3% gross margin. Pricing improved margins by about 3%; product mix favorably impacted margins by close to 1%; and cotton was negative 1%. So that brings you to the 30% in the second quarter of this year.

On the manufacturing side, our ongoing efficiencies balanced out with the higher energy and transportation costs of the impact of the lower capacity utilization in the Canadian yarn facilities. So that was all a wash.

Okay, okay and just 2 more questions; how many units in total did you sell in the quarter?

In the quarter, our total units were a little under 8.5 million dozen.

Okay, and then just on the retail strategy Glen, you talked before about that you’re doing some private label this year, but looking forward into next year I think that you’ve been looking at how you address servicing Wal-Mart and some of the other major mass merchants in the channel, vis-à-vis Gildan label versus doing private label. Have you made any decisions on that front?

Well, it’s premature for us to make a decision at this point in time. I mean, we’re putting our plans in place in our product lines and our pricing strategies, and we’re going to go and start soliciting these retailers basically. We believe that the number that we set forth at 1.5 million for this year and potentially going to 3 million for ’06 as well as for ’07 is very conservative, and we feel comfortable with those numbers at this time.

Okay, thanks guys.

Doug Cooper, Paradigm Capital.

Hi guys, most of my stuff has been answered already, but a couple of things. There’s been a lot of talk obviously about the revaluing the yen [ph] and increased or I guess putting back in place not the tariffs but the quotas in the U.S. and maybe you can make a noise about not approving KAFTA [ph]. Can you comment on how you see things going in and what impact it would have on your goods?

Well, obviously anything related to China wouldn’t have an impact if it doesn’t have an impact already today, so we’re not concerned about China in terms of their currency or the restrictions on their products coming into the country because it’s a non-event for us as we speak.

KAFTA we believe is something that’s going to transpire. It’s in works right now, and we believe that in the next coming months this will be approved.

Okay, and just on the retail side, how much of the planned, once you start ramping up in a major way how much of it do you think will be underwear?

Well, over our projections next year, it’s hard for us to evaluate right now what the mix would be. But we’re very optimistic because it’s a very large market and we think there’s a huge potential. But we’d rather not comment on the actual split today.

Okay, and the industry dynamics between T-shirts, fleece, and golf shirts versus underwear in terms of offshore, in terms of China for example.

I think that all of the products in which we are going to focus on going forward are all commodity products that need to be serviced domestically. And that’s really what our focus is in looking at products that are more replenishment type programs that need to be serviced domestically.

Okay, thank you.

Claude Proulx, BMO Nesbitt Burns.

Good morning, first question I mean I look at your -- you’re looking at going from 32 to 40 million units, dozens produced next year. One million of that will go into retail. What about the other 7? Is it all absorbed by wholesale in the U.S.? Can you split where the 7 million will be going?

Well, first of all I gave you our production capacity [inaudible] in our sales forecast, so that’s the first thing. We need to build inventory to support our retail initiative and basically we need to support our whole initiative. So, and also the fact that we’re actually very tight on inventories right now. So we look at talking about our capacity was more a manufacturing capacity. And we’ve built a 5-year plan right now to take our existing capacity from sales from over 32 million roughly dozen this year up to almost 60 million dozen over the next 5 years. That’s our plan, and we’re building capacity to support that plan.

Now, part of our focus has to be also looking at the inventories required to service the market, and within the season there will be some adjustments as we go forward.

So that 7, I mean are there 1, 2, 3 million dozen that will go in the inventory?

Well right now I would say there will be definitely a couple million dozen going into inventory. But you also have to understand that we’re not looking at just growing also our retail initiative by 1.5 million dozen; we’re also looking at expanding geographically internationally as well next year, and also continue to penetrate existing markets as well. So this capacity that we’re building will be utilized on all 3 fronts.

Okay, the second thing of the $85 million that you will spend on CapEx this year, how much of it would you say is maintenance CapEx? Or maybe you could say it another way considering the amount of capacity that you have right now, or you will have by the end of the year, what would be the normal maintenance run rate CapEx spending?

At the present time, it would be probably around $10 million.

Okay, okay thank you very much.

Michael Glenn, RBC Capital Markets.

Just a quick question; you mentioned that your ’05 EPS guidance includes sequentially lower selling prices. I’m just wondering heading into Q3 have you guys seen that at all taking place.

We’ve seen so far in April there’s been promotional activity, and we believe there is continued promotional activity in the month of May. And so far this quarter, we feel that what we’ve submitted to the market basically is somewhat the way it’s going out. The question is what will happen in June, towards the end of May and June I think is still not known for us. But there’s still promotional activity happening. In May we had quite a significant promotion on white T-shirts, and basically there’s been another promotion from one of our competitors launched in the month of May, and we’re just evaluating how we’re going to respond to it, and also looking at the supply and demand balances in the marketplace.

Okay, and just on your product mix, the higher margin you’re getting is that from an increased sale of color product?

Well, it’s also if you look at our golf shirts and fleece basically, those are [inaudible] margin products for us and we’ve expanded significantly in those 2 categories combined with all the other items that we produce, which is tanks and Ts and pockets, and we have a whole slew of other product lines which we provide that bring us better returns that white T-shirts. So net-net, we’re managing our capacity and white T-shirts are now very tight in inventory.

And you saw Michael from the margin analysis that I provided that higher pricing and lower promotional discounts have had a more significant impact on our margin expansion than product mix.

Okay, great. Thanks, that’s it.

Cynthia Rose-Martel, Jennings Capital Inc.

Good morning Glen, Laurence. Well done, nice quarter. Most of mine have been answered too, but just 2 little questions. The plant adjacent to Rio Nance, the fleece plant, you were planning 5 million dozen I believe for Nicaragua. Would the plant be the same size?

Yes, it would be the same size.

Okay, and I can’t really expect too much of it until 2007.

Right.

Okay, thank you. In terms of the STARS, as you said it’s getting a little iffy. Can I assume that your sales to non-STARS participants was roughly equivalent to the growth you saw with the participants?

Yes, I would say yes.

Okay, thank you very much. That’s all for me.

Ron Schwarz, CIBC World Markets.

Thank you, just 2 for me. Glen is it fair to say given the revamp of the capacity rollout that you probably reduced the risk on the timing and the execution of that by focusing solely in on the DR and not having to deal with the same parallel track in Nicaragua?

Yes, for sure. We’re going to utilize our management obviously, and where we’re going to gain here Ron is really more in the buildup of the facilities. And to facilitate that would be much quicker in Honduras than it would in the DR.

Okay, and given that the capacity rollout is essentially the same with reduced risks, your numbers this year are going to be obviously much better than most people had originally expected just given where pricing is. So looking into fiscal ’06 with that capacity ramping up, chances you guys are going to try to push pricing down to continue to gain market share. How do you see the balance kind of where you’ll have the capacity at including the execution of getting there with driving down pricing to kind of make sure you’re in that 15% to 20% targeted earnings growth objective? Is it matching up better today now with these decisions than it might have 6 months ago?

Well, the thing is twofold. If you look at our initiative going forward, we definitely had the capacity and typically the Company is always taking that extra capacity and taking the cost savings from having that capacity and passing it to lower selling prices. And that’s driven our top line.

The only fundamental difference right now is that will legally transpire, but we are also looking to look at new markets and new opportunities from a sales perspective, so although we’re putting on a lot more capacity, it’s not necessarily not all going to the same place because now we’re going to be focusing on retail. And as well as we’re really looking to focus on our international growth as well in the markets like Mexico, Japan, Europe, and Australia where all the markets we’re looking to build. And as we continue to add capacity, only a portion of it will go, part will go to the incremental growth within the market; some will be adding additional market share among our existing customers, but also those other strategic initiatives. So we have a better balance now as we go forward, as we bring on this capacity. It’s not all going into the same channel.

Okay, and sorry the last one was my numbers might be wrong from memory, but I think the DR was going to reduce general costs by another $3 a dozen, which was what Honduras originally. If you tack the fleece facility onto Honduras, so call it Rio Nance II will that be another $1 or $2 a dozen better than perhaps what Nicaragua just given all that leverage of existing infrastructure?

We believe that there are 2 things to happen, not just the cost but slightly reduced capital. So let’s say for example to put that facility there versus putting it originally in Nicaragua and the savings would be very similar in terms of the cost structure. And we’re really, I would say the same.

Okay, thanks.

(OPERATOR INSTRUCTIONS).

Phil Fisher, Travalet [ph] and Company.

Good quarter guys. I’m curious about what the, given the total manufacturing capacity in dozens for ‘05/’06 I was wondering what the split is between fleece, polos and Ts for those 2 years, if you can provide that level of granularity.

We don’t feel comfortable providing that level, but we have sufficient capacity to service our growth in all of those markets.

Maybe a different way to ask it then is the mix of fleece remaining stable between those 2 years, or will it be going up between those 2 years?

We’re continuing to grow a greater percentage of market share in fleece. If you look at our market share, it went from 14% to 24%. We believe that ultimately our market share in all categories will be relatively the same. So proportionately we’re selling the same, we’ll be selling more fleece and golf shirts relative to T-shirts, but it’s not relative in the overall scheme of things. I mean it’s on a smaller basis, so I wouldn’t worry about it.

Okay, all right thank you.

You have no further questions at this time.

Okay, with that I’d like to thank you and we’ll speak to you next August. Thanks.

This concludes your conference. You may now disconnect. Have a great day.