Gildan Activewear Inc (GIL) 2007 Q2 法說會逐字稿

Good morning, everyone and welcome to Gildan's second quarter fiscal 2007 results conference call. As a reminder, this call is being recorded for replay purposes.

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 second quarter results and an update on the outlook for the remainder of fiscal 2007 after which Mr. 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 meanings of the U.S. Private Security 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. Security and Exchange Commission and Canadian securities regulatory authority 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 and welcome to Gildan second quarter conference call. Our EPS for the second quarter before restructuring charges was $0.62 per share, up 22% from last year and $0.01 ahead of our guidance. Excluding the restructuring charge in fiscal 2007, and also excluding the prior year impact of the reversal of a litigation reserve and a favorable adjustment to our bad debt account reserve, which together increased EPS by approximately $0.03 per share in fiscal 2006, our year over year EPS growth was approximately 30%.

Compared to our previous EPS guidance -- compared to our previous forecast, not to last year, the positive impact of more favorable manufacturing cost efficiency, more favorable selling prices and more favorable product mix than projected was largely offset by lower than forecasted unit sales volumes for activewear in the wholesale distributor channel and $0.03, and the $0.03 per share diluted impact of the KDH acquisition in the quarter due to short-term factors.

Compared to the second quarter of last year, our EPS growth was due to the significant positive impact of manufacturing efficiencies, which contributed approximately $0.24 per share to the year over year increase in EPS in the quarter and 11% increase in active wear unit sales volumes due to continuing market share penetration in all product categories and more favorable product mix. The impact of these favorable year over year variances was partially offset by reduction in activewear selling prices of approximately 2% compared to the 2.5% reduction we had forecast, higher cotton costs, increased SG&A and depreciation expenses and impact of the KDH dilution.

The growth in activewear sales was due to our continuing market share penetration in all product categories in the U.S. wholesale distributor market. Compared to the second quarter of last year, our share was up by 8.6% in t-shirts to 48.2%, up by 12% in fleece to 42.5%, and up by 3.2% in sport shirts to 35.7%. For the first time, we achieved the number one brand position in the fleece category to complement our market share leadership already achieved in t-shirts and sport shirts.

The overall U.S. market for screen print t-shirts was slightly down by 0.8 of 1%. We attribute the absence of growth in the second quarter to unseasonably cold weather which negatively impacted demand for t-shirts, but helped to fuel an 11.5 % increase in overall market growth for fleece. We do not see any reason to believe that market growth for t-shirts will be weak during the peak summer selling season.

However, shipments into the distributor channel, into the channel were negatively impacted in the second quarter by the warehouse consolidation being undertaken by the largest wholesale distributor in order to integrate recent acquisitions and reduce inventory levels. This consolidation process is expected to continue through the balance of our fiscal 2007 and has been taken into account in our current sales forecast for the third and fourth quarters.

T-shirt inventories in the distributor channel at the quarter end were down by 4.1% compared to a year ago -- compared with the 0.8% decline in industry demand.

Gildan sales growth in all of our international markets was very strong. In particular, unit sales -- unit shipments in Europe were up by 34% from the second quarter of last year, partially due to the expansion of our distributor network in the U.K., but also reflecting further share penetration in Continental Europe.

Total sales revenues in the second quarter, including socks, were up by 26.3% in the quarter, compared with the second quarter of fiscal 2006. Socks contributed $32.8 million to our sales in the second quarter.

In March, we began shipment of our first branded sock program to a national retailer. As previously indicated, this program represents a very substantial sales opportunity for Gildan. Initial sell-through of Gildan branded products to consumers has exceeded expectations and reorder quantities have already been increased by the customer. We will be starting to ship a major new sock program to a second U.S. national retailer in June.

We have also continued to obtain branded programs for socks, underwear and activewear with regional retailers in the U.S. and Canada which we can support this year from a capacity perspective.

Gross margins in the quarter were 33.9%, compared with 33.4% in the second quarter last year. Margins for socks in the second quarter do not yet include the benefit of anticipated cost synergies from ramping up the Rio Nance facility and relocating sock production offshore. In the interim, sock margins are currently being negatively impacted by sourcing incrementally from higher cost contractors in order to meet our new retail commitments which are price based on the Rio Nance cost structure, and also continue to reflect low margins from unprofitable specialty product lines, which are being phased out of our product mix.

These are transitional issues which are expected to be resolved by the fourth quarter. We continue to be fully confident that we will achieve our previously stated objectives for the KDH acquisition accretion which were a run rate of $0.20 per share accretion by the end of fiscal 2007 and $0.30 per share by mid-2008.

Gross margins for activewear in the second quarter were 37.2%, up 440 basis points from the second quarter of 2006 after adjusting last year's margins to exclude the benefit of reversing litigation reserve in relation to raw material purchases which enhanced gross margins last year by 60 basis points.

The increase in activewear margins was primarily due to an approximate 750 basis points positive impact of manufacturing efficiencies as well as an approximate 60 basis points impact of more favorable product mix. Higher cotton costs negatively impacted gross margins by approximately 200 basis points in the quarter and lower selling prices reduced gross margins by approximately 170 basis points.

The restructuring charge recorded in the second quarter amounted to $0.27 per share, primarily for cash severance costs relating to the recently announced plant closures in Canada and Mexico.

SG&A expenses for the second quarter were $28.5 million, up from $20.7 million in the second quarter last year. Over $5 million of increase was due to KDH. We expect SG&A cost for KDH to be reduced by the end of the year as we complete the acquisition integration and eliminate duplicate overhead.

Also, we are currently experiencing normal start-up efficiencies in the new retail distribution center, which are expected to be eliminated by the end of the third quarter. SG&A in the second quarter of last year included a favorable adjustment to our bad debt reserve, the non-recurrence of which resulted in a higher year over year increase.

Our tax rate in the quarter was 8.5 %, compared to 3.5% in the second quarter last year. There was no tax benefit applicable to the restructuring charge and the tax rate in the second quarter, excluding the impact of the restructuring charge, was 5%. The increase in tax rate from 3.5% to 5% was mainly due to higher income from our Canadian operation which is taxed at a higher effective income tax rate. We expect the effective tax rate for fiscal 2007 to be approximately 5.5%, excluding the impact of restructuring and other charges. The closure of the Canadian manufacturing operations at the end of the current year should result in a lower tax rate for our screen print business in fiscal 2008.

Our EPS guidance for the full fiscal year before restructuring costs has been left unchanged at $2.61 per share. We are projecting 25% to 30% EPS growth in the third quarter and 30% to 35% EPS growth in the fourth quarter. Although the earnings forecast for the second half of the year is unchanged in total, we have slightly reduced our forecast for activewear unit sales volumes in the screen print channel to reflect expected continuing inventory consolidation by the major distributor. The impact of the lower unit volume sales forecast in the second half of the year -- of the fiscal year is expected to be fully offset by more favorable selling prices than previously assumed. We're now assuming selling price reductions of approximately 1.5% in activewear in each of the third and fourth quarters compared to last year and sequential reductions of approximately 1% compared to the second quarter of this year.

Raw material costs are assumed to be comparable with the second half of last year.

We have further increased our full year capital expenditure program in fiscal 2007 to $170 million versus our previous estimate of $145 million. This increase is primarily due to two new major cost reduction initiatives. These two projects are expected to require total capital investment of approximately $60 million over the next 18 to 24 months and result in approximately $15 million of annual cost savings once completed One project is designed to significantly reduce energy costs in Honduras while the other will reduce chemical costs in both offshore manufacturing hubs.

We will initiated our formal earnings guidance for fiscal 2008 in August or September as in prior years when we have completed our annual operating budget process and have better visibility on new retail programs for fiscal 2008. However, both Glenn and I feel very positive about our earnings growth potential for fiscal 2008. Our major objective for next year, of course, is to build on our initial successes in retail and obtain further major new programs, not only in socks, but also in fleece and underwear as we ramp up our new capacity expansions.

In the screen print channel, we expect stronger overall market growth than in fiscal 2007 as the largest distributor should have completed its warehouse rationalization and we see opportunities for further market share penetration, especially in 50/50 t-shirts and fleece as we will be relocating these projects -- products to our new factory in Honduras.

We also see growth opportunities in international markets. A main driver of next year's EPS growth is expected to be the major cost reductions resulting from completing the restructuring of our Canadian textile manufacturing and ramping up our offshore textile capacity expansions. We recently announced that the rationalization of textile manufacturing capacity is expected to provide approximately $45 million of cost savings in fiscal 2008 compared to fiscal 2007. And as previously indicated, we remain very confident that we will achieve our projected run rate of $0.30 per share EPS accretion from the KDH acquisition by mid-2008 as we complete the ramp up of our state-of-the-art sock manufacturing facility in Honduras.

We are making steady progress in transitioning to our new business model for socks and the transitional issues being experienced in the current fiscal year will not impact our financial performance in fiscal 2008.

Given our positive outlook for the balance of fiscal 2007 and our prospects for EPS growth in fiscal 2008, we believe this is an opportune time to proceed with another stock split. Consequently, we have announced today a two-for-one stock split to be effected, as before, in the form of a stock dividend. Gildan shares are expected to begin trading on a post-split basis on May the 16th on the TSX and on May the 28th 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 date of record for the dividend which is May the 18th 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 the the 25th. This will be the third two-for-one stock split since Gildan's IPO in June of 1998.

Finally, I want to comment on the announcement today that Glenn is entering into a Rule 10 B51 plan to sell a portion of his shareholdings in Gildan over the next year. You will also have an opportunity to question Glenn directly on this matter during our Q&A session. Glenn has not sold any of his founding shares since the time of the IPO and is entering into this program to achieve a degree of asset diversification with the full support of our board as well as to achieve personal liquidity and to finance certain charitable and community projects that he and his wife have committed to do or are intending to undertake. Subsequent to the completion of the program, Glenn will still retain close to 4 million shares in Gildan, a level currently surpassed by only our two largest institutional shareholders based on the most recent regulatory filings. Glenn continues to be fully committed to lead the Company through the next stage of our growth strategy.

The reasons for choosing to enter into a 10b5-1 program as opposed to an overnight bought deal by the sale or monetization of share, which is more common in Canada, are to provide better and more equitable distribution to U.S. as well as Canadian institutions and also so that Glenn continues to share in the risks and rewards of share ownership for this (inaudible) throughout the selling process.

We're now ready to receive questions. With regard to questions, while we're always transparent in our shareholder communication, we're not in a position to respond to questions that will require us to provide information that is of value to competition such as segmentation of sales, product line profitability and cost competitive data, including specific as opposed to directional information on cotton costs and fixation. In addition, we will be happy to discuss our retail strategy and progress, but can give limited information on specific retail programs both for competitive reasons and to respect the confidentiality requested by retail customers with regard to their procurement arrangements. With this exception, we will always be pleased to respond as fully as possible to questions and we are now turning the call back to the operator to open the line for questions.

Thank you. (OPERATOR INSTRUCTIONS) And our first question comes from the line of Richard Pittico with CIBC World Markets. Please proceed.

Good morning. Just a quick question on the sock business. I won't certainly ask you for the volume segmentation, but could you talk directionally about the price per units realization as you more meaningfully penetrate the mass channel? Does this have a compressing impact as you reinvest the savings into pricing at the retail channel?

Well, we are projecting approximately $2 a dozen cost reduction from relocating sock manufacturing offshore. And if you apply that to the number of dozens, you come to a far higher EPS accretion than $0.30 per share so the difference between the two is what we're assuming will be flowed through into lower selling pricing.

And that has not yet, I'm assuming, begun in the Q2 volume, is that a fair assumption? We're pricing based on the Rio Nance cost structure. Okay. So that is baked into the new mass order then?

Correct.

Okay. And then just to clarify, on the capacity for socks, your current capacity at Rio Nance, could you shed some light into what that is? I know your run rate is about 25 million, 27 million, but what's the current level of capacity available?

Right now we're ramping up. We will be at the end of September, we will be roughly around a 20 million dozen run rate. And currently we're somewhere in the neighborhood of about 11 million dozens in April. So it's ramping up quite steadily between now and the end of this fiscal year.

Okay.

And the balance of the equipment will be installed during our first quarter and the plant will be at 100% efficiency by March 30th of '08.

And that is, if I recall correctly, Glenn, that's 27 million dozens at the optimal level?

Approximately -- maybe a little bit higher than that.

Okay. And then could you also shed some light into the seasonality of orders for the sock business?

Well, the sock business has got some seasonality to it, but the big shipping periods obviously back-to-school and holiday. But it's pretty well balanced. There's -- it's maybe like, I would say 60% in the height of the season and 40% in the lower part of the season, so it still has pretty good balance despite the big build-up to back-to-school and holiday.

Perfect. And last question just on the retail side, Laurence, you had talked about some new orders coming in which is great and you talked about them in the context of branded Gildan product. Is it still safe to assume that your current negotiations for all incremental retail business is highly skewed to Gildan branded product?

No, we have a combination of both Gildan brand and as well private label. Don't forget that Kentucky Derby was specializing in private label so we're focusing on some of their major customers that can provide significant volumes in private label in the type of products that we can produce in Rio Nance as well.

And going forward, the thrust of our strategy is clearly to develop the Gildan brand, but there are some selected situations where private label will fit with our business model.

And those selective situations relate solely to the sock business?

They could relate also to other product categories as well, but they will be very selective.

Okay, great. Thanks a lot.

And our next question will come from the line of David Glick with Buckingham Research. Please proceed.

Good morning, Glenn and Laurence. Congratulations on the quarter.

Thank you.

Just wanted to get, to the extent you can obviously, it is a sensitive topic given the competitive nature of your business, but some color would really be appreciated on the progress you're making in the retail channel, in branded versus private label, and given your capacity ramp up as we head into next year, how many additional retailers could you take on in the balance of '07 and then into 2008?

Well, right now just for 2007, because of our limited amount of capacity, we're still focusing on the regional retailers both in the United States and Canada. And also to supply them the full product line of the -- just continue supply them the full product line of all the garments that we make including socks, underwear and fleece, to make sure we have a full branding approach to all these customers, and all of these regional customers are buying Gildan brand only.

We started to ship our first major retailer and we have now announced our second large program. The program we're announcing that will be shipped in June will be approximately about 20% of the Rio Nance volume just to give you an idea of the scale of the volume and that's strictly in socks. We're also discussing with both the initial program that we put together with the first retailer and as well as the second retailer other products for 2008 such as underwear and fleece. As we bring on this capacity, we will be able to service some of these larger programs into next year. At this time, we don't have the capacity so we're focusing on those programs going forward as we ramp up Rio Nance 2.

Just to clarify one thing, the 20% that Glenn mentioned is based on the full ramp-up capacity of Rio Nance, not the current capacity.

Okay, and you're talking Rio Nance 3 there?

Yes, Rio Nance 3.

Okay. So beyond, so a third major retailer, you would not have the capacity to begin in '08 or could you start in '08 or is it more of an '09?

Well, we sell all the retailers right now because selectively we're pretty well through the acquisition of KDH. We sell most of the major retailers to begin with. The question is that what we're trying to develop here are more large, more significant type programs. So we have our foot in the door with all the major retailers. It's just a function of us to have capacity and really right now, in terms of underwear and fleece, for example, we won't have any additional capacity till we move into '08. So our focus right now is in discussions with the existing retailers in which we're doing business with significantly as well as we're continuing to push just in general in the whole market.

Okay, and if I could shift over to Laurence, your comment about '08, the 45 million which is about $0.70 per share, do you expect that to fall completely to the bottom line in earnings or are there some offsets there, that, the $0.70 and then the 30 from KDH in 2008?

We will hope to retain as much as possible of these cost reductions in margin. But when we provide our detailed guidance for '08, we will provide what our selling price assumptions are.

Okay, great. And then last one for Glenn, just some perspective on the 10b5-1 would be appreciated.

Okay, well look it. I've been a shareholder and founder of the Company since 19-- actually since 1984 so I have a lot invested in the Company. This is something for me as more of an asset diversification and bring me some personal liquidity and also to sort of clean up my personal balance sheet, believe it or not. And also to -- like Laurence mentioned, to finance certain charitable and community projects that I have set forth with my wife and to give back a little bit to the community. It's very difficult being an insider and a CEO of a Company to sell your stock and because of reputational risk and the 10b5 will mitigate a lot of that for us. But at the end of the day, most importantly for us right now and the time and the position of the Company, we're very confident in the visibility that we have going forward into the balance of '07, into '08, so there's never a perfect time but when you have a lot of visibility and the process we're going through brings us comfort in terms of for me to achieve some of my personal goals in terms of diversification. And I'm still going to be the -- one of the largest shareholders of the Company. I'm fully committed to driving the strategy as we go forth. For those people that know me, this is my life and but at the same time I've got to also have some diversification and worry about my family and so forth. So that's just where we are right now.

Thanks a lot. Good luck guys.

And our next question comes from the line of Jessy Hayem with Desjardins Securities. Please proceed.

Thank you. Laurence, I just want a clarification on your top line forecast, I guess, for 2007. Are you still around 975 despite the drop in unit sales to wholesale distributors in the year?

It actually comes back to a pretty well the same number, Jessy, because the lower activewear volumes are offset by more favorable pricing than we previously predicted plus actually higher sock volumes.

Okay, great. And on -- I guess on the second national retailers that we were just talking about that you announced, is that essentially the same one that you had alluded to with regards to the back-to-school program in the past?

Yes.

Okay. Just wondering on the phase-out of products that are unpractical lines, I guess, that KDH, that you mentioned, Laurence. Can you give us an idea how many units that would represent roughly?

These are low volume units, but basically the cost of divesting ourselves of those, it's all small volume products, it's a limited amount of SKUs that create, a little amount of volume that creates a lot of SKUs, so it's not a lot of volume but it's -- we have divested ourselves of anything that's really complex with low volume.

Okay, great. And just to get a clarification on the current, I guess, production at Rio Nance 3, can you give us an idea of how much of it stems from the transfer of Kentucky Derby units and how much of it is organic so far?

None of it is a transfer. It's 100% organic so far.

Oh, it's 100% organic? Okay, great. Thank you.

And our next question comes from the line of Sarah Hughes with Cormark Securities. Please proceed.

Hi, guys. Just to follow up on Rio Nance 3, given your success in the sock program and then today's announcement, another big sock program, how are you going, when are you going to hit up to your capacity at Rio Nance and you need to start to look for additional sources?

Right now we're going to hit capacity as fast as we can actually train and build and bring the capacity on line. But based on our organic growth that we have just obtained over the last six months and plus some future opportunities we have, basically, and also some of the products that will be transferred from KDH when we have the capacity coming on line, we're basically have sold most of this production and we're in the process of re-evaluating further expansion and this is something we're going to bring to our board in August.

Okay. And then Glenn, on your t-shirt market share, it seems to be picking up some steam lately. Wondering if you could go into a little bit more detail. I know, in terms of is it broad based among the distributors or how your 50/50 market share is going, given that you're starting to move it to Dominican?

To Rio Nance 2.

Oh, Rio Nance 2. Sorry.

We're continuing to grow share in 50/50 and again, this is something as we have transferred offshore will make us much more competitive and give us the ability to generate share. And if you look at our overall share, we have a higher -- much higher percentage of cotton market share versus 50/50, which we're currently running around 24%. So as we continue to look to grow, this is an area of opportunity and we will utilize this low cost structure to continue driving more market share in the category.

Okay, and then just lastly, given your success in the international market that you have talked about in the last few quarters, is there any thought of potentially pursuing that a bit more aggressively or will the main focus still be on the retail market in North America?

Well, no, we're never losing sight of our wholesale market ever. We're growing in all of our various opportunities. We're going to continue to focus even on the wholesale market in North America because we believe there is still a lot of upside and share. And as far as Europe is concerned, we have always been capacity restraint there. And next year basically, we're going to continue to fuel more capacity in the European market as well as we're putting in a couple of items and new SKUs there that are really more conducive to the European market that we've never really had the capacity to support. That should generate significant volumes for us next year as well. So our focus is to grow our international business significantly at the same rate as we're growing North America and as well as continue pushing in the retail. And that's really the key to our growth strategy. We're not one-dimensional. We're growing in all three aspects of our business and we still have lots of growth opportunity in every segment.

Okay, great. Thanks, guys.

And our next question comes from the line of Sara O'Brien with RBC Capital. Please proceed.

Hi guys. Just a question on margins. Going forward, given I guess cotton costs should be a little bit lower or less cumbersome going forward, should we expect a huge margin expansion going to the second half of the year?

Are you talking for activewear or -- ?

For activewear, and then we can get into socks later.

We would, we're just talking for activewear.

Yes.

See activewear margins being comparable to what they were in the second quarter.

Okay. And I just wondered like why is that, if cotton costs should be sort of lower in the second half of the year?

Because we have assumed sequential price reductions in the second half of the year.

Okay. And in terms of socks, it looks like your gross margin is around 14%. To get to the $0.30, what kind of margin -- are you looking to grow it it up to about a 30% range and over? When should we get to see that ramp-up happen?

When do we expect sock margins to achieve around 30% was your question?

That's right.

Hopefully, we will be getting close to that level in the first half of '08 and reach that level by the mid of '08 when we fully ramp up the facility and achieve our targets for cost efficiency.

Okay. And Laurence, can you give us just a free cash flow outlook with these new capital expenditures plans for, let's call it '07 for now?

Well, I'd say at the end of '07, we expect to be slightly into our bank lines as a result of the additional CapEx and the restructuring costs, plus you will recall that in the coming quarter, we make the last installment of our senior notes.

Okay. And into '08, I mean are we looking at free cash flow positive in '08 or would it be the same situation based on your current CapEx plan?

Based on our current CapEx, we would certainly be free cash flow positive. But our objective will be to find further opportunities for profitable redeployment of our excess cash and our unused debt capacity, both through further organic capacity expansion such as Glenn was just mentioning and potentially also looking at complementary acquisitions.

Okay, and can you just remind me what your current CapEx plan is for the next, call it, five years and where that takes you volume wise?

Well, I'd say that without anything that we haven't announced, we're probably looking at about 80 million next year.

80 million for next year, and that takes you to your 100 million or beyond 100 million volume including the socks.

That will allow us to fully ramp up all of our existing projects, plus also takes account of what we spend next year for the additional cost reduction projects that we refer to today.

And it's for per 100 million dozens.

That's for 100 million.

Yes.

Okay, thanks a lot.

And our next question comes from the line of Susan Sansbury with Miller Tabak. Please proceed.

Yes, thanks very much.

Hi Susan.

Hi, how are you? Some, I guess, nit-picking questions but with the increase in the CapEx budget, how is that going to affect your D&A for the balance of the year or for the year in total?

It will have minimal impact.

Minimal impact, okay.

Yes.

And can you tell me of the 31% increase in total inventories, how much of that is accounted by Kentucky Derby?

Kentucky, actually I'd prefer not to give out that information, Susan, if you don't mind.

Okay, that's fine. Thanks very much. I'll get back in the queue.

And our next question will come from the line of Margaret Whitfield with Sterne Agee. Please proceed.

Good morning, everyone. Wondered if you mentioned in your release the sell-throughs that your key retailer, Dollar General were above your plan, if you could be more specific?

What's your question?

The sell-throughs at Dollar General you indicated were above your expectations, if you could be more specific on what the sell-through rates are at currently?

Well, the sell-through rates are based on their forecasts which we really can't say, so -- but they have exceeded almost about 15% of what they expected to sell, I can say that.

Exceeded 15, one-five?

One-five, yes, more.

Okay. [Broder] Brothers, the large customer with the consolidation, could you give us an update on where they stand and why you feel so optimistic that the business will begin to grow again at the beginning of the new year?

We're just reflecting their own plans that they have communicated in their conference calls and to their suppliers.

Okay. And of course, the weather was impacting your activewear business in the March quarter, but of course the weather trends in early April were not very kind. Could you give us an update as to how the market has been to date in this quarter?

So far it seems it's back on track and we feel comfortable with this quarter going forward.

Okay. That's good to hear. You mentioned acquisitions as a possible use of cash. Any comment as to what your strategies are as regards acquisitions?

Well, I think we'll provide definition of our acquisition criteria and our strategic plan as far as acquisitions at sometime in the future. Right now our focus is on our organic growth.

Okay. Congratulations. Thanks.

Thank you.

And our next question will come from the line of Claude Proulx with BMO Capital Markets. Please proceed.

Thank you. Good morning.

Morning Claude.

First question, Kentucky Derby, at the beginning of the year, I think if I remember, you were guiding, or when you issued your guidance, you said that it would contribute $0.05. I guess should we reconsider that number now?

Well, we said $0.05 in year. We said $0.20 cents running rate at the end of the year and $0.30 by the middle of next year. We're reconfirming our confidence in the $0.20 and the $0.30. For this year, we haven't projected that we catch up the $0.03 that Kentucky Derby diluted earnings in the second quarter. We're going to work hard to try and achieve the original $0.05 but that's not what's reflected in our guidance.

Okay. Second question, cash, I mean you're sitting on some cash and at the same time you borrowed money to finance your CapEx. I'm not sure I understand. Seems to me like borrowing is more expensive than what you're getting from your cash.

Yes, this was the result of a major cash in-flow from receivables on the last day of the quarter that was in the bank. But due to a technicality wasn't credited until the first day of the next quarter into our bank account.

Okay. And lastly, can you expand a little bit more on the two projects to save money, energy and chemical? I guess your -- is it like a co-generation plant that you will be building? I thought you were building one. Same thing with the chemical, what are you doing exactly?

For competitive reasons, Claude, I would rather not say.

And what about the timing of the disbursement of the $60 million?

It will be primarily in '08.

But you don't want to split it or -- ?

I'd say of the difference between 145 and the 170 that we're now projecting in CapEx, let's say the majority of that relates to these new projects. Out of the 25 million, it's between 15 and 20.

Okay. Thank you.

Thank you.

And our next question comes from the line of Doug Cooper with Paradigm Capital. Please proceed.

Hi, gentlemen. Can you just remind me, Laurence, again the exit rate on capacity for '07 and exit rate capacity for '08? I think it was 100 million. Is that the exit rate for '08?

Yes, correct. For '07, it should be roughly about 47 to 48 million. And that's with a much higher mix of fleece than we originally anticipated because this is one of the areas where we had significant growth opportunity for this fiscal year in the wholesale market, and our exit for '08 should be close to 100.

Can you just give me a ballpark breakdown of that 100, Rio Nance, is around 30 million sock?

Yes, so let me re-quantify. In '07, it's going to be roughly about, roughly about 77, let's say, for example, with socks, okay?

Yes.

And it will be roughly about 100 with socks in '08.

100 with socks in '08?

Yes.

That's all your current facilities that are under construction fully ramped up, right?

Yes, fully ramped up by the end of '08. Everything we have under construction or being built up right now, yes.

Okay. And based on the visibility you have today with the new, the announcement of the second major retailer program plus you're growing some share in the screen print market, etc., what percent of that capacity is already essentially sold out of the 100 million?

Well, that's hard to say right now but --

I think that would require giving you a sales forecast for next year, Doug, which we're not ready to do until we provide our '08 guidance later in the year.

I guess the point I'm getting to is with any major new retail wins, if you will, I mean you are going to need more capacity in '09?

That's correct. That's quite possible.

What, I know you mentioned that you're going to go to the board with that in August, but I mean what do you think, can you -- 20% capacity increase in '09, is that a reasonable assumption?

We're definitely in the need because of the amount of socks we're selling today to add more capacity in the sock area. We will evaluate the activewear and underwear as we go closer into the balance of this year, going into next year, we will evaluate it based on the programs we obtain from retail.

And how long will it take to build something if you have to start at the end of '07, be ready sort of 12 to 14 months, or how long would it take?

Right now, to build a plant is usually about 10 to 12 months for construction, and about anywhere between 12 and 18 months max to get to 100% efficiency and capacity so that's sort of the timeframe and we can accelerate it because of the expertise we have now, but that's roughly what the timeframe is.

Just to be clear, that's not -- is that 18 months in addition to the 12 or that's 18 months in total construction and operational efficiencies?

It's in addition depending where we put the plants at but if we were to put something up in Honduras, it would probably be a little bit fast.

Okay, and you have how much available land you have in Honduras and Dominican?

We have lots. I mean there's no limit to how much space we have.

Okay, and just a quick question on the revenue that you started in the quarter of the first retail program, is that revenue material at all?

Well, the, we have an idea of the size of the program.

Yes.

And we shipped it for one month in the, we were filling it during the last month of the quarter.

And the 35 -- just final question, the 35% growth in Europe, what is the base that's coming off, can you say?

No, I don't want to get to that segmentation of the sales.

Okay. Thank you, gentlemen.

Thank you.

And our next question comes from the line of Monica Logani with Wall Street Access. Please proceed.

Thank you. First question, just getting back to this first retail program that you would start selling through in March and your sell-through is exceeding expectations. I'm just trying to understand, it sounds like or at least you alluded to in your comments that the reorder quantity was increasing. I was just wondering if you could give us an order of magnitude in terms of what's 5%, 15%, which is what it's exceeding sell through expectations or is it more than that?

As far as expectations, I said was roughly about 15%.

Right.

Yes.

Sell-through expectation so I'm just curious is that also kind of what the reorder quantity will be increasing?

That's -- yes, exactly. That's exactly what happens, and we are upping our forecast by that amount basically to service the order. And the order size was, we said in previous calls, was roughly about a third of the capacity of our Rio Nance sock factory.

Okay. Okay. And how -- as you are selling into additional retail sock programs, how is the ASP holding up? I mean is it kind of steady? The second program versus the first program?

We definitely wouldn't like to discuss that for competitive reasons, Monica.

Yes. I'm not asking for an amount, I'm just saying kind of generally, directionally?

Generally the same.

Okay. And then just in terms of a modeling question just in terms of the higher SG&A, did I understand correctly that that should subside in the second half and that it was obviously higher because of KD but should that come down in the second half?

I indicated with respect to the SG&A for Kentucky Derby specifically that we would see reductions going forward in the second half of the year for two reasons, one because of the elimination of duplicate functions --

Right.

-- as we integrate the business into Gildan and secondly because there were startup inefficiencies in the new distribution center that will be worked out by the end of the third quarter.

Okay. So that should come down in the second half, okay. That's helpful. And also if you could, just in terms of Kentucky Derby, what kind of gross -- you told us in the past couple quarters what kind of gross margin that was in the quarter, the Kentucky Derby gross margin?

It was a little bit lower than the first quarter and we will be projecting higher margins in the third and fourth quarter as we start to move from the 15% range to the 30% range by the middle of next year.

Okay. Okay, all right. That's very good.

Thank you.

Thank you very much.

(OPERATOR INSTRUCTIONS) Our next question comes from the line of -- as a follow-up question, I'm sorry, from Richard Pittico with CIBC World Markets. Please proceed.

Hey guys. Last question on the sock business, I promise, but just wanted to follow up on the second mass order that you talked about. Is it fair to characterize it as margin enhancing with volume being somewhat cannibalistic from the previous business that you already sourced with Kentucky before acquiring them?

The second retail program that will be shipping in June, is that what you're asking?

Yes.

That's a completely new program that wasn't -- that was being previously supplied by a competitor.

Perfect. Didn't realize that. That's great. Thanks a lot.

And our next question also comes as a follow-up from Sara O'Brien from RBC Capital. Please proceed.

Hi. Just on those retail programs, the one in June, that's for socks only, and did you say if it was branded versus unbranded?

We said it was socks and we didn't say if it was branded or unbranded.

Okay. Will you say?

When we ship the product, we will maybe be in a better position to provide more color on the program.

Okay. And in September for a follow-up or a new retail program, did you say that was going to be for socks or socks, underwear and fleece? I just didn't catch that.

Well, no, what we said was that we're working on other programs for fiscal 2008 and they will be for underwear, socks and fleece.

Okay. And do you have fleece capacity -- I mean if you were to win a big retail program for fleece, do you have the capacity or how long would it take take you to ramp up capacity for such a program?

We're ramping up the capacity right now basically at Rio Nance, two facilities being ramped up as we speak, so that's to support future opportunity.

So major thrust right now is to pursue opportunities to utilize that capacity and to achieve orders that we will be able to produce at Rio Nance 2 when it comes on stream.

Okay. So the main focus is that Rio Nance 2 could be dedicated to fleece for retail versus, call it, increased wholesale? I mean it could do either but --

It will be both because our wholesale business is flying as well in fleece and that's one thing that's keeping our capacity restrained right now is that we're exceeding the amount of fleece we expected to sell.

And if you have to come down to a capacity crunch, I mean do you give the retail programs a win versus wholesale, or how did you figure that out?

We have very good focus -- visibility in our wholesale markets, so we understand it's very well planned out and as far as retail's concerned, that's why we sort of take our time in approaching these retailers because it comes in big chunks so we make sure that we can support these programs affecting our existing business and also support them for what their needs are.

Okay, great. Thanks.

And our final question will come from the line of Philippe Habeichi with Genuity Capital Markets. Please proceed.

All right. Thanks, guys. Just a question for Laurence. Laurence, I wasn't able to jot it down earlier in the call when you were talking about the substantial gross margin improvement in the quarter in activewear. I think you mentioned something like 750 BPs coming from efficiencies. Could you just run down those numbers again and if my 750, if I understood that correctly, could you speak a little bit more as to how this was achieved? I mean this is a phenomenal progression. Just wondering how that was achieved in the quarter?

Well, 750 was the right number for cost reductions and one of the big factors, there was the ramp up of the Dominican Republic textile facility. That production in the second quarter of last year was either being produced in the DR at much higher costs as the facility was just starting its ramp-up or it was being produced in Canada. The other factors were more favorable product mix due to the higher proportion of fleece and also a better mix within t-shirts. And going the other way were higher cotton costs which reduced margins by 200 basis points and the approximate 2% reduction in selling prices which reduced margins by that 170 basis point.

Okay, that's great. Thank you.

Thank you.

And there appears to be no additional questions at this time. I would now like to turn the call back over to Mr. Glenn Chamandy for any final remarks.

Thank you everybody for attending our second quarter conference call and we will speak to you next quarter. Thank you very much.

This now concludes your presentation. You may now disconnect and have a wonderful day.