Gildan Activewear Inc (GIL) 2007 Q4 法說會逐字稿

Good day, ladies and gentleman. Welcome to the fourth quarter 2007 Gildan Activewear earnings conference call. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session toward the end of today's conference. (OPERATORS INSTRUCTIONS) I would now like to turn the call over to Ms. Sophie Argiriou, director investor communications. Please proceed.

Good evening, everyone, and thank you for joining us for our fourth quarter 2007 results 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 would like 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 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 Laurence. Laurence.

Good evening. We will first review our results for the fourth quarter of fiscal 2007, and then discuss expectations for fiscal 2008. EPS for the September quarter, before restructuring charges, was $0.38, the same as our prior guidance and up 26.7% from the fourth quarter of last year. Although we achieved our projected EPS growth, EBITDA was lower than previously projected for three reasons. Firstly, activewear selling prices in the quarter were 1% more unfavorable than projected due to higher annual growth incentives paid to wholesale distributors. Secondly, we were unable to fully capitalize on market demand for high-volume hooded fleece and golf shirts as a result of temporary inventory constraints due to transitioning our Canadian textiles to (inaudible) and the Dominican Republic. And thirdly, there was a one-time unfavorable non-cash impact of $0.01 from revaluing our Canadian deferred tax liability due to the significant increase in the Canadian dollar in the fourth quarter. The negative impacts of these variances were offset by income tax recoveries, which had not been reflected in our prior guidance.

The 26.7% increase in Q4 EPS compared with last year was due to manufacturing efficiencies and an 8.9% increase in activewear unit volumes, plus the impact of the tax recoveries, partially offset by the higher activewear price discounts, slightly higher costs, higher SG&A and higher depreciation and impact of consuming higher cost, stock, contractor inventories. Activewear unit sales volumes were up by 8.9% in the fourth quarter and unit sales of socks increased by 15.7% compared with the fourth quarter of last year. Industry unit shipments for all products combined from U.S. wholesale distributors to screen printers increased by 2.4% in the quarter compared to last year and, in addition, Gildan continued to achieve market share increases in all product categories, even with short-term supply shortages in certain styles as we transitioned our Canadian textiles offshore.

In addition, unit shipments in the screen print market in Canada in the quarter increased by approximately 20%. Unit shipments in Europe and other international markets outside North America increased by 21.4% in the fourth quarter. Gross margins for activewear products increased to 35.2% compared with 32.5% in the fourth quarter of last year, primarily due to further manufacturing efficiencies which more than offset the impact of higher sell discounts, slightly higher cotton costs and the foreign exchange impact of reevaluating the Canadian deferred tax liability. Stock margins were lower than last year due to the continuing consumption of higher cost inventories from outside contractors, which were used to supply new programs which were priced based on the cost structure for the new Rio Nance facility.

SG&A was 10.9% of sales, compared with 10.1% of sales in the fourth quarter of last year. The increase was primarily due to higher distribution costs and increased administration and IT costs to support our continuing growth strategy. The income tax recoveries reflected the 3.1 million tax benefit for the full year of losses incurred in fiscal 2008 -- 2007 by Kentucky Derby as well as tax benefits of 1.9 million relating to a prior Gildan taxation year, which became statue barred by fiscal 2007. The Kentucky Derby loss for the first three quarters of the fiscal year had not been tax effective due to the accounting requirement that there must be likelihood of sufficient future profits against which to apply the tax losses. This test was satisfied in the fourth quarter and accordingly we were able to tax-effect the Kentucky Derby losses for the full fiscal year.

We have reiterated our EPS guidance for fiscal 2008 at $1.85 a share, up 43.4% from fiscal 2007. Although the selling price increase in the screen print channel is currently being successfully implemented, we have not increased our earnings guidance at this stage until we have better visibility in the outlook and business climates in the coming year. Part of the increase will be required to offset impact to higher than projected input costs for energy dyes and chemicals which, together, are expected to negatively impact EPS by approximately $0.08 per share based on assuming close to a $100 per barrel of oil throughout fiscal 2008. We believe that we're well positioned to achieve or exceed our EPS growth projections for fiscal 2008. Firstly, the U.S. screen print market is continuing strong into the first quarter of 2008. Overall, industry T-shirt shipments in the month of October increased by 7%, although overall demand in fleece was weak due to warmer weather. Our largest customer has essentially completed its warehouse consolidation, and industry supply demand continues to be in very good balance.

Inventories in the U.S. distributor channel at the end of October were down by 14.7% compared to October 2006. Consequently, inventories in the channel continue to need to be replenished, and market conditions are currently supporting successful implementation of the non-selling price increase. In addition, Gildan continues to have strong market share momentum in all categories of this channel. In particular, our share in the fleece category in the screen print channel reached 49% in the month of October, and unit sales of Gildan branded fleece from U.S. distributors to screen printers increased by 15.2% in October compared with 16.2% reduction in overall industry shipments. On the retail side, we are very confident that our underwear test program will result in confirmation of our mixed important new mass retail program in the coming weeks for potential shipment to the retailer in the spring of 2008.

In addition, we are targeting further large mass market programs in fiscal 2008 to utilize additional capacity which will be available for Rio Nance 2 in the second half of fiscal 2008. We are also projecting strong growth in Europe, Mexico and Japan. We see Mexico as a large market opportunity where we have now established our presence and where we will continue to pursue aggressive growth in fiscal 2008. In addition, we presented at a screen print show in Beijing in September, and we believe we have potential opportunities in China which are not reflected in our fiscal 2008 guidance. We also expect the Pruitt acquisition to further enhance our overall retail platform and to be accretive to EPS in fiscal 2008.

We do not anticipate transitional problems with Pruitt such as we experienced in the first year of the Kentucky Derby acquisition for two reasons. Firstly, Pruitt is a stable and profitable company and we will not be faced with the same challenges to implement an immediate restructuring of the sales distribution and manufacturing operations of the business as we were with Kentucky Derby. Secondly, during fiscal 2007, we've established our business model and organizational structure to manage our retail division and service our retail customers. In addition, Pruitt's product mix is well aligned with Gildan's business model and manufacturing capabilities. However, the potential EPS impact from the Pruitt acquisition in the first year will be mitigated by an accounting rule that requires that a portion of the margin on opening inventories must be capitalized as part of the acquisition purchase price.

Next both Rio Nance 2 and Rio Nance 3 are wrapping up very well and they are surpassing their cost performance objectives. Virtually all of our basic men's and boy's retail sock programs prior to the acquisition of Pruitt, as well as certain large basic Pruitt soft programs are now being manufactured at Rio Nance. For the first quarter of fiscal 2008, we are projecting a 50% increase in EPS to $0.21 per share compared to $0.14 per share in the first quarter of fiscal 2007. Due to the impact of higher activewear selling prices in the screen print channel, growth in activewear units, sales and projected accretions from our two sock acquisitions partially offset by increased selling, general and administration and depreciation expenses. This increase in EPS includes the impact of consuming higher cost opening inventories for socks and for activewear that was produced in Canada prior to the closure of the Canadian textile operations.

The impact in the first quarter of consuming higher cost previously manufactured textile and sock inventories is expected to amount to approximately $12 million compared with the targeted cost structures in Rio Nance 2 and Rio Nance 3 which will translate into further significant cost reduction potential in fiscal 2009 compared to fiscal 2008. Our projected Q1 EPS also includes impact of the valuation of Pruitt softening inventories. Projected EPS growth in subsequent fiscal quarters in our guidance is primarily driven by cost reductions, acquisition integration and unit sales growth with potential upsides from pricing and further retail programs as previously integrated, plus the potential of the Pruitt acquisition. We have reduced our capital expenditure forecast for fiscal 2008 due to a delay in the planned cogeneration project for Honduras, which will also result in significant further manufacturing cost savings beyond fiscal 2008, and lower spending for Rio Nance 2 where we have trance fathered certain equipment from our Canadian textile facilities.

Capital expenditures in fiscal 2008 include completion of the manufacturing ramp-up of Rio Nance 2 and 3 as well as our planned new sock factory. During fiscal 2008, we will also be evaluating alternative sites for our next capacity expansion in activewear and underwear. We expect all of our existing textile capacity to be fully utilized in fiscal 2009 to support our growth in retail and our international expansion. So we will require new textile capacity to be built and in commercial operations by the end of fiscal 2009.

Due to the revised fiscal 2008 capital spending estimate, combined with the projected $30 million reduction in inventory in fiscal 2008 as we consume a high level of opening inventories required to support our transition to offshore soft manufacturing. We now project to generate approximately 150 million of free cash flow in fiscal 2008 before the cost of the Pruitt acquisition compared with our prior pre-cash flow forecast guidance of approximately $100 million dollars. In summary, we are comfortable at this time that we are well positioned to achieve or exceed our EPS guidance of over 40% in fiscal 2008 and that all key elements are in place for us to achieve our objective of minimum 20% EPS growth beyond 2008. So, that completes our formal comments and we will turn the call back to the operator to invite questions.

(OPERATORS INSTRUCTIONS) Your first question will be from the line of Anthony Zicha from Scotia Capital.

Hi. Good afternoon, gentlemen. Laurence, could you give us an idea, in terms of the retail sales going forward on the channel, what do you expect them to be in terms of proportional?

Well, we already said that we had approximately 1.5 million dozens of retail sales in our budget for 2008 and that over a three-year period, not including socks, we were looking at 15 million dozens of retail sales.

Okay. And if we look at, in Europe, what was the primary contributor to the improvement in the 20.9% increase in shipments? Was it new customers or was increased market share? Was there anything unusual?

It's a combination of allocating more inventory to the markets in Europe, introducing new products to the European market, and one of our competitors in Europe which is a major competitor repositioning itself in the market.

We expect also to have pretty big increases going forward into 2008 because of the fact we have extensive product expansion in our line going forward next year as well.

Okay. And the last question, with reference to basic materials, you mentioned that the energy costs and inflation is going up. Are you able to increase the prices, like are they accepting the price increases?

Well, we're seeing -- as we're seeing our price increase that we announced in the screen print channel being successfully implemented that would be related not just to inflationary cost pressures but also to the very favorable supply demand balance in the industry.

Okay. And sorry. One last one. With reference to the retail initiative, your strategy, have the competitors reacted accordingly? Have they reacted to your entrance?

We'd rather not talk about our competitors at this point in time. I think that we're focused on ourselves and we believe in our strategy and so far it's been very successful, and we're very encouraged about our opportunities by going forward to retail, and we're continuing to chip away at different types of programs, and this new program we talked about potentially in the underwear will be a significant opportunity for the company to lever as we go forward. And also with the acquisition of Pruitt, it's also giving us a much bigger platform in which to expand our whole retail strategy with an expansion of their sales force, which we combined their sales force and our sales force together.

So we're very optimistic about our whole retail strategy and maybe just because I know we're going to have a lot of questions on retail, we can just make the point that in the wholesale market it took us almost six years to build the chief sales of about $300 million, and in the last 15 months we've repositioned ourselves in retail to be equal to very close to that volume on a going-forward basis. We're now the largest sock supplier to the mass market in the United States and our objective is to leverage that and to get product categories, such as underwear, sweatshirts and golf shirts that these retailers are purchasing. So we're positioned exactly where we need to be, in terms of developing a retail strategy to allow the companies to achieve significant sales growth over years to come.

Okay. Excellent, Glenn. Congratulations. Thank you.

Your next question will be from the line of Sara O'Brien from RBC Capital Markets.

Hi, guys. Just to talk a little bit more about the retail program. Sock margins based on sourcing, is that sort of an issue that's behind you? Are you now fully producing everything that you want to in Rio Nance that can be produced there?

We say in the -- yes, everything we want to. We say in the release that virtually all of the men's and boy's products to support all of our major retail programs, plus certain Pruitt high-volume basic programs are being manufactured at Rio Nance. We're still producing some more specialty products at our remaining Kentucky Derby facility in Virginia.

Okay. And I guess I was a little surprised just in terms of the rollout of the Rio Nance facility, the second one for socks. I mean, are you waiting for the tariff ruling by the Department of Commerce before ruling that out or are you going to produce in Honduras no matter what comes out in terms of tariffs?

Right now we're paving the way to produce the fail and our plans are to start construction in January.

Okay. And that's even if that tariff does go through?

We're planning is the basis that the safeguards will be implemented.

Okay. And just wondered about -- you talked, Laurence, about EBITDA being below expectation and one of the reasons being your supply of hoodies and polo shirts. Is that all behind you now or could we see some of that Canadian production transition still affecting margins going into the next quarter?

That's all behind us right now and Rio Nance 2 is producing all of our fleece products and we have located all of our golf shirts offshore, and everything is running at 100% and that's all behind us.

And there's sort of pent up demand there -- I understand from one of your main distributors that there were some supply issues with your competitors as well. Would you say that the demand for fleece then is still high.

Our demand for fleece is still high, and despite the fact that we still had shortages, we still had record market shares. Just to give you an idea, we really got a lot of momentum behind us right now in fleece and we're capitalizing it as quickly as we can, and we've now caught up on most of our shipments in the first quarter and that's why we see our market share continue to grow in the months of October, November and December.

Just to remind you of the October numbers, Sara, where we had a market share of 49% in fleece. So we were able to take advantage of the opportunity in the marketplace.

Okay. Great. I will circle back. Thank you.

Your next question will be from the line of Jessy Hayem of Desjardins Securities.

Thank you. I just want to circle back on some of the comments you made, Laurence, with regards to -- and if I heard correctly, you were not able to capitalize on fleece demand during the quarter. How many dozens did you sort of leave on the table in the quarter?

Well, it had -- it had about a $0.02 impact on our EPS.

Okay. And is it fair to assume that this still may be an issue into the first quarter as you're still in the process of wrapping up Rio Nance 2?

No. I think the previous analyst, Jessy, just asked the same question, and that's behind us now. We had a 49% share of fleece in October. So we were able to fully capitalize on the opportunity in the market in the month of October.

Okay. Great. I missed that. And just another question on your -- you mentioned that you had to give higher annual growth incentives in the quarter. Can you just give us some color on, I guess, why there was a need to do so during the quarter?

It was just a function of the timing of incentives to individual customers and when they met their growth targets.

Okay. Fair enough. And with regards to the Pruitt accretion, you mentioned something with regards to portions of the margin to be capitalized on the purchase price. What do you expect the accretion to be in '08, and if you can give us some more color on those comments, please?

Well, to give you more color on the comments, there is an accounting rule where the concept is that you apply both manufacturing margin and a sales margin to the inventory that's included in an acquisition, and the manufacturing component of the margin is assumed to be realized by the seller before the sale. So that's capitalized to the value of the inventory and you only flow through P&L, the sales portion of the margin. So I didn't invent that accounting rule, but that's the way it works. So what that potentially means is that about $0.02 or $0.03 of potential accretion of Pruitt will be capitalized in the value of the opening inventory. So, we haven't changed our assumptions and our guidance apart from, I would say that not withstanding the bump. We're still comfortable with the couple of cents that we had included in our previous guidance for Pruitt, even with absorbing this margin that we'll be capitalized in inventory, and there is potential further off-site.

Sounds good. Just one last one on cotton costs, which is a recurring subject, given their rise. We understand, of course, that within the wholesale channel you're able to pass through these cotton costs as it is industry practice, but can you elaborate your ability to do so within the retail segment?

Well, we feel comfortable with our margin analysis, and, you know, we have a lot of room in retail -- much more room in retail, in terms of our pricing strategy. So we're going to fit in any additional cotton prices into our pricing assumptions as we go forward.

Fair enough. Thank you very much.

Your next question is from the line of Jay [Solo] of Morgan Stanley.

Hi, good afternoon.

Hi, Jay.

Can you hear me okay?

Can hear you very well.

Okay. Great. I just wanted to step back for a second and take about the big picture. Obviously, the macro economic environment is pretty difficult right now. When you look out at this business three to four years down the road, where do you see this business developing? Because there's a lot of opportunity out there, whether it's wholesale, whether it's retail, whether it's acquiring, consolidating other private label makers, going to new categories perhaps? What's your vision right now?

Our vision is quite simple. We have a four-pronged growth strategy. One is to continue taking and achieving greater market share in our wholesale market in all three categories. We believe that there's still upside potential in market shares in the wholesale market as well as we're going to continue to expand on our international sales both in wholesale and potentially as we go forward into retail. To give you an idea, I would say that in a couple of years from now -- I would say within three years, Asia will probably be our second largest market, even in the wholesale market, and this is where we believe the opportunity is in China, which is -- which is partly reflected in our long-term vision of wholesale. As well as we're going to continue our retail strategy and, like I said before, we're currently right now the largest supplier of socks in the mass market. This is only after 15 months of us penetrating the marketplace, and we built -- we're not only the largest, but we also have a significant advantage from a cost perspective as well.

As we keep taking advantage of our leveraging the relationships and the infrastructure that we put in place in socks and also leveraging the infrastructure that we have from a cost perspective in underwear, activewear in sweat shirts, T-shirts, for example, we believe there is significant upside in our whole retail strategy. We haven't even gotten going yet, but the point is over the last 15 months we've now built a base, an infrastructure to be able to take advantage, we believe, in the opportunities of retail. And fourthly, we're going to continue to look at tuck-in type acquisitions that can complement our growth strategy, either in potential new markets to accelerate our growth within the marketplace or potentially to accelerate the penetration within one of the segments of which we're selling in the North American market. So, right now the company is well positioned. We have a very conservative balance sheet with lots of debt capacity available to us. So we believe that we're positioned right now for the years to come and it's not -- we're not one-dimensional. We have the growth strategies that will take the company in four different levels and we're very excited about the opportunities.

Okay. Sounds great. Thanks so much.

Your next question will be the from the line of David [Glick] from Buckingham Research.

Yes. Good afternoon. My question is for Laurence. Laurence, you do such a good job of walking us through from an EPS standpoint, how you get from '07 to '08, and I was wondering if you could update us from that perspective, talking about the organic -- is it possible to quantify the EPS from organic growth from the Kentucky Derby accretion, Pruitt accretion, which you touched on, the manufacturing cost savings of closing the North American facilities, all those steps you've taken us through in the past, if you can kind of update us as of today?

Well, I wouldn't change the components that are driving our growth from the way that we've presented it to you before other than we've included some of the price increase to offset the increase in energy and chemical costs. Apart from that, I would say that the drivers of our EPS growth are what they've been before.

Okay. So essentially you're talking about -- you talked before about a $0.20 possible upside from pricing increases, and you're saying that you're assuming about $0.08 of that to offset the increase in chemical and energy costs?

Yes.

And you didn't comment on the fleece test. I wonder if you had any thoughts there, Glenn.

Well, we're very confident that we're going to be selling fleece in the market as well for the fall season.

Okay. So that would be reflected in your Q4 potentially next year, and you might have I guess two quarters of benefit potentially for if you were to get the underwear program as well?

Right. And the underwear program will be more of a spring shipping, so it will be in May, I would say. But the point I would like to make is we still have lots of other opportunities in programs. We just realigned our whole sales force between the Pruitt and the Gildan sales force, and we're going to be very actively going out and soliciting new retail programs. So, we're in a position now that we believe that there's -- we're going to work hard in developing other programs as well.

And just to clarify, none of those potential programs are reflected in your $1.85 guidance?

The underwear program is reflected in our guidance.

The underwear program is?

Yes.

Okay. And the fleece would not be?

No.

Okay. Thank you very much. Good luck.

Your next question is from the line of Susan Sansbury of Miller Tabak.

Yes. Thanks very much. Following along or behind David's line of questioning, can you discuss sales revenue -- organic revenue growth in the contribution from socks and some of these other new programs or give us an update? Because -- just to make sure we're on the same wavelength.

Well, we're looking next year probably at around close to 1.3 billion of sales of which approximately 300 million is socks.

Okay. I won't press. Just another -- two -- or one other, I guess, item. The tax rate ex the tax items just on the surface would appear to be very low, Laurence. Can you address that for me, in the fourth quarter?

In the fourth quarter, it was about 1%, and full the full year it was just under 4%.

Okay. Any change for fiscal '08?

The same.

I'm sorry. I didn't hear you.

It's the same.

And then --

Same as before.

Same as before. Okay. Finally, I just wanted to confirm what you said with respect to resolution of the tariff issue. Are you waiting for the tariff issue, or are you going to go ahead and start construction in January regardless of the tariff issue?

As Glenn said, we have everything in place to start building the plant and we're thinking in terms hopefully there will be a favorable outcome to the the tariff issue.

And if there isn't? Is that going to delay the construction, or are you just going to absorb the tariff?

It's not going to delay the construction because we're still going forward with the bidding that we're going forward, but we also have a contingency plan to reduct costs and mitigate the additional duties as we go forward.

Okay. Great. Thanks very much.

Your next question is from the line of Doug Cooper from Paradigm Capital.

Hi, Laurence. Just to confirm that 185 guidance is based on 5% tax rate or 4% tax rate?

4%.

Okay. And did you touch on -- I missed at the beginning of the conference call, I apologize, but did you mention what unit volume was in the quarter?

No, I didn't. I was just looking at whether we're still getting that. But our overall volume -- I have it here. Our overall volume was, not including socks, was just wonder 11million dozens.

11 million dozens, not including socks. Okay. Great. Thank you.

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

Good afternoon, everyone. Wondered if you could give us some thoughts on modeling the new year by quarter. The first quarter looks up to be up, according to your guidance, more than the yearly guidance, although you would indicating there would be upside. Anything to factor in as we model out the quarters, SG&A, depreciation, gross margin trends or any unusual things that might occur during the quarters?

No. I mean obviously there will be more and more impact of cost reduction as we consume our opening inventories and ramp up the new facilities. That's really the only thing other than the kind of normal seasonality of the quarters and closing costs will be higher at the end of the year than at the beginning of the year.

And the SG&A increase in Q4, do you expect continued pressure in the early part of this year?

Well, I'm not sure about pressure. We'll continue to require increases in SG&A to support our growth strategy and the increase in the size of the company.

Okay. Any estimates on depreciation and amortization.

We're not looking -- we're not looking at our SG&A increasing as a percentage of sales.

Okay. And I take it gross margins should be favorable, especially in the the second half?

I think we're going to generate significant cost reductions and increase prices (inaudible voice).

And Kentucky Derby, what would be the accretion that you would see in the first quarter of the year?

In the first quarter, I mean, I'll take the two acquisitions together; but in our guidance, we're looking -- after absorbing the impact of the Pruitt inventory evaluation, which could be $0.03, we're looking at $0.02 of accretion built into our guidance.

From both sock companies in Q1?

Taking account of the effect.

Right, of the $0.03. And for the year?

And for the year there's no change in the assumptions that we've used before.

I had 20 cents from --

Yes. We're not -- we haven't provided any updates on that.

What was it, if you could just recast it?

Twenty cents.

Twenty cents. Okay. And China, you talked about a task force looking into your manufacturing there based on your comments that this could be a second best market for you in a few years. Hence, what are your thoughts on opening up a few production facilities there?

Well, we're evaluating -- what Laurence said before is we need to bring on additional production capacity by the end of 2009 to support our growth strategy. So we're going to evaluate the next location where that capacity will be located. We haven't decided at this point in time, so that's one point. And as far as from a sales perspective, we -- we're beginning to sell product into China right now, which we mentioned last year, and we basically don't really have any of that factored into our projections for this year so that would be all upside in terms of whatever we do sell into the market. But we're very optimistic for the future.

Okay. Thank kay.

Thank you.

Your next question will be from the line of Richard Piticco of CIBC World Markets.

Hey guys. This is Richard Piticco from CIBC World Markets. Just a quick follow-up on guidance. I'm admittedly a bit confused. First of all, just wanted to clarify on the top-line assumption, your previous conference call you had talked about the 185 including momentum from regional accounts only but not including the mass. So, Glenn, when you talked about underwear being included in your guidance, is that still the case from the regional or are you also giving some attribution from the mass account?

I don't believe, Richard, that we said before that it was only -- the growth year-over-year was only from regional accounts. We had also assumed some penetration of mass.

Okay. And secondly, with regards to the guidance, with the cost savings initiatives, I guess, being pushed out regarding the delayed CapEx into next year, I thought you had previously included that in your '08 guidance. So considering your reiterating, is something else going up to offset that slower realization?

Well, the benefit of that was really going to be in '09 any way by the time the project was completely constructed.

Okay. And then just a couple further technical questions. I'm not sure I followed the logic on the EBITDA shortfall this quarter in relation to fleece. Now, presumably your prior guidance had factored in the reallocation from North America to offshore. So I get why the demand might have been higher and you couldn't fully capitalize, but why did that cause you to miss on your own expectations in the quarter?

It was a unit volume -- we achieved our overall unit volumes, but the mix was different, and we were not able to -- it would have been upside in volume, but in terms of mix, it turned out to be unfavorable.

If we would have achieved the demand for the fleece, we would have actually achieved our unit volume guidance.

Right. But EBITDA, you were saying that was one of the factors why EBITDA was short, right, relative to your expectations? Like, were you expecting to have a higher allocation of fleece in quarter than realized?

Yes, because we were unable to fully capitalize on the demand in the quarter?

Because it took longer --

There was more demand than we shipped. And we didn't forecast, Richard, that we wouldn't be able to meet the demand. I mean, this was a transitional issue as we closed the Canadian textile facilities and moved our production offshore.

And overall, in light of the transition we made, we made a huge quantum leap forward because the synergies for 2008 are quite significant. So this is just a small fallout of really the bigger picture and the opportunity of closing these facilities and reallocating that production to Honduras. Secondly, the facility that is now up and running is running at equal cost to Rio Nance 1 already even at this point in time. We're very optimistic about the whole transition.

Okay. Perfect. A final technical question. I think you talked about it. I just missed it, but the impact in Q1 with regards to the higher cost inventory that's going to roll through your Q1 results, I mean, there is both the Canada issue as well as the sock issue was that the 12 million that you threw out, Lawrence, or what was the total impact of the higher cost inventories?

$12 million relative to what the costs would be of producing these products offshore.

And that includes both the Canada as well as the sock, right?

Yes.

Okay. Perfect. Thanks a lot, guys.

Your next question will be from the line of Claude Proulx of BMO Capital.

Thank you. Good afternoon. One quick one. You mentioned that the cost of 8 pennies, you're assuming $100 per barrel oil for BTI, I assume. I mean, the price is well below that at this point. We're below $90. Material would be a $10 difference.

Well, it would mean that, you know, our energy costs would be lower by $0.02 or $0.03.

Okay. Thank you.

Your next question will come from the line of Jim [Strater] of [Mones, Crespi, Heart. ]

Good afternoon. On the incentive compensation for distributors, it sounds like -- is that a timing issue that just happened to hit in the fourth quarter of this year?

Well, every distributor achieves their growth targets to a different time, and it's really a question of more customer mix and when certain distributors achieve their targets.

So was -- were you expecting them to achieve their targets in the first quarter of '08 then? So is it a shift in gross margin dollars from first quarter to fourth quarter?

No. I mean, just a timing thing. I don't want to get into the structure of our incentives in any great detail for competitive reasons. It just related to maybe a distributor not achieving targets that we hadn't anticipated, that kind of thing.

Okay. Thank you.

Your next question is a follow-up from the line of Sara O'Brien of RBC Capital Markets.

Hi, guys. We've heard from some competitors that the retail environment, even for basic activewear, socks and underwear has been a little sluggish. What are you seeing in those channels right now, and do you expect that can have a negative impact going into the next year?

On our products, we're very optimistic. I mean, most of our programs are doing quite well. So we really haven't felt that effect right now to be honest with you. Right now we're on plan based on our forecast.

Okay. And I wondered, Glenn, if you could expand on your brand versus private label differential in the retail channel, what your real strategy is on that front now?

Well, our strategy hasn't changed. We're continuing to drive our Gildan brand strategy which has been very successful on the placements that we do have right now, and we're continuing with the retailers that are currently carrying Gildan to add more product line. We're starting to ship more underwear to these retailers. The ones that bought fleece are buying socks and so forth. So we're working on driving of these retailers that are carrying the Gildan brand to be as full-line as possible.

So you have fleece underwear and socks with Gildan imprinted on them now?

In some of them, yes.

Okay. Yes.

And we're continuing to drive that strategy, and it's going well. The people are buying our product. Sales have been strong, and we're very optimistic for the future. We're just going one at a time and trying to convert some of the existing customers that both KDH and Pruitt have from their private label business into the Gildan brand.

Okay. And I mean, if you look at sort of the split going forward do, you see yourselves sort of 75 private 25 branded, or is there some kind of a split you would look to to achieve at this point?

Well, it's hard to say right now because certain retailers skew the volumes much more significantly. So we were looking at it more from a distribution point of view and a retail allocation. So we hopefully have a lot more retailers selling our brand in the future, but the volumes might differ depending on the size of the customers.

Okay. And margin wise, is there a difference at this point, or do you expect a difference on the margin?

Well, we expect retail in general to be the same as wholesale.

Okay. And that's like -- by F '09? Is that a correct assumption?

Yes.

Sorry. That was a yes?

Yes. Sorry.

Thank you.

Your next question will come from the line of Dave Pupo from Macquarie Capital Markets.

Hi, guys. Can we -- I'm sorry if I missed it. Can we concentrate on the top line a little bit. On the second page we have Gildan unit growth of all products of 16.1% and that's in the wholesale market, but then the first page has a much lower number. How do we justify these?

I think that you're referring to the table which shows sales out of the channel from distributors to screen printers the first number.

Okay.

And the second number is sales into the channel.

Okay.

Which means inventories have come down.

Yes, I understand that. Did you find -- in your opinion, is the top line in the fourth quarter, did you find it weak?

Well, when you look at the rationalization of the inventory in the marketplace, we think we're right where we need to be. Right now we're seeing good demand in the first quarter, good supply-demand balance, and we're very optimistic as we go forward into '08.

Okay. Thanks.

Your next question is a follow-up from the line of Susan Sansbury of Miller Tabak.

Hi. Yes. One quickie question for Laurence, and then one for Glenn, if I may. The goodwill, if you will, the write-up of inventory to current market value and the goodwill accounting is going to amount to how much in dollars? You said $0.02 to $0.03, but do you have a number in dollars?

So $2 to $3 million.

Okay. And that will be booked in the first quarter?

Well, that will be part of the accounting for Pruitt at the time of acquisition at the beginning of the first quarter, and we'd expect that opening inventory to essentially flow through during the first quarter, yes.

Okay.

Assuming it will -- you know, that the opportunity cost would be in the first quarter.

Okay. And then, Glenn, Qualitatively or quantitatively, getting back to this -- the top-line assumptions for this year, do you see any -- when you talk to your -- on the wholesale side when you talk to your major distributors, are they relaying back to you any softness in any of their core markets like advertising and promotion here in the United States? And the second part of the question is, have you qualitatively in your mind adjusted for any weakness in the United States and err go reallocated unit to Europe and/or other international markets?

Well, first of all, I think that the momentum is still quite strong in the states as of now. T-shirt sales were up 7% in the month of October, and that's after implementing a price increase, so that is really pretty good. Fleece was a little bit weaker, but that was because of the weather.

Okay.

We believe that fleece has been strong all year and will continue to be strong, and on the contrary, when it starts to get cold like it has now and snow starts to fall, we believe fleece will pick up significantly. So, so far, we haven't seen any indications of any weakness in the marketplace and I think overall our distributors are pretty optimistic and I think, more importantly, is that the supply and demand balance in the industry is very favorable. And one of the things I think is important to understand is that with the inflationary cost we're seeing in the industry right now between raw materials going up and the big impact of raw materials, I think people, in general, are going to be facing are going to be happening in January when the new cotton crop comes out and the higher prices start hitting people's P&Ls. What's going to end up happening, it's going to -- people are going to need to manage their inventories as they go forward into next year because if cotton is continuing to go up and there's price-pressure because of higher oil, people don't want to be in the position that they're going to be producing excess inventories in the like that there's a switch in the cotton prices, and let's say there is a downturn for argument sake and it comes back down, you don't want to have high-cost inventory.

Right.

Typically, when cost pressures are going up people are managing their inventories a little bit closely. So, therefore, we believe the supply and demand balance will stay pretty good the whole year based on that which will allow for obviously potential price increases and a good supply and demand balance in the market.

Okay. All right. You're wonderful. Have a wonderful holiday season. Thanks ever so much.

Thank you.

Your next question will be from the line of Monica [Logani] of Wall Street Access.

I think you may have just answered my question. My question was with the likelihood of a non-cotton based price increase would be, and it sounds like you just said that that's possible.

Well, I would say that I don't think -- I think the price increase that we've obtained so far, I think the likelihood of it sticking I think is possible based on these price pressures.

Not on cotton?

And also depending on supply and demand balance, obviously.

Okay. Okay. And then the other question I had was just looking at your gross margins, you said that the sock gross margin was less than what it was in the fourth quarter a year ago, which I think was probably in the mid teens then. So the first question is, how much worse was it, and then, secondly, I'm just trying to understand. It sounds like everything is behind you now. As we enter '08, where can we expect sock gross margins to get to?

Well, the reason for the lower margins was because of consuming high cost contractor inventories.

Right.

And as we transitioned to leaving aside Pruitt, as we transitioned to our Rio Nance cost structure, we're looking at gross margins in excess of 30% and comparable to what we're making on the wholesale side.

So we could start seeing it in the first quarter; is that correct?

Well, we're still going to be -- as I said earlier, we're going to be consuming contractor inventories. We're not still producing with contract torsion, but we're still going to be consuming inventories through the first quarter.

Okay. So in the second quarter, correct?

There will be a buildup to those levels and by '09 we'll be running at that type of rate once we're fully ramped up in Rio Nance.

Okay. So that's by '09. Okay. And just in terms of your SG&A I know somebody asked you what's in your guidance for '08 and you said there is no change. I just want to be clear. Does that mean kind of a 10-1/2 or an 11% type of number as a percentage sale for SG&A?

Well, this year, including socks, we're looking at -- we're looking below 11.

Below 11. Okay. And just finally usually you give breakdown in your gross margin, in terms of contribution. Would you mind doing that?

Okay. Well, leaving aside -- leaving aside the socks, we went from 32-1/2 to just over 35. Manufacturing efficiencies contributed 5-1/2% to gross margins. Price was negative 1-1/2. The cotton was at half percent, and the impact of the foreign exchange on revaluing the balance sheet liability was reflected in the margin and reduced margins by 1%.

Okay. Great. Thanks.

Yes.

Your next question is a follow-up from the line of Richard Piticco of CIBC World Markets.

Hey guys guys. Just a quick follow-up on the capacity. I think you said you needed a new facility in the place by the end of '09. I'm just wondering with your expectations of lead time, when we're going to hear an update in terms of geography, size.

Well, look we don't want to jump the gun right now, but we're in the planning stages, so obviously we need to work pretty quickly if we want to get something running for the end of '09 to service and support our sales going for '010. We have enough capacity in place to achieve our sales growth for the year of '09, but we need to by the end of year '09 and for '010 have something in place to support future growth. So we still have time, but it's coming in the near future.

Great. Thanks.

And there are no more questions. I will turn the call back over to Ms. Sophie Argiriou for closing remarks.

Thank you. Once again we appreciate your interest, and thank you for joining us this evening. We look forward to talking to you again at our next conference call. Good night.

Thank you for your participation in today's conference. This concludes our presentation, and you may now disconnect. Have a great day.