Gildan Activewear Inc (GIL) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to the third quarter 2007 Gildan Activewear earnings conference call. My name is Danielle, and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be conducting a Q&A session toward the end of this conference. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded for replay purposes. I would like to turn the presentation over to Ms. Sophie Argiriou, Director of Investor Communications. Please proceed, ma'am.

Thank you, Danielle. Good morning, everyone. Thank you for joining us on the call today. With me here are Glenn Chamandy, our President and Chief Executive Officer; and Laurence Sellyn, our Executive Vice-President and Chief Financial & Administrative Officer. Before we begin I want to remind everyone 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 filing with the U.S. Securities and Exchange Commission and Canadian Securities Regulatory Authorities that may affect the company's future result. I would now like to turn the call over to Laurence Sellyn.

Good morning. Welcome to Gildan's third quarter conference call. I apologize for the delay in starting the call, which was due to very high volumes of participants being processed into the call. We will review our results for the June quarter and our outlook for our fourth quarter, then cover the assumptions underlying our fiscal 2008 EPS and capital expenditure guidance. EPS for the third quarter before restructuring charges was $0.47 per share which includes the $0.05 benefit of an income tax recovery relating to the first year of our international tax structure 1999, which became statute barred in June of this year. Compared to the third quarter of fiscal 2006, EPS before restructuring charges grew by 34% including the benefit of the tax recovery and by 20% excluding tax recovery. The growth in EPS was due to the $0.10 per share favorable impact of favorable manufacturing efficiencies compared to last year and the $0.07 impact of higher unit sales volumes, partially offset by a slight reduction of approximately 0.5% in unit selling prices, the $0.03 per share impact of higher cotton costs, higher SG&A and depreciation expenses, and a continuing dilution from the Kentucky Derby acquisition, which amounted to $0.03 in the quarter. Unit sales increased by 66% from the third quarter of last year. Excluding the impact of socks, unit sales increased by 11.6% June to higher market share in all product categories in the U.S. screenprint channel, 3% growth in overall industry demand in the channel during the June quarter and 38% unit growth in activewear shipments in international markets outside North America.

Pricing is relatively stable in the channel. And industry supply demand is in very good balance. According to S.T.A.R.S., total inventory in the channel in the end of June was down by 6.2% compared to demand growth for the quarter of 3% and unit sales growth of 3.7% in the month of June. These sales of T-shirt inventories in the channel at the end of June were 54 days versus 59 days a year ago.

Our guidance range of 25 to 30% EPS growth for the quarter did not include benefit of the tax recovery and did not anticipate the $0.03 per share dilution from Kentucky Derby. The main factor resulting as a continuing EPS dilution from Kentucky Derby is that our major new sock programs for national retail chains have been priced so as to generate appropriate margin based on the ramp top cost structure of the Rio Nance sock factory, which will be achieved by the end of this fiscal year. Margins in the third quarter reflected a cost structure which was based primarily on our former Kentucky Derby U.S. manufacturing plants, which has previously announced are in the process of being closed, as well as high cost contractors. Also, although 25% of the product which flowed through cost of sales in the third quarter was produced at Rio Nance it was primarily produced in the second quarter when the plant had more inefficient rate of capacity utilization. EPS dilution from Kentucky Derby was not reflected in our guidance, mainly because inventory reorder requirements to support the major new retail sock programs which we have obtained were greater than had been anticipated, resulting in more extensive use of contractors and additional transportation costs.

To put this into perspective, approximately 50% of our total sock sales in the third quarter were to service our new mass market retail programs. And about 30% of the product to service these new programs was sourced from high cost U.S. contractors which generated minimal single digit gross margins. The impact of the Kentucky Derby acquisition is expected to be $0.01 dilutive in the fourth quarter due to the consumption of inventories previously produced at a higher cost structure. However, the integration process will be completed in the fourth quarter. By the end of the current quarter, Rio Nance will be ramped up to an economic scale of production, consolidation of retail distribution centers will be complete with operations of the margin filled distribution center being fully cost efficient, and retail sales and support functions will be fully integrated into Gildan. Gross margins for products being produced at Rio Nance 3 were approximately 17% of the end of the third quarter, but are expected to be at the same level as our activewear gross margins by the end of September. Consequently the sock business is expected to be $0.04 per share accretive in the first quarter of fiscal 2008, even after reflecting the impact of consuming the balance of the higher cost inventories produced in fiscal 2007.

For the full year fiscal 2007, we are re-iterating our previous guidance of EPS before restructuring of $1.30 per share, including the benefit of the tax recovery. EPS growth for the full year is projected at 24% before restructuring charges. Fourth quarter EPS is expected to be $0.38 per share, slightly below our previous guidance range due to the continuing EPS dilution in the fourth quarter from Kentucky Derby as we consume previously manufactured higher cost inventories. Gross margins for activewear are projected to increase by close to 200 basis points in the fourth quarter compared to the third quarter, mainly due to improved manufacturing efficiencies in the DR and Haiti, where we experienced some short-term operating issues in the third quarter. Activewear margins in the fourth quarter will also begin to benefit from the ramp-up of the Honduras fleece facility. Our Canadian textile operations are being closed this week, though activewear inventories produced in Canada will still flow through cost of sales in the fourth quarter and first quarter of fiscal 2008.

Turning to fiscal 2008, we have completed our detailed budgeting process for next year and are comfortable to initiate our EPS guidance for next year with a range of $1.80 to $1.85 U.S. per share, up approximately 40% from fiscal 2007. The main base case assumptions driving our projected EPS growth for next year are as follows. Firstly, the closure of our Canadian textile operations, the ramp-up of our offshore textile facilities in Honduras, and the impact of having continued to improve the efficiency and cost structure of our Dominican Republic and Haiti manufacturing hub during the course of 2007 are expected to contribute in excess of $0.30 per share to year-over-year EPS growth in fiscal 2008, primarily due to relocating fleece and 50/50 T-shirts offshore. Projected savings are after taking account of the impact of consuming in 2008 fabric inventories produced in Canada in fiscal 2007 at higher manufacturing costs, the nonrecurrence of which will result in further savings of over $0.05 per share in fiscal 2009 versus 2008.

The Rio Nance fleece facility began commercial operations in April of 2007. We expect the facility to be fully ramped up in the third fiscal quarter of 2008, by which time unit cost savings for fleece products are projected to be approximately $8 per dozen. The second factor driving our EPS growth in fiscal 2008 is the projected year-over-year EPS accretion from completing the integration of Kentucky Derby, which is estimated at $0.20 per share, up from our previous estimate of $0.15 per share because of the $0.05 dilution in fiscal 2007. The $0.20 per share EPS accretion is comprised of $0.18 per share which is the impact of manufacturing cost reductions and $0.05 per share due to lower distribution costs and the consolidation of administration and [fill] support functions into Gildan. These cost reductions are assumed to be partially offset by the negative $0.03 per share impact of consuming the balance of high cost inventories produced in fiscal 2007. The annual production run rate of Rio Nance 3 is expected to be approximately 18 million dozens by the end of fiscal 2007 and increase to 27 million dozen by mid year fiscal 2008.

The third factor impacting our EPS growth [next] year is the unit volume growth for activewear products in fiscal 2008 which has been projected at approximately 14%, And which is projected to contribute in excess of $0.30 per share to EPS growth next year. The majority of our additional capacity in activewear in the first half of fiscal 2008 will be required to support our projected continuing strong growth in the screenprint channel, both in the U.S. and in Europe and other international markets. In addition our guidance includes additional 1.5 million dozens of new retail programs for activewear and underwear. Based on the projected ramp-up of Rio Nance 2, we will have additional capacity available to pursue new mass market retail programs in the second half of fiscal 2008, which we will pursue although it is premature to include such programs in our guidance at this stage. With the integration of KDH and our retail operations complete, we will be in a position to focus on pursuing and servicing further new retail programs. We will be evaluating our needs for further capacity expansion and activewear during fiscal 2008.

We believe that we are relatively well positioned competitively with respect to our coverage of future cotton costs for fiscal 2008. We have taken a conservative approach in our EPS guidance for fiscal 2008 by assuming that the currently uncovered portion of our fiscal 2008 cotton is purchased at current futures costs, which reflect significant cost increases in the latter part of next year. Historically, increases in raw material and commodity costs have generally been passed through into higher selling prices in the screenprint channel. Gildan has announced price increases averaging 3 to 5% for most product lines to take effect at the beginning of the first quarter of fiscal 2008. However, we have not assumed at this stage that these selling price increases will be successfully implemented, notwithstanding the upward pressure on pricing resulting from higher cotton costs.

Our capital expenditures for fiscal 2008 are projected at approximately $155 million, including carry over expenditures of $20 million which were previously projected to be incurred in fiscal 2007. The carryover is due to a minor delay in the timing of the delivery of equipment for Rio Nance 2 and 3 combined with a delay and beginning the energy cost reduction project in Honduras which we announced in May due to [privating] and other logistical issues. The majority of the planned capital expenditures for fiscal 2008 relate to completing the ramp-up of Rio Nance 2 and Rio Nance 3, implementing the new energy and chemicals cost reduction projects, and beginning the construction of a second sock facility to support our continuing growth in socks in the mass market channel of fiscal 2009. It is intended that the new sock facility will also be located in Honduras. The capital cost of the new facility to be expended over the next 12 to 24 months is estimated at approximately $40 million. Finally, we continue to have significant unused debt capacity and cash flow to finance our working capital and capital expenditure requirements to support our organic growth strategy and future capacity expansions. After financing our major capital expenditure program and capacity expansion projects in fiscal 2007 and 2008, we expect to end fiscal 2008 with no net debt and close to $100 million of cash and cash equivalents, which we will plan to reinvest in new high return growth opportunities for the company. So this point, operator, I will turn the call back to you to invite questions from participants.

Thank you, sir. (OPERATOR INSTRUCTIONS) Your first question will come from the line of Jessy Hayem from Desjardins Securities. Please proceed.

Thank you. Laurence, if you don't mind, could you go over the comments that you made on Rio Nance 3 and Kentucky Derby in regards to the accretion? I missed some of the details, please.

The accretion in fiscal 2008?

You mentioned something with regards to $0.20 up from $0.15. Is that the dilution you -- the accretion you were expect in fiscal --

I will go through that again slowly. So we are projecting a $0.15 accretion impact in '08, which is a number we always projected. But because '07 will be dilutive for the full year by $0.05, the year-over-year increase is not $0.15 but $0.20 from the lower 2007 base.

Okay. Fair enough.

And when I break down the $0.20, there are three components of that. $0.18 for manufacturing cost reductions. $0.05 from lower distribution costs that result having implemented having the consolidation of our distribution centers and also from integrating our administration and field support into Gildan. $0.18 plus $0.05 is $0.23, and then negative $0.03 -- it's from absorbing the balance of our higher cost inventories produced in '07 and '08.

Great, thank you. Clarification, why was the dilution greater on the sequential basis versus the second quarter obviously?

Because of the fact that 50% of our sales in the third quarter came from the new programs, which due to the reorders for the first program and supplying the fill for the second program were greater than we had anticipated. In order to meet these requirements, we had to source a significant proportion from high cost contractors, which generate margins for us in the low single digits. I think we have to look at this as short-term pain for long-term gain. And where the integration will be complete during the fourth quarter -- by the end of the fourth quarter all of the manufacturing will be integrated into Rio Nance, the distribution consolidation will be complete. The sales and admin will be completely consolidated into Gildan.

Great. Thanks. And maybe, Glenn, could you give us a bit of feedback on the first program that started to ship in June? Can you confirm who the retailer is now, who you displaced and just general feedback you got from the retailer and acceptance from consumers on the product?

The first program is also doing very well, which is the program that we started to ship to Dollar General. The second program which we received in June was a Wal-Mart program. It is also doing very well and is in stores today. We are very excited about the opportunities with both of these and they are doing very well.

And have you sort of discussed -- started discussions for additional program? Or there is a certain -- maybe when the next round of planning would occur with these mass merchants where you start actually planning additional programs? Are you sort of taking a pause given your capacity expansion plans that are taking place right now?

On the contrary. We already forecasted 1.5 million dozens in our forecast next year for additional programs with additional customers -- more the regional retailers. We have two test orders right now that could be quite significant for next year. One in underwear and one in activewear that are not factored into our forecast at this point in time, but they are only being tested today in retail. And as we put the consolidation of this acquisition of Kentucky Derby behind us, we have our sales force geared to focus on selling additional programs and really pushing into the retail strategy, as everyone is ready to go and we have all the customers and relationships online as we go forward.

Okay. Just a clarification, Laurence, on that you mentioned that you had growth rate within your assumptions for fiscal '08 was 14% of activewear -- of which was how much was destined to wholesale?

We said out of the growth in units, 1.5 million dozens was retail development.

Great. I will circle back for more.

Your next question will come from the line of Richard Pittico from CIBC World Markets. Please proceed.

Hey, guys. Just a quick follow-up from the last question. Glenn, the tests that are currently being conducted in underwear and activewear, is that also in the regional accounts? Or is that mass?

That's mass.

Perfect. And then from just a quick follow-up. On the delayed capital for Honduras, with regards to the equipment, does still that mean you can meet the end of 2000 -- Q2 '08 additional capacity in Honduras, or does that push back into Q3?

These are minor timing delays. There's a lot of equipment flowing into these plants. This is more a question of deliveries in October versus September rather than any delay. We started Rio Nance 2 a little bit later, and I guess it will be the beginning of the third quarter by time is ramped up to full capacity. Apart from that we're fully on track to meet the ramp-up objectives that we've given you before.

Right. Not that material then. Then other quick technical question. The inventory churns in the quarter seemed a little bit less impressive than in the past. Is that because of building up of inventory in anticipation of the back half and perhaps the rationalization of the North American facilities?

And I think the only factor there really is a build up of sock inventories for the major programs.

Okay. Perfect.

And also a little bit more fleece inventory to support our fleece sales as we go forward into the back half of the year, because we were going into the height of the fleece season, which we built inventory through to year.

That totally makes sense. The new sock facility, can you give me metrics how big that is going to be when it's fully ramped up?

Right now it's projected to be a little smaller than the first Rio Nance. It's going to be providing a little more specialty type products to give us a good balance, and Rio Nance will be our basic workhorse. But we are projecting to date to be roughly about third to two-thirds -- one-third less than Rio Nance in terms of its ultimate size.

The building will be big enough for further expansion to the same scale as Rio Nance 3.

Okay. Perfect. Then just last question, with regards to pricing, just wondering -- is there anything in the retail channel either contractually or otherwise that you think would make it more difficult to take price increases next year because the commodity exposure relative to what you could take in wholesale?

We are pricing at such low prices and retail that we feel we have room to increase prices. And there are no contractual commitments that prevent us from doing that. Really, the majority of our volume is still in the wholesale channel. And traditionally in the wholesale channel, inflationary cost increases in cotton and other raw materials have been passed through into higher selling prices.

And we have such a competitive advantage today relative to the pricing in the retail market that it's almost irrelevant to us.

I think it's just a final price related question -- when you say you are not including the price increases that have already taken from wholesale next year, is it based on conservatism or is there something you are seeing or hearing in the wholesale channel that questions whether promotional investments will have to offset that price?

Simply question of it being premature. We just announced the price increase and it would be premature to include it in our guidance.

Perfect. Thanks a lot, guys.

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

Good morning. Laurence, I was wondering if you could give us some color on '08 in terms of the quarterly flow. Obviously the consumption of the higher cost inventory being consumed in the first half of the year might tilt it toward the back half. But if you can give us some color on that -- you've given us a lot of great detail on how you build it up from '07 to '08. That's the first question. Then a follow up for Glenn on some of the retail programs.

First of all, we're not yet ready to initiate our quarterly guidance. But in terms of an overall directional question, whether we expect the EPS growth to be weighted toward the back half of the year, the answer is, no. Even with the absorption of the opening inventories, I mentioned that we are looking at $0.04 EPS accretion from Kentucky Derby in the first quarter. So there is no reason to think that each of the quarters won't be accretive in line with the full year guidance. But we'll doing a more detailed breakdown in the coming months.

That's helpful. Glenn, the 1.5 million units in the new programs, you said that was the regional retailer, so that would not be Dollar General or Wal-Mart. Are you getting into new categories with some of those regional retailers? Give us some color on that, it would be helpful.

We keep expanding with each one of the retailers and basically adding more products to individual programs we have. Some of that will be shipped to additional products into Dollar General. Most of the product is continuing to consolidate our position with the regional retailers, and we haven't forecasted any significant major programs.

Are you starting to get more of a foothold in the underwear business? I know that's the more brand driven business. You mentioned a test -- I don't know if it's at Dollar General or Wal-Mart. Can you give us some sense in the progress you are making in the underwear category and then in the fleece category?

Right now we have tests on both those product lines. We believe that we have a big opportunity, and as we bring on capacity -- and our capacity restraint is always prohibitive from obtaining big large programs. As we build capacity and have available capacity, we believe this is a viable opportunity for us, and we are focusing our energy and efforts to make sure that this is really the guts of our whole growth strategy. We're looking forward to a great year.

So it's fair to say one test in fleece and one test in underwear?

Yes.

And that's from one of the two -- at the two national retailers that you mentioned earlier?

More than two national retailers. There's a handful of them.

So maybe a test outside of those two.

We don't want to comment.

Trying to clarify to the best of my ability. Thank you very much. And good luck.

Your next question will come from the line of Sara O'Brien with RBC Capital Markets. Please proceed.

Quick question on cotton costs. Just wondering how the impact of higher 20% up cotton costs year over year can impact your retail pricing? I know you said your pricing is so low now that you have room to increase that. But given the competitors do not have room to sort of renegotiate on price in the short-term, can you still protect a 30% plus gross margin going out with new category programs? Are you worried that margin might be impacted with your pricing strategy?

We're not concerned at all. We have -- we priced our products -- obviously our margins are going to be most likely north of 30% anyways. For us, we're going to go after new additional programs, so we have the ability to price them accordingly to our cost structure. And then in socks, cotton is not a big part of the overall cost of the sock because it doesn't take a lot of material like a sweatshirt or a T-shirt does. We feel comfortable our margin structure as we go forward even with these types of prices of cotton.

Okay. In terms of the guidance you gave, if you don't have price increasing going through to compensate for cotton -- you didn't sort of say what the negative impact would be in your guidance from the cost of cotton. Do you have that estimate?

Well, what we are seeing is that number is already included in the $1.80 to $1.85 -- conservatively assume that the proportion of our cotton that is uncovered has been -- is purchased at high premiums in the futures prices. That's already included in our guidance. But we haven't recovered any of that in higher selling prices. How much we have uncovered we prefer not to discuss for competitive reasons.

Just to clarify on the price increase, we are raising our prices on October 1. And the question will be -- is how much do we have to discount off those higher prices, is what we don't know today.

Okay. I guess sort of everyone in the channel tends to follow the same trends. So you expect everyone to be increasing their pricing at the same time?

That's what we don't know and basically that's the unknown at this point in time and why we haven't included it into our guidance.

Is it safe to say if those price increases get through and you don't have to discount significantly, you could have some serious upside to the $1.80 to $1.85?

You can work out what a 3 to 5% selling price increase translates into, Sara. It's a material number.

And also we have been hearing recently from the mass channel, particularly Wal-Mart, that they are getting into more private label program. How much do you think you can benefit of this going forward? Is it a quarterly phenomenon as consumer spend slows down in the back half of the year, or is this a new shift that they are looking at so by the time your capacity comes on you can really fulfill some of this need?

I think the reality for us is that we see the retail opportunity is quite significant. Each one of the retailers are continuing to look for higher margins. And that's our whole growth strategy is better product and better prices and higher margins for the retailers. We fit the profile of the retailers. And including our supply chain and our efficiencies that we can bring product to market, we have everything that a retailer needs and we can offer everything the retailer needs. We are excited about the opportunity and this is reason why we are focusing as our growth strategy.

And then maybe a question on volumes in the quarter. Little lighter than we expected and wondered is that because you weren't pricing as aggressively as in the past, and so market share gains weren't as great as you expected?

Volume growth was exactly in line with the assumptions in our guidance, Sara.

Market share gains as we now have 48% of the U.S. T-shirt market and we were up 13% year-over-year. Despite the high market share, we have grown our T-shirts market share quite significantly. And we have grown our fleece share close to 10% year over year -- 10 points year over year -- and we have mounting momentum. We were very happy with our market share gains in activewear. And more so the big opportunity for us right now is really internationally. We are really focusing on our international markets. Shipments were up significantly in Europe. And for next year, we also are putting in additional product lines for our European marketplace that are more unique to Europe. And we believe that we will have significant increases in Europe. And we have just opened up a major distributor in Japan which is going to be all new business for us, who will service both retail and wholesale our products. And we are also looking at Asia/Pacific in general. And we believe that there is, like I said in the past, but we would say by next year we will be shipping products into China as well to capture some of that market as well. That will be a big part of our international expansion -- will be a big part of our growth in wholesale as we go forward.

So next year's shipping into China is wholesale or retail?

Wholesale. Japan will be both.

Japan retail will be branded or unbranded?

Branded.

So we're talking socks here?

Socks, underwear, sweatshirts, T-shirts, the whole product line.

Great. Thank you very much.

Your next question comes from the line of Margaret Whitfield with Sterne Agee.

Following up on the comment you made about the retail test, how long do these tests usually take, and when will you know there is going to be a followon order?

The product is going to be tested as we speak -- probably in August, September. And I'd say we would know sometime December.

By December. Okay. Curious if Roeder Brothers was in the market for your goods in Q2 and what the outlook is for that large customer?

Sorry?

Large customer Roeder buying your product in Q3 and will they be in the market in the future?

Roeder Brothers is has for many years been the largest distributor in the wholesale channel. And therefore been a major customer for Gildan throughout our history, this year, next quarter, next year.

Thanks. I thought that they were doing consolidation of inventories and their business was less --

Yes, within their purchases they have been going through a process of inventory warehouse consolidation and careful inventory management which was reflected in our guidance. I don't think they want to talk about sales to a particular customer. But they will have completed this process of inventory consolidation and will continue to be a very valued customer and partner to us as we go forward.

Business may start to ramp up soon then?

We think the inventory consolidation process should be completed by the end of this year.

What tax rate is imbedded in your guidance for the fiscal '08 year?

Pardon me?

What tax rate is imbedded in your guidance for fiscal '08?

Below 4%.

And how about gross margin range? I know you can't be specific because of all of the variables for your guidance in '08.

We expect gross margins next year for Gildan will be couple of hundred basis points higher than this year and will be looking at significant market expansion in Kentucky Derby as we price off the cost structure from Rio Nance 3.

Thank you and congratulations.

Your next question will come from the line of Susan Sansbury with Miller Tabak and Company. Please proceed.

Thank you very much. Laurence, can you parse the 44% increase in inventories -- how much of it was Kentucky Derby, how much of it is for fourth quarter delivery versus fiscal '08? Outlook for the end of the year -- and tell me again when you expect to get rid of higher cost inventory produced in fiscal year 2007 -- for the sock program? Can you talk generally about the inventory?

What we said, Susan, was during the first quarter of fiscal '08, we will consume the balance of both higher cost sock inventories that were produced during 2007 as well as higher cost Canadian textiles that were produced prior to the closure of the Canadian textile facilities. And we also said that even with this absorption of the higher cost previously manufactured inventories, we expect the sock business to have $0.04 accretion in the first quarter next year. We are expecting good EPS growth in the first quarter of next year. As far as breaking down our inventories, I think I prefer not to give a detailed breakdown of our inventories by product.

Okay.

What we can reconfirm is the reasons for increases in inventories are sock inventories in place to support our new programs and seasonal fleece inventories.

Okay. In terms of the third quarter unit volumes, do you discuss what they actually were and can you give me -- give me the breakdown between the activewear and the new sock program or retail program?

We have not been --

Providing that.

Providing that detailed breakdown of our sales.

Great. I will get back in the queue. Thank you very much.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of Doug Cooper with Paradigm Capital. Please proceed.

Hi, gentlemen. Laurence, could you remind me of the exit capacity for '07 and what the exit capacity for '08 will be -- and maybe by facility if you can.

We won't provide it by facility, but Glenn can talk generally about our capacity.

Our capacity exit will be roughly about 72 million dozens exiting '07. And that's based on the reduction of enclosure of the Canadian textiles. And in year '08 will be roughly about 85 million. And we'll exit '08 with an opportunity of around 95 to 100 million. That includes socks.

72 exit this year in '08, you said exit 95 to 100?

Yes.

What was the 85?

That would be about mid-year in '08.

Mid-year '08.

Yes.

And that obviously the new sock facility will be come online sometime you think in '09?

The sock facility will come on-line probably still maybe potentially in the back half of '08.

That was not included in your 95 to 100?

There might be a couple million dozens in that number.

And you said it was before two-thirds the size of Rio Nance 3 or plan to be and Rio Nance 3 --

27 million dozens -- but it has room to grow because the building will be the same size. Our first projection would be to make it about two-thirds the size but with room to expand.

My back of the envelope will be '09 capacity should be without any other major programs in terms of adding capacity about 20% more?

'09 because we will ramp it up because the facility will come on at the end of '08. And be ramped up during '09. There will be some timing.

And pro forma basis if you will.

Yes.

And just a question. I did hear through the grapevine you have hired a sort of M&A guy to head up a new team there. Is that -- first of all is that true? And second, what would that imply in terms of M&A focus in '08 and '09?

We've been bringing in additions as we're growing in the company to our senior management team, and we have indeed in the last couple of months hired a VP of corporate development who is a great addition to our team. His name is Patrice [Suimi] who has a background in investment banking. And clearly one of his main focuses will be to help us implement our acquisition strategy where we are looking at ending next year with unused debt capacity and approximately $100 million of cash. So with we've said all along that our intention is to redeploy that cash back in the business and new high growth opportunities. Not only for further organic growth in excess of our case assumptions buffer also to do acquisitions. And during the coming months the first thing we will be doing will be doing a good job of developing our strategic plan and our acquisition criteria is the focus pursuing acquisitions in areas that have attractive economics for us and fit with our business model and our core competencies.

Right. Okay, that's great. Thank you very much.

Your next question will come from the line of Monica Logani with Wall Street Access. Please proceed.

Thank you. Laurence, could you -- sorry if I missed this at the beginning, could you give the usual breakdown of the gross margins that you do, contribution from different aspects?

For what period?

For the quarter. Just in terms of how much manufacturing efficiencies helped and raw materials and et cetera.

I tell you what, so the gross margins for activewear went from 32.4 to 34.7. Manufacturing efficiencies were positive by about 550 basis points. Cotton was negative 150 basis points. Selling price mix was negative, about 100 basis points. And the negative impact of exchange on our Canadian operations was about 50 basis points. So that nets out to 2.5%, 250 basis points, which was a year over year difference.

Great. And also could you just -- sorry if you said this, I want to make sure have I this right -- in terms of your excess capacity in '08 for additional retail programs?

Excess capacity will be roughly about 5% on sales.

Okay. And then finally, just looking back at the KD (sic) acquisition when you announced the acquisition, we were looking for some nice accretion in the second half of this year. I think if I remember correctly like $0.30 in '08. If I'm understanding it correctly, the reason it's less is because you guys were pricing the product as if you were at a good capacity or good amount of volume was being produced at these facilities, at these lower cost facilities. I'm trying to understand kind of where the calculation was wrong in the beginning. What changed over the course of the year?

Monica, as far as '08 is concerned, the $0.30 was presplit and the $0.15 is post split. So the EPS accretion that we are projecting and including our guidance for next year is exactly in line with our original targets, notwithstanding the fact that there is some absorption of the opening inventory produced in '07. That's completely on track. And as far as the reason why it's been dilutive in '07, for the reasons that we said that we've -- our sales of major new programs that are price based and the ramp-up cost structure of Rio Nance 3 have come more quickly than had been projected. To some degree, we are a victim of our success, because we are achieving these programs very quickly but having to source them from higher cost U.S. manufacturing and U.S. contractors. But it's taken some time to go through the consolidation and ramp-up of a new retail distribution center. By the end of this year, all aspects of the integration will be complete. The manufacturing, the distribution, administration and we will be in good shape to achieve our EPS efficient targets next year. Plus have a template and a business model for our retail business for socks that will allow us, we believe, to very quickly and seamlessly integrate any future sock or other retail acquisitions.

Very good. And just on the Dollar General contract, I know that in the beginning basically if the sellthrough rate was very good you could start expanding to other types of products. I was curious if we have feedback on the sellthrough rates.

Sellthrough is going fantastic and we are very pleased with the performance.

Okay. Good. There could be opportunity --

That's our objective is to leverage opportunities as we go forward.

Thank you and good quarter.

Thank you.

You have a follow-up from the line of Richard Pittico with CIBC World Market. Please proceed.

Hey, guys. Just a quick question, follow-up on the activewear capacity. I know you talked about another facility potentially examining that in fiscal '08. I guess the question is with a lot of stuff if I ring at you in '08, what's the catalyst or timing you are looking for before you feel comfortable in terms of committing a (inaudible) facility?

I don't think we want to put ourselves in a box as far as any expectations and timing. Our focus, as Glenn said, will to be drive these new retail programs and as we do that we will evaluate our need to add more capacity during '09, assuming we are successful in filling the balance of the capacity from Rio Nance 2 as we ramp it up.

Great. Thanks.

Your last question is a follow-up from the line of Jessy Hayem with Desjardins Securities. Please proceed.

Just a clarification, Glenn, is it fair to say the excess capacity that you just alluded to in fiscal '08 would mainly be in T-shirts and fleece and not in socks because you are sold out in socks in fiscal '08?

Right now we were sold out in socks, but toward the end of fiscal '08 we will have production coming online from a new facility towards the back half of the year. Last move presumably toward the end of the year. We were also still operating some small portion of U.S. production today which we still have -- could still utilize if need be.

Great. So if any excess sock capacity exists, it would be from the additional new facility you announced today.

That's our focus right now is to build it.

Thank you.

And we have a follow-up from the line of Sara O'Brian, RBS Capital Markets. Please proceed.

Hi, just again a follow-up on the excess capacity, Glenn, at the end next year. If you do have a home run with one of these new retail programs with either fleece or T-shirts, would you use the same kind of strategy of filling capacity but using outsourcing in the meantime if you had to? Or would you take on smaller contracts until you can ramp up full capacity to flow through one of your more efficient facilities?

We will manage our capacity because it's very difficult in the activewear and underwear type product categories to find good contractual work in these types of volumes. So we will manage our capacity and each one of the different programs based on our availability. And we have capacity coming on because we are ramping up Rio 2 basically and -- they're still being ramped up now. Basically it's starting off at a certain level today that keeps going up through the third quarter when it's fully ramped up. If you look on a year over year basis, we will still have capacity available. We believe that our capacity is sufficient and hopefully we can obtain at least another 5% in sales for this year. But then on a go-forward basis on a year over year we will have still some availability as we go forward as well. Depends how the programs flow and so forth and the timing of them.

So if the underwear or T-shirt testing program or fleece program test is solid, you the capacity to respond to that immediately?

Depends on the type of program, yes.

Okay, thank you.

I would like to turn the presentation back over to Mr. Glenn Chamandy for closing remarks.

I'd just like to thank everybody for attending our third quarter conference call and we will speak to you soon. Thank you very much.

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