Gildan Activewear Inc (GIL) 2005 Q3 法說會逐字稿

Good day everyone and welcome to today's Gildan Activewear third quarter 2005 results conference call. As a reminder, today's call is being recorded. Our speakers today are President and Chief Executive Officer Mr. Glenn Chamandy and Executive Vice-president of Finance and Chief Financial Officer, Mr. Laurence Sellyn.

Before turning the meeting 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 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 that may effect the Company's future results. I would like to now turn the call over to Mr. Glen Chamandy, please go ahead, sir.

Thank you. Welcome to our third quarter conference call. I will discuss our capacity expansion plans which we announced today and then Laurence will reviews the third quarter results.

The passage last week of the Central American Free Trade Agreement, or CAFTA, further reinforces our strategic decision to support the next stage of our growth strategy with further offshore capacity expansion in Central America in the Caribbean. Today we announced that we will be constructing a second major textile facility in Honduras at our Rio Nance site. We will also be completing our investment in our new Dominican republic facility to maximize its economy of scale and product mix capabilities. And we will be constructing a modern large-scale fully-integrated at Rio Nance for the manufacturing of athletic socks.

I will first cover the textile expansion projects in the Dominican Republic and Honduras, which will support our growth plans as previously outlined to maximize our share penetration in the screenprint market to enter retail and market and to pursue further international growth expansion. Then I will discuss our new initiative to compliment our retail strategy by entering the athletic soft market.

In our fiscal 2006 capital expansion plan, we will complete our investment of our new Dominican Republic facility to complete its ramp-up to full capacity and further broaden its product line capabilities. Although the additional DR investment in 2006 will complete our spending for this project, in our five year plans we continue to include a future second textile facility at the DR site. The start up of the first DR facility is progressing well and paralleling the performance and efficiencies of our first Rio Nance facility at the same stage of its development.

We have also announced today that we will begin construction of a second textile facility at the Rio Nance site in Honduras. The total planned projected cost is estimated at approximately U.S. $65 million, of which approximately $20 million is expect tod be spent in fiscal 2006. The facility will be ramped up to full capacity during fiscal 2007 and 2008. With the two textile expansion projects coupled with our facilities in Honduras and Canada, we expect to have approximately 40 million dozens of production capacity in 2006 and approximately 50 million dozens of capacity for 2007.

With this projected--with these projections we expect to have significant capacity in place to support our planned sales growth for our existing product lines and underwear in the screenprint and retail markets for the next two years. As our new capacity comes on stream, we continue to be confident that we will achieve our annualized sales growth projections and marketshare penetration assumed in our five year plan. As you can see from the June STARS data, our brand continues to have excellent momentum in all product categories in the screenprint market.

Also, we are pleased with our initial progress in entering the retail market. We have sold over half a million dozens to retail customers in our current fiscal year and we are confident in our planned growth reflected in our sales projection for fiscal 2006, which calls for sales next year of approximately 1.5 million dozen. We have completed our product line, product development, and retail packaging for all of our products for entry into the retail underwear market. We are now producing underwear in Honduras and expect to be well-positioned with a solid base to drive more significant penetration as we ramp up our new capacity expansions announced today.

On the International front, we are establishing a network of distributors in Mexico and plan to enter this geographic market for 2006.

Our other major new initiative announced today is to enter the athletic soft market to compliment our overall retail strategy and broaden our basic apparel offering to the mass market retailers. Our planned new soft facility at Rio Nance will be the largest scale offshore facility in the region covered by the CAFTA agreement. This investment will position Gildan to be the low-cost producer of athletic socks for the North American market. Competition in this market is hardly fragmented with numerous small private companies in addition to the same companies that we compete against in the U.S. screenprint market.

We are extremely excited about the potential of the soft market for Gildan and view this as a major strategic growth opportunity for our company to leverage our success in low-cost offshore manufacturing of basic knit apparel. The first phase of our Rio Nance sock facility will cost approximately $20 million and is expected to be in production during fiscal 2006. We plan to ramp up our new facility quickly with the objective of capitalizing on the large volume potential of athletic socks market for 2007 and becoming a market leader in the business in North America by the end of our five year planning period.

With that, I would like to pass the call over to Laurence to review our financial performance.

Good morning. Our third quarter earnings reported this morning were $0.57 U.S. per share, a record for any fiscal quarter. EPS were 29.5% above strong comparative results in Q3 last year and 14% above our guidance of approximately $0.50 US per share given at the end of the second quarter.

Compared with our May guidance, our earnings were due to more favorable--our higher earnings were due to more favorable selling prices, more favorable product mix, and slightly lower manufacturing costs. Pricing for Gildan's products in the third quarter was down approximately 2% from last year when selling prices were stronger in the second half of the year than in the first half. And down approximately 1% sequentially from the second quarter of this year. In our opinion, we believe that the sequential decline in pricing does not signal any deterioration in the overall favorable supply/demand balance or pricing environment, but merely reflects some degree of pass-through of lower industry cotton costs.

Selling prices were more favorable in the third quarter than had been anticipated in our guidance as we were able to limit promotional activity in the quarter relative to our forecast, and focused as far as practical on higher value product lines. At the same time, notwithstanding our capacity constraints, we were close to our targets for unit sales volume growth in the quarter and achieve significant marketshare increases in all product categories.

Sales for the quarter, at $198.9 million U.S. were up from last year. While the information supplied to STARS continues to be incomplete due to the non-participation of certain major distributors, the STARS report shows our leading share in t-shirts increasing to 36.2% from 29.6% in the third quarter last year. We are now solidly the leading brand in golf shirts with a marketshare of 32.4% versus 23% in the third quarter last year. And we are achieving significant marketshare penetration in sweatshirts, where our share is now 25.3%, up from 16.4% in the third quarter a year ago.

Gross margins increased to 31.6% from 30.3% a year ago due to our more favorable product mix, lower cotton costs, and favorable manufacturing efficiencies. These factors more than offset the negative margin impact of lower year-over-year selling prices and higher transportation costs. Our manufacturing costs in the quarter also included expensing start-up inefficiencies for the Dominican Republic textile facility and inefficiencies related to the phase-out of our Canadian yarn-spinning operations as we consumed the balance of the inventory from the former Canadian plants. The DR facility is expected to reach an economic scale of production during the current fiscal quarter.

The positive EPS impact compared to last year of our growth in unit sales and expansion of gross margins was partially offset by higher SG&A expenses due to higher distribution costs, an increase in our provision for performance-related compensation expenses, and a stronger Canadian dollar in addition to ongoing organizational development costs. The cost of operating our U.S. distribution center was negatively impacted in the third quarter by the start-up of a new warehouse management system to increase distribution capacity. Although the new system was implemented quickly and successfully, it resulted in additional costs during the quarter.

At the same time that we raised our EPS estimate for the third quarter on July 12th, we also increased our full year guidance for fiscal 2005 to approximately $1.50 U.S. per share, excluding the charge recorded in our second quarter for the closure of our Canadian yarn-spinning operations. Our revised full-year estimate is up from our most recent guidance of U.S. $1.40 per share, and reflects an EPS increase of 34% from fiscal 2004 for the full year, excluding special items in both years. Overall industry conditions, as we said, continue to be favorable with supply/demand, inventories, and good balance. We are projecting EPS of approximately $0.42 US per share in the fourth quarter, an increase of 23.5% from $0.34 U.S. in the fourth quarter a year ago, before the special charge last year related to Greg Chamandy's departure from Gildan.

We generated $15.9 million US of free cash flow in third quarter after using $23.6 million for the construction and ramp-up of the Dominican Republic textile facility and other capital expenditure projects, including 100% of the investment we made by our joint venture with Frontier and a new yarn spinning facility in Clarkton, North Carolina, which is now almost fully wrapped up and achieving our targeted manufacturing efficiencies. We utilized $17.5 million dollars U.S. in the third quarter for the second of four scheduled annual principal repayments of our U.S. senior notes and ended the third quarter with cash of $31 million U.S. We are sill projecting capital expenditures for the full fiscal year of approximately $85 million U.S. We expect to be free cash flow positive for the full year after capital expenditures and end fiscal 2005 with approximately $65 million U.S. of cash and cash equivalents.

Glenn discussed our capacity expansion plans for fiscal 2006, resulting in capital expenditures next year of approximately $105 million U.S. We expect to continue to be able to finance our capital expenditure program in 2006 out of our internal free cashflow generation.

Now, we are ready to take questions.

[OPERATOR INSTRUCTIONS] Your first question will come from Jessy Hayem from Desjardins Securities.

Thank you, good morning. Just wondering, as we head into the fourth quarter, Lawrence, you mentioned so far a balance on the supply/demand side and the wholesale. Can you comment on the pricing so far or maybe capacity also. Can we expect less promotional activity than usual in the quarter seeing what happened in the third quarter.

This is Glenn. We can assume similar type pricing in the fourth quarter. Typically the fourth quarter is a little bit more pricing activity than the third quarter because we are usually going out of season. So in our projections we projected at least 1% lower pricing in the fourth quarter.

Okay, thanks. And it was mentioned also that with some price decline seen in the third quarter, I think it was about 2% that Lawrence mentioned, it seemed that you alluded to the fact this could be linked to the lower cotton cost pass-through. I was under the impression that we had not started passing through some of the cotton costs because of general capacity constraints. Is that correct? Or is this occurring?

Well, you can say a large proportion of lower cotton costs have been retained in margins but there has been some pass-through.

Okay. Thank you. Now on the expansion plans, obviously the rationale behind going after socks, seeing that CAFTA passed through and the removal of duties on socks, the fact that it compliments your strategy. Can you give us more color that led you to act so quickly on this and maybe an indication of potential retail customers. The need to have a full line, et cetera.

Well, first of all, our decision to build a facility in Honduras, we believe is irrelevant to the decision with CAFTA because we think we can develop a low-cost model with or without the passage of CAFTA, and that was our original thought. CAFTA is going to enhance our ability to be more productive in this environment.

The decision to enter the sock, athletic sock, is to compliment our existing strategy going into retail. It complements what Gildan is focusing on -- it is going to be basic nonfashion products that are going to be replenishment-type programs to retailers. It's very basic. There's very little fashion element in the athletic sock category and we believe that will be conducive to our skill sets and being a low-cost manufacturer off-shore.

Can you go over again -- I missed some of the comments you mentioned in terms of the breakdown of costs for each of the new facilities -- when they are expected to start producing full product and when will they be fully ramped up?

We are going to begin to build our facility both our -- we'll start off first with the textile facility where the Dominican Republic is being complete and the balance in the investment is being made in fiscal 2006 and will be ramped up in full capacity in 2006. We are investing in the Rio Nance facility and that building will be constructed during 2006 and we will be ramped up during 2007 and can be completely ramped up by the end of 2008. And the sock facility will be finished and built in fiscal 2006 and it will be producing product in 2006 but really be geared to supply the market for 2007.

One final question, what kind of price can we expect you to sell a dozen of socks, for example, and can you comment on the margins in this segment?

I would rather not si say right now. More importantly, I think is the overall size of the market from the data that we have, the potential size of the market is in the neighborhood of 400 million dozens annually in the United States. So it is a very large market. It's definitely not had the same type of selling prices as t-shirts because it's not the same type of product, obviously. But the range of products that are selling today, let's say for example, in the mass market. That sold through the mass market are selling six packs for around $4, $4.50 is what someone like a K Mart or a Walmart would be selling six pair of socks for, just to give you an idea.

Thank you, I will go back in queue for more.

Your next question comes from Ron Schwarz from CIBC World Markets.

Thanks. Glen, just a question on the capacity additions. It looks like you are adding somewhere around, at least out of the chute, somewhere around 5 million dozen into '07, bringing you up to 50 million dozen. Ultimately if you want to try to hit that 60 plus million dozen run rate of sales by, call it '08, '09, you will need more. To get to the ultimate capacity of 65 million dozen, is that the extra plant in DR that would need to come on?

Well, first of all the 50 million dozen doesn't assume the full ramp-up in 2007 of our Honduras facilities so we will be relatively close, with our existing capacity once it is all fully ramped up by 2008, to the number you just mentioned. And the opportunity for us is still to put additional facilities in the DR as well as we are still in the evaluation stage of looking at our Nicaraguan facility, which we still think is a strategic site for additional facilities as well. In the overall plan, our objective is to take capacity out of the equation and focus on the front-end of our business now.

So given that that is more, let's call it more than 10 million dozen or something around there, is it fair to say that these incremental add-ons--I guess a rule of thumb that I used to calculate was, a $10 million investment got you about a million dozen. It looks like that has actually been slashed in half. Is that about right?

Well, that's a function of mix and what products we put in these facilities. You know, if it is fleece, collared shirts, depending on what items we are producing where. You have to segregate it from t-shirts versus different product categories. The bottom line is that our investment per dollar is consistent with what we had in the past and proportionately we will be spending the equivalent dollars to get the value-added or values that are going to be generated in sales dollar at the end of the day.

Okay, so returns on capital are going up. And I would assume, just given that socks has virtually no or little sewing to it at all, that will be a much higher return on invested capital as well, correct?.

Correct. It is a lower amount of capital needed to be invested and a higher return on capital.

Last question. That original target of 60 million dozen, if I remember well, you guys never really included socks in there. So is it fair to say that there is upside potential over the next three to four years, in your kind of base-case scenario?

Those capacities of up to 60 million by the three textile facilities are fully ramped up plus our existing Canadian facilities don't include any capacity for socks.

Previous objectives that we have given for both sales and capacity did not include socks.

Your next question comes from Claude Proulx of BMO Nesbitt Burns.

Good morning.

Good morning.

On your retail initiative, would you expect over the coming months to announce which customers you will be supplying? Is that something we should be expecting?

For competitive reasons we would rather not say. But we are in a position to--you know, we achieved our goal last year and we have very much under the way of achieving our goal this year. We have over 40% of our bookings in-house based on our projected 1.5 million dozens for next year and we are feeling very confident. Our focus for this year so far has been to develop the smaller, more regional chains in the United States and as we see our products in the stores, we will tell you where to shop. How is that?

I would like to buy some, I guess.

Okay.

Next question, on, in terms of your production of socks, I mean, for that $20 million investment, how many dozens of socks would you be able to produce with your Phase I plan?

Well, the first phase is to build the infrastructure because regardless of our overall capacity we have to build the building and all the infrastructure, but the plant is geared to produce a significant amount of socks. It is going to be the largest state of the art facility in Central America and one of the largest facilities in the world and our plant capacity is going to be in excess of 20 million dozens out of this plant by the time it is finished.

That would be after the second phase is done and how much money in total would have been invested to achieve the 20 million dozen?

Probably $45 million total investment and that would be done over the next three, four years, depending upon the built up into the market place.

Okay.

Or faster if we are able to.

Okay. Thank you.

Your next question will come from Dennis Rosenberg with DSR Consulting.

Good morning. Your long-term growth rates prior to the socks business had been around 15 to 20% a year. Given that the growth potential for the new business is so big, what do you think happens to that longer term growth rate?

Well, our plan is to deliver and commit to 15 to 25% EPS growth and in our plan projections that we sort forth in the market in our five year plan, obviously socks has not been included in that number. We believe that we have an opportunity in all segments of our marketplace, which is including the activewear market. We believe we are going to penetrate additional marketshare. We believe there are lots of opportunities on geographical expansion into Mexico and Japan and other parts of Asia.

The retail strategy is we were very conservative in our numbers going into retail when we estimated only in the five year planning period we would be at 13 million dozens by the end of the fifth year. That's very conservative and now we have the entry of socks. We set forth a plan that would be 15 to 20% EPS on the existing plan. As we look at all the opportunities and we built up our opportunities, you know, that's the difference between taking us to more the historical growth rate of the 30 to 35% growth we've seen than the 25 to 30 that we've seen in the past five, six years.

Okay. Great. It sounds like we are talking about 25 to 30% growth instead of 15 to 20.

That's an upside potential, yes.

Okay. Could you talk about what your goals are as far as marketshare in socks.

Well, I mean, you know, our marketshare goals in the activewear market, we have achieved the share. Maybe around 30-- right now our current share is in the 36 range and we believe there is upside to the share. You know the areas of opportunity for us.

There are still product categories that we don't have that type of market penetration, which we believe are opportunity and as we add capacity we believe the share will grow. You know, we believe that 50% is a real good target for example in the long run.

What about socks?

Well, socks, we are obviously committed to building a facility and our investment is to look at at maximizing the capacity we have set forth and that's been our initial projections at this point. And as we get a little bit more involved in it, we we will get a feel for what the ultimate potential for it will be.

Your next question will come from [Phil Fisher] with [inaudible].

I was hoping you could give us a sense for what facilities were producing your capacity targets--I mean your production targets, I guess 40 million in '06 and 50 million in '07. Where is that coming from?

Well, you know, the thing is that based on how we are managing our mix, what is important for us is not to emphasize in which facility is going to be which product.

One of the things we are doing now is spending additional capital in our Dominican Republic facility to be in a position to have more flexibility in mix and that really changes the dynamics of how many dozens come out of what facilities, because if it is a fleece, if it's a golf shirt, if it's long sleeve, or so forth. In the volume of production we are producing, the DR facility will be slightly bigger than our Rio Nance facility in total pounds of fabric or kilos of fabric being produced. And the new facility in Honduras will be slightly smaller than the other two facilities because of the product we are looking to put there.

But overall we have sufficient capacity next year to support a minimum of 40 million dozens of manufacturing capacity and definitely for 2005 -- sorry, 2007 -- 50 million dozens is a realistic target. That capacity will be in place and will be managed through the mix of all our facilities to maximize the bottom line.

Okay. Will Rio Nance 2, not the sock facility but the second apparel facility, is that going to be for fleece or for t-shirts or what are you going to be making there?

Look, we are going to manage our mix. I would rather not say right now for competitive reasons. But the point is it is going to be a state of the art facility and we are going to make sure we balance all of our facilities to maximize our product mix and as well to maximize our sales potential in each one of the categories in which we compete. For competitive reasons I would rather not go there.

Okay.

Your next question comes from [Doug Cooper] from Paradigm Capital.

What was the volume was in the quarter in terms of a million dozen?

Our volume was about 9.7 million dozens in the quarter.

Okay. I noticed on the marketshare, it looks like it flat-lined in the quarter-over-quarter for t-shirts and the sport shirts relatively flat if not slightly down at 1%. Is that capacity issues or I think you just mentioned 50% realistic in the activewear market?

No, repeat your question again.

You showed 36% market share in t-shirts. It was 36% in Q2 as well. And sport shirts 33% in Q2 '05, 32% in Q3 '05. So my question is, it looks like it flat-lined quarter-over-quarter sequentially in other words. What is the reason for that? Is it capacity issues or is it you have reached the ceiling for the marketshare in those two categories?

I think you have to look at it that we are continuing our positive momentum and marketshare penetration. We are up significantly compared with last year. You have to remember this is the peak of summer selling for t-shirts so we were able to maintain our share of close to 40% even with much higher seasonal demand.

What is the realistic target on the t-shirts and the sport shirts?

We've sent targets out to the market and what we said to the market is that 40% in the t-shirt category and 35% in the fleece and golf shirt category were the initial targets that we brought to the market. There is an upside to those shares and--but, that's what we said to the market.

You know, your point is correct. There were capacity constraints from the quarter. So had we had more capacity in the quarter we would have achieved higher shares than what we did.

Okay. What is your production volume estimates for underwear. How big a mark? Can you talk about that as well? A lot of focus on the sock market but a little bit about the underwear as well if you could.

In North America, it is around 100 million dozens on an annualized basis. In our projections, we projected a very conservative estimate of underwear for the next fiscal year, and as we add on capacity, and new capacity comes on line, we will be increasing our opportunity in that category.

Perfect. Thank you.

Thank you.

Your next question come from [Michael Glenn] from RBC Capital Markets.

Just a question in terms of construction of the new facilities. Any increased activity among competitors like Russell down in Honduras and Nicaragua, in terms of construction.

I would rather not comment on my competitors, if you don't mind.

No problem. Okay. Okay, that's it for me.

Thank you.

Your next question will come from [Monica Golany] with Foresight Research.

I was wondering, Laurence, if you could go through your normal breakdown of gross margin and the different areas that helped and hurt you in terms of percentage changes?

Well, the gross margin increased by 1.3% compared with the third quarter of last year and the positive factors that increased our margins were lower cost of cotton and more favorable mix. Each of which had approximately a 2% favorable impact on gross margins of 400 gross margin points combined. That was partially off-set by the year-over-year decline of selling prices which reduced margins by about 2 percent and higher energy and transportation costs would account for the balance of just under 1% negative.

Can you comment a little bit about your fleece position in terms of supply and demand. Last quarter, you left some demand on the table because you didn't have enough capacity. I just wanted you to comment on what the position was in the current quarter. Also, am I correct in thinking that fleece is a retail driver in terms of that product line. It is really going to drive the retail business.

Well, our fleece business is still very strong. We continue to penetrate the market. We are definitely still tied to capacity. If we had more capacity in fleece, we would have achieved a higher percentage of share. We are still tight for fleece going into the fourth quarter. This is the season, basically, so we are selling everything we can make at this point in time. And yes, fleece is a major opportunity in the activewear segment of retail and one of our objectives in our new capacity expansion is to further increase the amount of fleece capabilities that we currently have.

So do you think in a year from now we won't have this problem of being capacity constrained on the fleece side?

In a year from now we won't have any limitations in any of our product categories and capacities the way we are setting up our manufacturing expansion plans.

Right. Obviously fleece is a higher margin business. That would only help your margins going forward.

It is not going to not only help our margins but it is also, from a seasonality point of view, it will give us more sales in the first quarter and last quarter which is typically our weakest two quarters of the year. So from all aspects it is going to be a positive product line for the company.

Also, can you comment a little bit about your free cash flow. Obviously you are generating a good amount of free cash flow every quarter. I wanted to know what you are planning to do with that.

Well, we will continue to reinvest our free cash flow in our capacity expansion programs and in the next year we are planning that -- both this year and next year -- we are planning that all of the operating cash flow that we are generating from our operating activities are being used to finance our capacity expansion and capital expenditures.

Just looking forward next year, you won't, obviously, it is after CapEx. So after CapEx, you really won't be generating much free cash flow, is that correct?

The way I would like to word it is we will be generating a sufficient amount of free cash flow to finance our expanded capacity expansion program through our internal free cash flow generation.

That's fine. That's all I have. Thank you so much.

Your next question comes from Martin Goulet from National Bank Financial.

Regarding the warehouse management system costs that you mentioned, can you quantify those and is there any carryover into the fourth quarter, because so far this year we've seen in SG&As versus last year percent of sales slightly above last year, can we also expect the same trend in Q4 and maybe going into next year?

The impact of the warehouse management system and our SG&A in the quarter was about $0.02 per share negative and that project is now behind us and should not be a factor impacting our SG&A in the fourth quarter next year.

Okay. In terms of SG&A, they have been tracking a bit ahead of last year in terms of percentage of sales. Can we expect the same trend to hold in Q4 and maybe into next year as you add to your infrastructure and especially retail.

Our objective next year when we provide our guidance for next year would be to reflect a reduction of SG&A as a percentage of sales and leverage our existing SG&A infrastructure.

Looking at the depreciation, Laurence, I notice that it was lower than in the previous quarter. There might have been some accelerated depreciation for the assets that you put up for sale or what ever reason. I would have thought it would be above 6 million. Any particular reason for Q3?

Our overall depreciation is about half a million dollars lower than the second quarter and that's because in the second quarter, because we don't have the reoccurrence issues of, say, the depreciation from the Canadian yarn-spinning facilities, which is about half a million. And also in the second quarter, we took accelerated--we wrote off pieces of equipment that were no longer being utilized which impacted Q2 depreciation by about half a million dollars. So, the combined million dollar reduction from these two things was offset by a half million dollar increase due to our capacity expansion.

So we should now resume a more normal trend.

That's right.

That's all for me. Thank you.

Your next question will come from [Hillary Lawson] from Sprott Securities.

I was wondering, what are you expecting in terms of dozens sold in Mexico in fiscal 2006?

Our timed projection is for at least half a million dozen.

Okay. And over time. Do you know the size of that market versus the U.S.?

Size of the market we estimate is between nine and 10 million dozen in the wholesale market. There is also a retail market there as well.

You are going to move into the screen printing market.

The screen printing market we estimate is between 9 and 10 million dozen.

Okay. For next year, what volume of socks do you estimate you will produce?

For fiscal '06? It will be limited.

Very limited, the majority seen in '07?

Yes.

So at the end of '07 you should be at 20 million dozen.

No, that number there is when the plant is fully ramped up to full capacity, which will take three or four years to get to that level based on our projections.

We will define our specific plans, Hillary, for the ramp-up of our sock factory and our marketshare as we go through the year.

Okay. Thank you very much.

Your next question will come from Cynthia Rose-Martel from Jennings Capital.

Just to clarify on the activities at Rio Nance. Last quarter you announced the 5 million dozen capacity fleece facility. Is that included in the announcement today?

We didn't announce the facility last quarter. We said we were contemplating it and we would define our specific capacity expansion plans on this conference call. So that's the second facility in Rio Nance that we announced today. As far as what the product mix is going to be, as Glenn just said, it is going to be versatile as far as its product mix capabilities and we will have the flexibility to produce different products at the facility.

I just wanted to clarify we weren't talking three new plants.

No.

Your next question comes from [Dave Proul] of Orion Securities.

Hi, Dave. We can hear you.

Actually, this is [Andy Teller]. I have a couple of questions. First congratulations on a solid quarter. Couple of things. For the past year a lot of your competitors have implemented new strategic initiatives to reduce raw materials cost. Can you provide some color on what you guys will plan on doing to reduce the raw material costs by establishing a better line of communication with your supplier base?

Well, we have done that a long time ago. We established a communication with our joint venture with our strategic yarn partner which we believe gives us the ultimate flexibility and lowest price possible on our raw materials already. That's why we are the low-cost producer and the market leader.

One thing I've noticed over the past couple of years that I have been following your company is that quality has always been a key driver of your company. How are you making sure that your suppliers are meeting your quality standard? Are you scorecarding with them? Are you meeting with them on a quarterly basis through forums? What are you making sure to do that they meet your quality standards?

We build quality from the beginning of the line. We have a full quality auditing system of how we receive our raw materials and we work very closely with all of our suppliers to make sure they conform to all the specifications we provide them.

Final question, what has been your supplier feedback? Do they feel that, right now in this challenging economy of raw material price increases, do they feel like they are getting squeezed? Are you letting them know you have alternatives? Are they willing to work with you? What has been there overall feedback in working with Gildan.

We make long-term commitments with all our suppliers so we have good visibility on our pricing and costing so we have very good relationship and we are very happy with where we are today.

Do they feel like they are getting squeezed sometimes if you let them know you have alternatives regarding that --

We work with our suppliers the best we can.

Thank you very much and congratulations on a good quarter.

[OPERATOR INSTRUCTIONS] Your next question comes from [Felipe Habishi] with [inaudible] Capital Markets.

Hi, I was wondering if you could comment on the current level of inventories with your wholesalers?

Well our inventory with our--maybe say the question again. Felipe,it wasn't very clear.

The level of wholesale inventories, are they in short supply or --

Well, at the end of, our share at the end of the quarter was 36% and our share of inventory was only at 32%. We have less share of inventory than we have market share so we are tight on inventory in the channel right now.

Now you mentioned already that you expected the current pricing environment to continue in the fourth quarter. I am just wondering for the first half of '06, if you have any idea how that might evolve.

Just to clarify. When we said the pricing environment will continue. In a general sense, that's correct. But the specific assumption we've made is that prices will decline 1% sequentially from the third quarter to the fourth quarter. And we haven't--we are looking at this point from the visibility we have. There is no reason to see that changing into the beginning of next year. But we will provide our specific assumptions and guidance for next year in the coming months.

I appreciate the update on Mexico. You already mentioned before that you had considered or are considering setting up a distribution center in China. Have you look at that further and if there have been some efforts to sort of scout out distributors there and addressing the Asian market.

All of our growth internationally it is being pursued right now. Our first objective is to service our local markets and bring on our capacity which is our focus right now for this year and going into next year. Once we feel comfortable with our capacity and marketshare demand, making sure we are in balance, that will be the next opportunity for us in future growth expansions.

Okay. Thank you.

[OPERATOR INSTRUCTIONS] Your next question comes from Jessy Hayem.

Back to the beginning again.

Thank you. In terms of your exit capacities in '06 in your three current facilities, are we still on track for about 6 million dozens at the end of '06 and in Canada, about 18 in Honduras and 20 in the D R.?

Exiting '06?

That's right.

Close to that.

Okay. All right. And then any indication that you can give us in terms of your cost--

Jessy, Glenn mentioned we are looking at being able to support 50 million dozens in '07, which is the key thrust of what you are trying to get at with your question.

Right. I was just wondering in terms of the cost structure of your second facility in Honduras, we've known in the past your current facility versus Canadian facility reduced your cost by dozen by three about bucks a dozen. What can we expect in the second facility?.

It's going to depend on the product mix and what goes in the facility. But we believe we will have the same cost in that facility as we have currently in our other Rio Nance facility. And we are going to leverage our infrastructure there so we believe it will be very competitive with our new facility.

Okay. One final one. I guess, a decision that you are going to end up with three facilities in Honduras was well-studied from the aspect of leveraging your cost structure and so on, can you give us a sense of comfort with ending up with three facilities in Honduras from a political aspect or any other influences that could be seen as a source of concern?

We are well diversified. We have our Dominican facility as well as the facilities we have in Honduras. We also diversify a lot of our products that get sewn, not necessarily just in Honduras but we use all of Central America as the basis of sewing our apparel. So we feel comfortable in being in Honduras. It is the most politically stable region for the last 25 years. We are not concerned at all.

Okay. Thank you.

Your next question will be a follow up from [Dave Proul] with Orion Securities.

That wasn't me last time, guys.

We realized that. I thought maybe you had a --

Of all the strategies being discussed, what is number one on your list? Socks to retail? T-shirts to retail? Underwear? What is the number one on your internal list?

Well, right now we are starting off this fiscal year, most of the sales into retail will be activewear products. And as we go into 2007 -- we will sell a little bit of underwear this year -- but as we go into 2007, our thrust will be all three categories and that is what will help us to develop the brand awareness that we need to be a major player in the basic apparel. All the products that we are trying to sell into replenishment-type programs, which are basic nonfashion and nondecorative products. They are a major focus and opportunity for us.

Does having a complete assortment have a lot to do with transportation?

Not really. It has more to do with developing a brand within the industry and having the exposure in the retail environment.

Okay. Thanks.

If there are no more questions, we would like to thank everybody for being on our call and we are looking forward to seeing you in the fourth quarter.

There are no more questions, operator?

No more questions, sir.

Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the presentation.