Gildan Activewear Inc (GIL) 2006 Q4 法說會逐字稿

Good morning, everyone. And welcome to Gildan's Fourth Quarter and Fiscal 2006 Year End Results Conference Call. [OPERATOR INSTRUCTIONS] We are joined here today by Gildan's President and Chief Executive Officer, Mr. Glenn Chamandy, and Executive Vice President and Chief Financial and Administrative Officer, Mr. Laurence Sellyn.

Mr. Laurence Sellyn will begin by providing a brief formal review of the details of the fourth quarter results and an update on Gildan's fiscal 2007 outlook, after which Mr. Glenn Chamandy and Mr. Laurence Sellyn will open the call to questions. 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 unknown and known 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 affect the Company's future results. I would now like to turn the call over to Mr. Laurence Sellyn, please go ahead, sir.

Good morning. Welcome to Gildan's Fourth Quarter and Year End Conference Call. As the operator said, I will present management's formal comments and then both Glenn and I will be available to respond to your questions.

Our fourth quarter was another success. A strong quarter compared with a strong prior year performance in the fourth quarter fiscal 2005. Our sales in the fourth quarter of fiscal 2006 were up by 30.2% including SOX and by 13.6% for activewear only. EPS, excluding restructuring and other charges in both years was up by 27.1%, and was $0.01 ahead of our most recent guidance.

Excluding the impact of the Kentucky Derby Hosiery acquisition, EPS growth over last year was due to our continuing growth in unit sales in the distributor channel, favorable manufacturing efficiencies, a higher valued product mix for activewear due to our increase share in fleece and a higher proportion of color T-shirts and an reduction in SG&A expenses. These positive factors were partially offset by almost a 3% reduction in activewear selling prices and higher depreciation expense.

The impact of the Kentucky Derby Hosiery acquisition was marginally dilutive to EPS in the quarter. Excluding the impact of SOX, gross margins were very slightly up from last year at 32.5% versus 32.3%, as impact of the manufacturing efficiencies and more favorable activewear product mix was essentially offset by the reduction in activewear selling prices.

We continue to have excellent market share momentum in the U.S. wholesale distributor channel. Our share in t-shirts was 44% versus 35.9% a year ago. Our share in fleece was 31% versus 25.8% a year ago, and our share in the sport-shirt category was up from 31.7%, to 33.3%. This momentum has continued into October when our T-shirt share increased to 46.9% and our share in fleece increased to 35.9%. Overall industry conditions in the wholesale distributor channel continue to be positive.

Year to date industry growth for all product categories combined for the nine months to September 30, is up 2.1%, although demand in the quarter was down by 1.3%, this was due to the impact of additional buying in the fourth quarter of last year in advance of a price increase that had been announced. October 2006, the first month of our fiscal 2007, was a strong month for industry demand with overall industry [inaudible] shipments as reported by S.T.A.R.S., up by 5.1% versus October of last year.

Inventories in the channel were in good balance at the end of September and were down by 1.1% from a year ago in line with a decline in industry sales in the quarter. For the full year, our EPS before restructuring and other charges was $2.09 U.S., per share up 34% from last year. We generated free cash flow of 19 million for the year after $18 million of capital expenditures for capacity expansion but before taking account of the acquisition of Kentucky Derby.

On the same basis we generated 7 million of free cash flow in the quarter. During the quarter our inventories increased by $39 million, all of this increase was due to Kentucky Derby, including $9 million post acquisition. The increase in Kentucky Derby's inventory subsequent to the acquisition date is temporary in order to support peak seasonal sales and to support purchases from contractors in Asia and Latin America while we undergo the transition from our U.S., manufacturing operations.

In addition our DSO and receivables were 54 days versus 46 days a year ago. This increase also was temporary, due to our significant increase in sales and market share for fleece. Industry practice is to provide extended credit terms to distributors for fleece sales in the summer, ahead of peak seasonal demand.

DSO are expected to be back in the normal range by the end of the first quarter of fiscal 2007. Turning to fiscal 2007, we have updated our EPS guidance to include the impact of Kentucky Derby.

Our guidance has increased from $2.56 to $2.61 per share, before reflecting the accelerated depreciation charge of $0.06 related to the impairment of the balance of our Canadian manufacturing operations. Our guidance for fiscal 2007 is based on dollar sales growth of 26%, and unit sales growth of over 55%, in fact, close to 60%, including close to 25 million dozens of socks.

Sales in fiscal 2007 are projected at approximately 970 million. As mentioned in our press release, we have obtained our first major branded sock program with a U.S., national mass market retail account for delivery starting in the second quarter of fiscal 2007. The significant exposure that this program will provide for our brand will enhance our platform to develop Gildan as a full product supplier of not only socks but also activewear and underwear.

We cannot provide any details of our major sock branded program at this time. In order to respect retailers practices regarding the privacy of their procurement practices and arrangements, to provide details at this stage would compromise our standing with this and other retailers. However, Gildan's management could not be more excited about our progress in achieving penetration in the retail channel. Our objective is to secure other major mass market programs during fiscal 2007, and we are ready to accelerate our capacity expansion projects to support faster penetration into mass market retail combined with our continuing growth in the wholesale channel. We have sufficient capacity in fiscal 2007, to support an additional 2 to 3 million dozens of sales.

We have currently projected $110 million of capital expenditures for fiscal 2007. We may incur some additional capital expenditures in the fourth quarter of fiscal 2007, which would allow us to have 90 million dozens of total capacity in place at the end of fiscal 2008 in our four-offshore textile facilities, in addition to the capacity still remaining in North America. We have also initiated guidance for the first fiscal quarter at $0.27 per share, the same as a first quarter of fiscal 2006.

The impact of higher unit volume growth in the quarter is expected to be offset by lower gross margins due to significantly higher cotton costs and the higher selling general and administrative and depreciation cost. Even though the first quarter is expected to be only flat with first quarter of last year, we are very comfortable with EPS growth reflected in our full-year guidance. In subsequent fiscal quarters in fiscal 2007, the impact of unit volume growth will be more significant, and gross margins for activewear are expected to increase, compared both with the first quarter of 2007, and the corresponding quarters of last year.

With respect to unit volumes, the first quarter is seasonally the lowest quarter of the fiscal year, and the impact of projected unit volume growth will be much more significant in subsequent quarters. With respect to gross margins, cotton costs were at their lowest point in the first quarter of last year resulting in significant raw material cost increases in the first quarter. In the second half of fiscal 2007, cotton costs are expected to be comparable with the second quarter-- with the second half of fiscal 2006.

Also, even though we have reflected a 2.5% reduction in selling prices for the balance of the year, projected selling price reductions after the first quarter are projected to be more than offset by manufacturing cost reductions. As we go through the year we expect to increasingly benefit from manufacturing efficiencies from the ramp-up of the Dominican Republic facility which now has achieved a cost structure that is approaching that of Rio Nance and is continuing to achieve further manufacturing efficiencies, as well as from the recently announced rationalization of our Canadian textile manufacturing, and we will gradually improve our cost structure and gross margins for socks in successive quarters as we progress with the integration of Kentucky Derby.

Our assumption for the impact of the Kentucky Derby Hosiery acquisition on our fiscal 2007 results makes provision for transitional costs in the first half of the year, such as duplicate distribution costs and manufacturing inefficiencies prior to the ramp-up of our new sock facility in Honduras.

We are confident we'll achieve an annualized running rate of at least $0.15 U.S. per share of cost synergies by the end of fiscal 2007 and $0.30 U.S. per share when the Rio Nance facility is fully ramped up during fiscal 2008 and the integration process is complete. Naturally, we're seeking to drive integration process as expeditiously as possible and achieve integration benefits and EPS accretion more quickly while recognizing the manufacturing cost reductions are largely linked to the ramp-up of Rio Nance.

Finally a number of institutional investors have asked us whether the Company is ready to introduce a dividend. This is a topic that we review periodically with our board of directors. While we project that we will generate increasingly significant positive free cash flows in each year of our current five-year strategic planning period, we have always said that our first priority use for our free cash flow is to reinvest our cash in additional high-return growth opportunities over and above the base case assumptions in our plan.

At this point Gildan's management and board are in agreement that we should continue to conserve our cash to potentially accelerate our current capacity expansion plans and to maintain our flexibility to respond to complementary acquisition opportunities resulting from industry consolidation. That concludes our formal comments so operator Glenn and I are now available to take questions. Thank you.

Thank you. [OPERATOR INSTRUCTIONS] Ladies and gentlemen, if you wish to ask a question, please key star followed by one on your touchtone telephone. The Company has asked that you limit your questions to no more than two to allow everyone an opportunity to ask questions in the allotted time. You may press star one to begin and please stand by for your first question.

Operator?

Your first question comes from the line of Jessy Hayem with Desjardins Securities. Please proceed.

Thank you, good morning. Just wondering if you guys could give us a bit more color on the accretion you expect from Kentucky Derby in 2007, and essentially the progress with integration? I guess trying to understand why you are expecting negligible impact up until the fourth quarter? I guess, how is the progress in ramping up Rio Nance three happening? Is it not occuring faster than anticipated, maybe just a bit more color on that.

I'll start and maybe Glenn will talk about the ramp-up of Rio Nance three. We have transitional costs in the first half of the year, Jesse, that offset some of the cost reductions that we're achieving. We have duplicate distribution costs as we transition to the new distribution center, and we have some temporary manufacturing efficiencies including products that we're out sourcing as we transition from our U.S. manufacturing and transition production to Rio Nance three. Okay.

In terms of I guess the time line just trying to get an idea of how things are progressing, you announced closures of facilities in North Carolina and Virginia, starting at the distribution center, I guess what is the time line on all of these events, if it's possible to get something?

Well, we're going to continue to -- we started our facility in the fourth quarter, and we're basically going to continue to ramp-up Rio Nance too through this year and into next year. We plan to exit this year roughly about 18 million dozens worth of production on an annualized basis. So we have a quite aggressive build up. We're the stage right now as those costs reductions occur when we get our economies of scale that's going flow through through the back half of this year. And we're continuing to rationalize not only the capacity within North Carolina and KDH but also to rationalize some of the SKU's that they have currently assigned to their existing existing customer base.

What you also have to take into account Jessy is that you have to allow quarter for inventory to turn to get the benefit of manufacturing efficiency . But having said all of that we are obviously trying to implement this rationalization of the start up of Rio Nance three expeditiously as possible, and hopefully achieve our targets more quickly.

And we're on track to achieve our target of an annual run rate of accretion of $0.15 by the end of this year and $0.30 into next year.

And we're very comfortable with those numbers.

Fair enough, and I know you can't give more details on the contract you received with the sock program, I'm just wondering if you can tell us is this an account that you were already present with private label socks or over and above, I guess what you are already selling if you were already present?

I think we're not prepared to say more than it was major U.S. national retail chain.

Okay. One final one, we've heard of late some concern on your-- from distributors that some of your competitors are focusing more and more on retail at the expense of their wholesale account. Can you give us color on how you guys are giving yourself more flexibility to be able to cater to both channels, simultaneously, would you accelerate expansion plans if it means maybe getting faster penetration in the wholesale? Just looking to get your thoughts of that.

Our focus has always been never to lose focus of our wholesale business and we continue to gain more market share and you can see that from our results. At the same time we're adding capacity this year and we're also planning to accelerate our capacity buildup through '07 and '08, to take advantage not only of the opportunity in wholesale but also to take advantage of what we believe is the mayor opportunity at retail.

Right. Okay. Great thank you all. I'll circle back for more.

Your next question comes from the line of Candice Williams with Raymond James. Please proceed.

Good morning I was hoping you could help clarify some of the pricing assumptions you have used and how they work into your guidance. You said that lower cotton prices would be passed through into into that 2.5% decrease in pricing, but you-- you said that that could be completely offset by manufacturing efficiency. It looks like there's two positives impacting one negative that both potentially in and of themselves offset one negative. There could be more upside to guidance because of that. Am I reading this wrong?

Are you talking about the first quarter? Or are you talking about the full year?

Full year.

Okay. So our full year EPS rate, we're looking at about $0.60 a share coming from manufacturing efficiencies, which is a very significant number in '06, and we're saying that that will be slightly more than the combined effect of lower selling prices, and higher cotton cost next year.

Okay. Thank you. Again, on pricing, the 2.5%, is that sort of an overall rate across the board? Or are you seeing very different pricing pressures in your retail versus your wholesale channels? Because when we see what you are selling for at retailers, there's some regional chains in western Canada that sell-- it looks like you have a lot more room for pricing pressure to exceed that at retail.

All of our pricing that we're talking about is strictly for the wholesale market.

Okay. I was looking for-- thank you I'll get back in line.

And your next question comes from the line of Richard Piticco with CIBC World Markets, please proceed.

Good morning. First you made reference on the call about obviously the branded sock portfolio segueing nicely to your other portfolio products. And I'm just wondering could you give us an update on what your hearing with regards to selling other portfolio of activewear products into the larger mouse channel.

We're continuing to focus-- first of all just for your reference, we're continuing to develop first of all the regional chains which we started to sell last year and developing them to be full product line-- carrying our full product line, which is, underwear, socks and activewear and that is going very well. Our focus right now is to focus on those major chains, which is the mass market, which we have been successfully been able to land our first major Gildan branded sock program. The thing in the retail market is that the business is very chunky, so it comes in big quantities when you do land these programs. And through the opportunity of this major sock program, we believe that there's other opportunities for us to sell in activewear and underwear to large mass market retailers, of which is not reflected in our forecast for the balance of 2007. So our focus is to leverage this opportunity we have and to continue penetrating with these large major mass market retailers.

And just to clarify that on-- that Glenn, when it comes to big chunks, do you feel that you have sufficient capacity in fiscal '07 to satisfy those big chunks, should they come in for the activewear products in fiscal '07?

Our capacity in this fiscal year will be roughly about 70 million dozens worth of product, 25 million roughly in socks. So it would be 45 million between the activewear and underwear category. We should end this fiscal year in activewear and underwear roughly about 50 million, and both 28 million worth of socks, and our objective is to accelerate our capital expenditures through '07 and put in place so that by the time we end fiscal 2008, we'll be running in excess of 90 million-- it will be 90 million offshore and roughly 10 million domestically will be our overall capacity. We're in the process right now of starting Rio Nance 2, which is another major facility that will produce fleece and other products, and that is only going to come on line in the second quarter and it will be ramped up through the balance of '07 and '08. We have lot of capacity still coming on and there's still additional capacity in Dominican Republic, although it is at the same level as Rio Nance today, it's still going to continue to grow as efficiencies continue there over the course of this year. So we feel very comfortable. We are expanding and expending additional capital to expand our facilities to take into account the opportunity of both the wholesale market momentum we have, as well as the penetration into retail market.

And just to clarify, did you previously indicate that Rio Nance 2 would contribute about 4 million this year. Is that approximately correct?

For this year it's going to produce roughly 2 million. Because it's a starting off producing fleece so it's a lot of dozens. The actual run rate will be roughly about 5 million with it will be a combination of fleece and other products by the end of the year and when it's ramped up the mix of the factories should be in the neighbors of around 14 million dozens.

And could you just finally provide some incite on what are the initiatives you are undertaking to get to that 90 million?

Sorry?

He wants to know how the 90 million.

The 90 million is broken up between-- well, we-- 90 million is broken up between roughly about 23 million in Rio Nance 1, 26 in the DR, 14 in Rio Nance 2 and 27 million in Rio Nance sock factory. We're have additional capacity in Canada of roughly 3 million of activewear and additional 10 million dozens worth of socks in the U.S. facility on top of that capacity by the end of '08.

Great. Thanks a lot.

Thank you.

Your next question comes from the line of Sarah Hughes with Sprott Securities. Please proceed.

You said in your remarks that you would have access capacity in '07 to support about 2 to 3 million in retail in '07, what would the excess capacity support retail be in '08?

Our capacity in '08 in season is going to be significantly higher than this year.

Yes.

Between-- this year our capacity between activewear and underwear type products is 45 million. That capacity end year next year will be about 56 million. And your sock capacity this year is roughly about 25, and it should be in excess of 31 million next year as we do the full ramp-up.

[inaudible] Another paint Sarah is-- just over 65 million dozens in '07 to close to 90 million dozens.

Okay. And then just on-- on your guidance you talked about a bit more pricing pressure than previously expected, is that pretty broad across the industry? Is it one player being a bit more-- forcing prices down a bit more than others.

Your strategy in terms of pricing is we have been consistent, as we continue to lower our cost we continue to pass through those costs in the industry. That has been our-- somewhat our MO since day one, and we're going to continue to follow that practice.

In terms of now that you have been with socks for almost six months how has the pricing pressure been in that market?

We feel comfortable with the prices within that market and based on the cost structure we have developed that we can make significant margins or similar to what we we're currently making in the activewear products.

Okay. Great. Thank you.

Thank you.

As a reminder, ladies and gentlemen, if you wish to ask a question, please press star one. Your next question comes from the line of Monica Logani with Wall Street Access, please proceed.

Hello?

Yes.

Go ahead, Monica.

Sorry, I didn't hear them say my name. Okay a few questions, one is just in terms of your activewear unit growth, close to 14%, seems a bit lower than what we have been seeing in the previous fourth quarters of '05 and '04. Does this happen to do with-- sorry-- I just have to turn this off. Does this have to do with what you had alluded to earlier with a lot of buying going on in last year's fourth quarter in terms of a pricing increase. Is this all connected?

It was mainly that, and also the fact that one of our customers in the fourth quarter of last year had been going through financial difficulties, which were resolved, and there was a big shipment to that customer. So we're very pleased with our growth over a very strong sales base in the fourth quarter of the prior year.

Okay. So-- I mean, just looking forward in terms of the your gross margin levels, I just want to make sure I understand this correctly. Because obviously fourth quarter of in year, was lower because of Kentucky Derby. Is that the kind of level we're looking foregoing into '07? I know in the fourth quarter is when we'll seeing the cost efficiencies take place. But in the first three quarters should we be looking at similar gross margins as we're seeing this quarter?

What we indicated in the release and in our comments is we'll be look for margin expansion next year on the activewear site compared both with the first quarter and compared with the corresponding quarters of last year due to our the impact of our cost reductions and lower year-over-year cotton cost increases.

Uh-huh.

And then on the socks side we'll be look at margins increasing in each successful quarter as we go through the integration process.

So basically it seems like fourth quarter should be the trough and we should see that go up?

The first quarter.

The first quarter and then continuing to go up in the second and third quarter?

That's what we're saying, yes.

Okay, and usually you give a breakdown of your gross margin in actual basis point from different factors. Can you go through that?

Yes. So-- well gross margin was essentially flat for activewear between the fourth quarter of this year and the fourth quarter of the previous year, and the elements there was we had about 3% impact of more favorable manufacturing efficiencies, and 1% contribution from product mix and that was offset by about 1% increase due to higher energy and transportation cost and the negative impact of 3% margin impact of lower selling prices, 3 plus 1 is 4 and 1 plus 3 is 4.

Okay, and-- flat over all, and that's just for activewear, correct?

[inaudible]The impact of the socks was dilutive to gross margins.

Okay. And what kind of gross margins are we seeing from socks versus the 30% that you have overall, 30% plus.

Gross margins we're seeing for socks at the moment-- bear with me one second. I will get that for you. It's in the sort of mid-to high teens.

Mid-to high teens. Okay.

Your next question comes from any line of Martin Goulet with National Bank Financial, please proceed.

Yes, good morning, Glenn and Lawrence. [inaudible] What about the international markets? What are the major initiatives that you want to bring forward this year? And when would be a realistic time frame to maybe start entertaining retail business overseas.

For this fiscal year for sure we don't have any expectation to develop retail over sea, but we are continuing to develop our activewear overseas. We also begun to sell our products in the Mexican market as well. So we're focusing on international expansion more aggressively in '07 and particularly to be developed for '08, and we're planting those seeds today.

Can you mention the shipments to Europe and Mexico in dozens? Was it in the year just ended?

Mexico was roughly about 350,000 dozen. [inaudible]

Uh-huh.

And we had about a 22% increase in Europe.

Okay. Mexico you mentioned initially, Glenn, could be 1 million dozen market. Is that number still fair and can be reached in fiscal '07?

Well, the Mexican market is-- the size of the market we estimate is close to 10 million dozen, so your objective is to evaluate what kind of share we can penetrate in that marketplace.

Okay. Thank you, Glenn.

Your next question comes from the line of Kai Kaufman with [Dresdner] [Kleinwort], please proceed.

Good morning, guys. Looking back over your pro--[inaudible] 120 million dozen by 2010 and in the subsequent presentation 115 million dozen. I don't know if that was product category mix or you were just scaling back production in hosiery or can you give color in terms of what kind of products? Is it an impact of longer production time for fleece and polo versus T-shirts or is there some other area that you are cutting back on, growth?

Are you talking a five-year target of 115 versus 120 is that what you are asking.

Yes, that was it.

It was slight reduction in number for socks to align with the capacity we currently have available.

And our objective is in terms of building up to, 90 offshore and 10 domestic by the end of '08. Growth rate, relative to that plan.

And hopefully as we-- at capacity, we would be in the position to support hire targets.

And do you feel like your current capacity growth right now you are going to be-- [inaudible] demand comes online face end of fiscal '07, heading into fiscal '08?

Well, what we said, Kerry is that we plan to have 90 million dozen of capacity in place by the end of '08, which will allow us to support significant growth in both wholesale and retail from the base of 65 billion dozens we have projected for the coming year.

Great. Thanks, guys.

Thank you.

You're next question comes from the line of Anthony Zicha with Scotia Capital. Please proceed.

Hi, good morning, gentlemen. Lawrence with reference to the sock production, 25 million dozen for '07 can you give us the breakdown how much would be stemming from the U.S. and the remainder in Rio Nance?

Rio Nance will produce roughly about 8 million dozens shipped in '07, and the balance would be 17 million in U.S. And going to-- exiting the year. That's because it's ramp-up and ramp-down down of one or the other-- will exit the year at a run rate of 18 million for Rio Nance and about 10 million for the U.S., as we continue to move more production offshore.

Okay. Great. And, Glenn, with reference to the question[inaudible] in terms of international market sales development, can you please give us incites on some of the key markets, say in Europe, about the-- [inaudible] how different is it reference to the U.S.?

Well our European business we just actually started selling for fiscal 2007, one of the largest distributors in the UK market, and that's going to give us, we believe, continued momentum in the UK, and we're also focusing on our efforts on product expansion as well as customer expansion in Europe, so we feel very comfortable with our outcome of our future look at the European market, and we built a plan to drive that business up to roughly 5 million dozens over the next three to five years, so we're on track with our plans. I think for us we're really looking to look for future growth also above and beyond Europe would be for Asian marketplaces and that's really what we're spending our time focusing now and planting the seeds for '08.

Okay. Thank you very much.

Thank you.

Your next question comes from the line of Claude Proulx with BMO Capital Markets, please proceed.

Good morning. I won't ask a question on production. I think there's been enough of them. But I'll talk about one of your input, cotton. I think I read somewhere that subsidy for U.S. cotton or the purchase of U.S. cotton has come down or has been eliminated. I mean, can you talk about what is it now? Does it impact your business?

Well it doesn't impact our business. What it was was a subsidy from U.S. government to-- on product that was actually being produced-- shipped out of the country or bawled open in the United States where they gave the difference between what the cost of U.S. cotton is versus what the cost of cotton in AM index which was a price they determined I think FOB-- something-- in Europe. So that has gone away in July, and so what has happened, basically, is it's just a function of cotton is a commodity product. I think what is more important for us is we have been in the position, typically to manage ourselves in terms of our exposure with cotton through the-- buying forward and manage our cost structure based on a-- a six-to 12-month window, regardless of the price of cotton what is important is that we have visibility in terms of how we lock it is and how we compare against our competitors.

To follow-up on this, does it mean when I look at the forward market on my screen for U.S. cotton, and I see that the price has come down in maybe the last three months, the last six months, does it have-- is the price comparable to what it used to be in the past because you don't have the subsidy anymore? Has the price come down really in the last few months?

The price now is relatively close to what the price was 12 months ago.

Yes. Okay. Thank you.

And your next question comes from the line of Dennis Rosenberg with DSR Consulting, please proceed.

Hi, guys. When I look at the-- when we look at the three quarters from Q2 through Q4, on a percentage basis, is there going to be a big acceleration in the rate of growth as we move through the quarters? Or will the rate of growth be-- relatively similar in reach of the last three quarters?

It's relatively similar in the balance of the quarters in terms of growth rate in units.

What about-- I'm talking about in EPS.

In EPS growth, it's higher in the third and fourth quarters than in the first quarter-- second quarter, excuse me, yes.

By what order of magnitude?

You know, Dennis when I'm ready to give guidance for the upcoming quarters, I'll do that.

Okay.

You know, we're looking at healthy growth that hopefully everyone will be comfortable with in all three quarters.

Okay. Great. Thank you.

Thanks.

Your next question comes from the line of Omar Saad with Credit Suisse please proceed.

Thanks, good morning. Congratulations on your continued momentum in your businesses. You guys are clearly doing a great job. I wanted to ask-- Glenn, I wanted to get your thoughts, as you start to look at the consumer market in the U.S., I wanted to get your thoughts and kind of get a better understanding of how you think about penetrating the mind share in the consumer market? What kind of marketing and advertising strategies do you think would be most appropriate for the categories you are going to start to attack under the Gildan-branded halo, and just wanted to see where your thought process was there.

Our thought process is quite simple. Our whole strategy is to add value to the marketplace and diluting better value through better design in all of our products. Traditionally that's what made us successful in the wholesale market and we'll replicate that in the retail. If you look at what we're trying to do our products will r going to be far superior than those currently being offered by our other major compete no, sir the market. At the same time we're going to leverage our low-cost manufacturing and price those goods in accordance to allowing A our retailers to make higher margins and our consumers to buy them at better prices. Our focus is going to be based on building relationship with these mass market retailers, and developing a profitable product line. Our advertise willing be based on leveraging co-op advertising and selective trade advertising as we go forward. And in specific markets potentially using-- doing some consumer advertising, but we don't plan on spending a greater amount of money relative to what we're currently spending as a percentage of sales today for our wholesale market.

Okay. And can you share that percentage?

I would rather not right now, thank you.

Okay. Okay. Kind of a follow-up, would you consider acquiring brands? I know you have done the Kentucky Derby acquisition. Would you consider looking at brand acquisitions on that front or--

Right now we're going to drive the Gildan brand for the mass market. If we plan to penetrate other market segments, potentially we may use other brands in the future, but right now we're focusing-- there's so much opportunity in the mass market, that we're not planning on deviating from this marketplace for quite sometime.

Perfect. Thanks.

Your next question is a follow-up from the line of Richard Piticco with CIBC markets. Please proceed.

Really quick actually. The impact of the SKU rationalization from Kentucky Derby can you quantify, how many dozens will be rationalized?

I would rather not say right now, but our objective in Kentucky Derby is to-- narrow down the product line and the SKUs being carried so we can facilitate large production runs that were similar to our structure within Rio Nance. We're definitely going to trade a little bit of business this year but I would rather not say for competitive reasons.

But the rationalization will be completed in fiscal '07 in.

Yes.

Thank you.

Your next question a follow-up from the line of Jessy Hayem with Desjardins Securities.

Thank you my question was just asked, actually.

Okay. Thanks.

Your next question is from the line of Ricky Sandler with Eminence Capital. Please proceed.

Hi, guys. Looks like you guys did a terrific job in the quarter in managing expenses if I back into some of your numbers it would have suggested that the sock business-- would of had about 4 million of SG&A-- your over all SG&A was up about 3.5 million, suggesting the quarter was down. Can you talk about the factors that drove that if that math is correct and sort of whether they were sustainable?

We would not suggest that anyone starts muddling in the basis of SG&A coming down. We have always talked about SG&A continuing to be, between 10 and 11% of our sales and-- growing that way in line with our sales. What we had was the non-recurrence of some costs in the fourth quarter of last year, where there were some year-end adjustments to incentive compensation of some severance costs that weren't repeated.

What order of magnitude of each of those?

Well, you know, let's just say that the SG&A reduction in our core business was about $1 million.

Okay. And you would have expected it to grow in line with sales on sort of normalized basis what you are saying?

Yes.

Got it. Okay. And you mentioned that the DSOs were elevated sort of temporarily from the fleece promotions. Can you give us a sense from when we should expect those to come back down?

I think I mentioned on the call that we expect to be back to normally by the end of the first quarter of this year. This is just a seasonal thing to support sales that are made in the summer for the fleece season and that will be-- converted into cash during the course of this quarter.

Oh. Great. Okay. Thank a lot.

At this time there are no further questions in the queue, I would now like to turn the call back over to Mr. Glenn Chamandy for closing remarks.

Thank you for attending our fourth quarter conference call, and we wish you happy holidays, and we'll hear from you in the end of January. Thank you.

Ladies and gentlemen, that concludes your presentation. You may now disconnect. And have a great day.