Gildan Activewear Inc (GIL) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2008 Gildan Activewear earnings conference call. My name is Lacy, and I will be your audio coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to our host for today's call, Ms. Sophie Argiriou, Director of Investor Communications. Please proceed.

Thank you, Lacy. Good evening, everyone, and thank you for joining us for our first quarter results call today. With me are Glenn Chamandy, our President and Chief Executive Officer, and Laurence Sellyn, our Executive Vice President and Chief Financial and 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 & 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.

Good evening, everybody. We will first review our results for the first quarter and then discuss our earnings guidance for the balance of the fiscal year. EPS for the December quarter was $0.23 per share, including $800,000 or just under $0.01 per share of ongoing restructuring charges. EPS was up 64.3% from $0.14 in the first quarter of fiscal 2007 and was also $0.02 better than our first quarter guidance, which we initiated in December. Total sales in the first quarter increased by 35 -- 34.8% to $250.5 million, compared with the first quarter of fiscal 2007. Sales revenues for socks increased by 92.7%, due to the Prewett acquisition and our major new retail socks program achieved in fiscal 2007, partially offset by the impact of discontinuing unprofitable product lines from the KDH acquisition which did not fit with Gildan's strategy and manufacturing model. it sales volumes for activewear were up by 13.7% from last year, due to continuing strong market share gains in all categories in the U.S. screen print channel, combined with 19.3% growth in unit sales in our international markets. Also activewear selling prices increased by approximately 2.5% compared to the first quarter of last year.

Although the final year-end S.T.A.R.S. report is not yet available, the preliminary market share information provided by AC Nielson is that Gildan achieved a 60.1% share in the T-shirt category in the U.S. distributor channel for the quarter compared to 45.9% in the December quarter of last year, a 49.2% share in fleece compared to 36% a year ago, and a 33.4% share in sports shirts, up from 32.5% last year. AC Nielson also verbally indicated to Gildan this afternoon that overall industry shipments from U.S. distributors to screen printers grew by approximately 3% in the December quarter. Gross margins for the quarter were 31.5%, compared to 29% in the first quarter last year and 32% -- 30.2% assumed in our guidance for the quarter. Gross margins for activewear increased to 41.3% from 33.1% in the first quarter last year. The higher activewear margins were due to the 2.5% increase in activewear selling prices, which improved gross margins by approximately 600 basis points, and an approximate 320 basis point impact of more favorable manufacturing efficiencies for activewear products.

Sock margins were negatively affected by $0.02 per share of charges in the quarter, primarily to reflect a writedown of sock inventories which are being liquidated in line with our strategy to discontinue unprofitable sock product lines and focus primarily in high-volume basic socks. Socks margins were also negatively impacted by more than $0.01 -- by more than the -- by more than $0.01 impact from the upward revaluation of the opening inventories acquired from Prewett in line with GAAP requirements. Including the negative impact of this adjustment, the Prewett acquisition still contributed $0.01 to EPS in the quarter. Adjusted gross margins for socks in the first quarter, before the impact of the above adjustments, were approximately 16%, due to the consumption of opening inventories produced in fiscal 2007 and uneconomic cost structures and outside contractors and high-cost U.S. facilities, which have now been closed.

The impact of potential safeguard provisions regarding Honduran sock imports has been a focus of recent investor concern and questions. The outcome of the CITA decision-making process represents, in our view, a fair balance between respecting the administration's commitment given to Congressman Aderholt and its commitment made under DR-CAFTA to promote investment in Honduras and assure that sock manufacturing in Honduras will continue to be globally competitive against imports from China, Pakistan and other Asian countries. The CITA decision contemplates a tariff that would be imposed at the end of a consultation with Honduras and the tariff if introduced would not extent beyond December 31st, 2008. The maximum tariff rate for this eight-and-a-half month period would be 13.5%. Although we believe that CITA will approach its upcoming consultations with Honduras in this matter in a spirit of mutual compromise. Under the terms of CAFTA, any sock safeguard would be required to be offset by corresponding trade concessions given by the U.S. to Honduras. In our revised guidance, we provided for a potential negative earnings impact in fiscal 2008 from the proposed Honduras sock tariff.

In spite of our strong first quarter, and the fact that the recent selling price increase for activewear in the screen print channel is continuing to be fully implemented, we decided to update our full-year guidance by introducing a range of projected EPS due to the fact that it is still early in our fiscal year, combined with the current uncertainty in the overall market and economic climate. In line with this approach, we are increasing our full-year EPS guidance for fiscal year 2008 to a range of $1.85 to $1.90 per share. Although we have reflected the impact of more positive pricing than previously projected for the balance of the year, with the top end of the guidance range reflecting the inclusion of most of the projected benefits of the recent price increase, the benefits of the more favorable pricing and the stronger than projected results for the first quarter are expected to be offset by a higher income tax rate than previously projected and the provision for the proposed tariff on sock imports from Honduras.

With respect to the income tax rate, we're now projecting a tax rate of approximately 7% for fiscal 2008 compared to 5% previously. The projected higher tax rate is due to a higher proportion of pre-tax earnings being captured at this time in higher tax legal entities. This change has negatively impacted our earnings guidance for fiscal 2008 by approximately $0.03 per share. Our projected growth in EPS in fiscal 2008 continues to be driven by our projected unit sales growth of 14% in activewear and underwear, more favorable selling prices in the screen print channel, manufacturing efficiencies from ramping up Rio Nance 2 and 3 and consolidating production in Honduras. At the present time, we are capacity constrained. However, the ramp-up of both new facilities in Honduras is progressing very well and based on our current performance, we are confident in our previous projection.

The margins for socks at Rio Nance 3 will be similar to the margins which we were obtaining for activewear as the new sock facility ramps up to its targeted production capacity and cost efficiencies for the second half of fiscal 2008. Socks produced at Rio Nance 3 are already generating a gross margin in excess of 30% at a current rate of capacity utilization. We're also leveraging the expertise of our Honduras management team to maximize the efficiency of our manufacturing operations in the Dominican Republic and Haiti. We continue to be optimistic about the market and pricing climate in the screen print channel. Inventories in the wholesale distributor channel continue to be in good balance and Gildan's sales and margins for activewear continue to be strong in the month of January. We believe that the end uses for our products in the wholesale channel have historically been relatively stable even in downturns in consumer spending and the mood of our distributors at the recent imprint and sportswear show in Long Beach, California remained very positive.

As we mentioned in our December conference call, we have obtained an important retail underwear program with a national mass retailer for shipment in May. We are actively pursuing selective retail programs for next fall, but our main focus in retail for the balance of 2008 will be to service the underwear program, integrate the Prewett acquisition, and position our manufacturing capacity and cost structure to aggressively pursue further major new programs in fiscal 2009. During fiscal 2008, we plan to proceed with the construction of Rio Nance 4 to support future growth in socks, and also, decide upon the location of our next textile manufacturing facility to support our projected growth in activewear and underwear beyond 2009. We would also like to respond to investor concerns about the potential impact of the high cost of cotton futures. As we have said previously, we are confident that this will not adversely affect our guidance for fiscal 2008.

If cotton costs increase significantly in fiscal 2009, compared to fiscal 2008, our view -- our view is that these increases would be passed through in to higher selling prices in the screen print channel with further price increases under this scenario potentially being introduced late in 2008 linked to the cotton futures at that time. A 1% increase in wholesale activewear selling prices is required in order to pass through a $0.04 per pound increase in the cost of cotton. Finally, we generated $71 million of free cash flow during the first quarter, before taking account of our investment in the acquisition of Prewett. Even with the increased utilization of our credit facility to fund the acquisition, at the end of December, we continued to have very low debt leverage, a strong balance sheet and significant financing capacity and flexibility to pursue further new growth opportunities. For the full fiscal year 2008 year, we are continuing to project free cash flow of approximately $150 million after financing our fiscal 2008 capital expenditures of approximately $140 million. Sophie?

Thank you, Laurence. Before moving to the Q&A, given that we have a large number of analysts and investors covering Gildan and to give everyone a chance to ask a question, we ask that questions be limited to one per caller. Thank you. Operator, we are now ready to take some questions.

(OPERATOR INSTRUCTIONS) And our first question will come from the line of Eric Tracy with BB&T Capital Markets. Please proceed.

Good afternoon, and congrats on a nice quarter. If I could just with the one question maybe dig a little bit in to the guidance for '08 and the various puts and takes that you all have laid out. Laurence, is there any way to sort of quantify each of these or at least provide an order of magnitude based on the 14% unit volume, but maybe talk about the assumptions around the new retail programs as well as sort of what you baked into your assumptions for the tariff impact? Just to try to get a little bit more color as to the various positives and negatives to what is going on.

Okay. Well, in the previous guidance that we provided for the full year, we'd projected about $0.30 of EPS accretion from 14% increase in activewear and underwear volumes, and that assumption hasn't changed. We have included more of the price upside from the price increase that's been implemented previously. We had included $0.11. And we have now included enough at the top end of the range to take our guidance from $1.85 to $1.90 if you assume the top end of the range, plus to offset the impact of the higher tax rate of $0.03 and the impact of the tariff provision, which I prefer not to quantify, but you know what the kind of rates are that are being discussed in that dialogue. And these are really the only assumptions that change. Will not change anything in terms of our cost reductions that we projected at $0.23. We've not changed in addition in terms of the impact of moving socks offshore and the accretion from the Prewett acquisition and our assumptions for SG&A depreciation. The other items are unchanged, so it's really a question of including more of the price upside, partially offset by the $0.03 impact of the taxes and the provision for the potential tariff.

Just a quick follow-up, to make sure, so the synergies -- the potential synergies that you laid out for upside for Prewett plus the potential for a fleece program in the back half of the year still represent upside and are not reflected in the current guidance?

Well obviously there are upsides and down sides from the guidance, and obviously, we're going to try and maximize our results as we go forward. We're comfortable with the range we've provided, and we think the top end of that range is realistically achievable. And obviously we're going to try to work hard to try to maximize our EPS in all areas of the business, be it maximizing our volume, maximizing our cost, maximizing our acquisition accretion.

Fair enough. Thank you, guys.

And your next question will come from the line of Jessy Hayem with Desjardins Securities. Please proceed.

Thank you. Just a question on -- you mentioned your capacity constrained at the time being. If I can get an update on the ramp-up with Rio Nance and Rio Nance 2 in the fleece and particularly the confidence that was expressed that you would be selling fleece at retail by fall, just an update on the program there given your capacity comments?

Okay. One of the main reasons why we are capacity restrained is the significant increase in the market share in the wholesale market. We have seen our share go from 35% to 50% this fiscal year with still mounting momentum, so that's used up a lot of our capacity, and we're in the process of ramping up our Rio Nance 2 facility which is on track. It's currently running around 65% of its optimal capacity, so it's in the process of still being ramped up. So really, as far as we're concerned right now, we are being very careful in terms of not taking any risks or taking anything on -- any type of programs which are too large for this fiscal year and are focusing on more regional retailers in terms of providing fleece and that's what we forecasted for the balance of the year. And as we bring on the capacity, it's a going to come on quite -- as we build it up, we just have -- we're going to the height of the fleece season in June and July, so we need everything we can right now to support our projected wholesale and regional retailer, so that's where we stand as far as Rio Nance 2 is concerned.

Fair enough. Thank you. I'll circle back for more.

And our next question will come from the line of Sarah O'Brien with RBC Capital Markets. Please proceed.

Just going back to last quarter there was a bit of a timing with fleece deliveries for Q4, I just wondered if you can quantify how that played in to Q1 and if there's some seasonality we should peel out going forward.

I don't understand the question.

Fleece in Q4. I think there has been timing delays for deliveries and that impacted you results.

Okay.

I just wondered what the top line impact was this quarter and margin impact.

We've (inaudible) but the fleece in general, I mean, we basically are still tight on fleece throughout the quarter. We did ship a lot of those products we said in October that were carried over from September, but we remain very tight on fleece through the whole quarter, basically, and that's representative of our market share.

Okay. I guess just in terms of the unit volume increase of 14%, excluding that catchup on fleece, would it have been as material as that, would it have been sort of as material as that, would it have been -- 14% have been --

We shipped all of the fleece that we could produce, and we had open orders left on the table, Sara. There's no timing impact of fleece that has to be adjusted to normalize our sales in the -- in the quarter. The market was in short supply for fleece, and the $0.02 impact that we had in the fourth quarter was an opportunity cost that we missed, but this -- the results for Q1 are -- reflect the reality of the market.

Okay. Great. And just, the Prewett sales were a little higher than I expected, which is great, but just wondered if you would quantify the seasonality of that product, the sock product?

Well, our Q1 and Q4 the largest two quarters, but it's pretty -- maybe it's a, it's a -- Those are the two largest quarters, but it's pretty well all year-round business I would say. But slightly larger in Q1 and Q4.

Okay. Thanks a lot.

Our next question will come from the line of [Jay Sole] with Morgan Stanley. Please proceed.

Hi, good afternoon, how are you doing?

Great, thanks.

Just quick question, just looking out big picture the strategy has still been to do more wholesale, retail, international and acquisitions. Has acquisitions maybe moved up in the queue a little bit as maybe asset prices have come down? What are you seeing out there as far as potential to make an acquisition.

At this point in time, we have nothing on our plate. Our focus for this year is to consolidate our retail position with the acquisition of VIP Prewett and to continue generating additional opportunities in retail, maximizing our market share in the wholesale market and really focusing expanding internationally as fast as we can. So right now there is nothing on our boilerplate for this fiscal year.

And in addition to being focused and executing our retail entry and our operations, we have also mentioned that we are going through formal strategic planning process with our new corporate development group to really articulate and define well our acquisition -- criteria and acquisition strategy, rather than reacting to opportunities that are always coming up.

Okay. Thanks a lot.

And our next question will come from the line of Richard Piticco with CIBC World Markets. Please proceed.

Hi, guys, just wondering if you could help me understand the algorithm, the growth algorithm in Q2 respect of your $0.42 guidance. It seems to me that the adjusted year-over-year growth rate would decelerate in Q2, based on $0.42 number. Can you provide me with some -- if you don't want to get into the numbers, qualitatively why Q2 might be more difficult relative to the growth rate experienced in Q1?

Yes, there are two factors -- I mean, we're still projecting over 30% growth in Q2 over Q2 last year, so -- but the reason that it's lower in relation to other quarters is two reasons. One, is the consumption of higher cost opening activewear and sock inventories result in a $0.10 per share opportunity cost as we consume these inventories, which is included in our guidance. And also, the structure of our incentive program in '07 resulted in lower discounts in the corresponding quarter of last year, so we have a higher pricing base in the second quarter compared with the third and fourth quarters, so we -- in that sense, get less benefit from continuing with the recent price increase.

And the higher cost inventory that's being included, I guess, in Q2, when does that -- when do you circle that -- Laurence, when does that end? Is Q2 the last quarter that we'll see that impact?

I think we should be -- obviously our guidance is going to include $0.23 of cost reductions in activewear and over $0.20 of cost reductions in socks, and the benefit of having consolidated our production at Rio Nance 2 and 3 and having ramped up these facilities is going to be in the back half of the year primarily, by which time any impact of consuming the inventories should be minimal.

Great. I'll circle back. Thanks, guys.

And our next question will come from the line of Jim Chartier from Monness Crespi Capital. Please proceed.

Hi. Just curious what we should be looking at for tax rate 2009 and beyond?

For 2009 and beyond. I would suggest that it would be less than the 7% that we're now projecting for this year, but I wouldn't like to give you a specific rate at this point.

Okay. And then what was the sales impact of exiting the unprofitable sock businesses?

It was probably about 10 million dozens.

That impact was basically replaced with product that was more suitable. So what we did was, we obtained new business that met the requirements of our manufacturing and our long-term objectives, and we divested ourselves of all of the fashion-type products that they were currently manufacturing.

Okay. Thank you.

And our next question will come from the line of Doug Cooper with Paradigm Capital.

Hi. It's actually [Marissa Karen] for Doug this evening. Just wondering if it was possible to get unit volumes for the quarter?

No I think I would prefer not to provide the unit volumes, thanks.

Okay. Can I just get some comments on your hedging position for fiscal '08 and fiscal '09?

Hedging of cotton?

Yes.

Well, we have never provided specific details of our hedging, but what we have said is that, in terms of our uncovered position for this year for cotton, it does not give us a material exposure to the higher futures cost. And we'll -- we haven't provided any information on our hedging into '09 at this point, but what we're saying is that if cotton costs are significant higher in '09 than '08, we don't believe that this would impact the economics of the business, as we would be able to flow through the higher cost cotton into higher selling prices in our channel.

Okay. Thank you.

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

Thank you, good afternoon. In the press release you say that the pricing for activewear is up 2.5%. When you look at this price increase, can you say it's sufficient to pass on the higher cotton prices or you had to use some of the gains from the efficiency to offset the higher cotton prices? And then the second part of my question is when you look at retail and let's say at Prewett or KDH, I know it may not be easy to comment on that, but can you say that the pricing today relative to last year is offsetting the higher cotton prices?

Well the first part of the question is, the -- we did use some of our manufacturing efficiencies to offset the higher cost cotton. And that's why we believe -- even where cotton is trading today, there's potentially room for price increases going forward towards the end of 2008 going to 2009. So that's one part of your question. As far as the -- as far as the retail is concerned, it's not material in our pricing strategy at this point in time. And where we're pricing our programs we don't think will have any material effect on where cotton is being priced at the current time, because most of these programs are relatively new.

But do you think the market would have been able to absorb higher cotton prices in retail?

Sorry?

Do you think that retail would have accepted a higher price?

I think that retail over time will see price increases. We know there has been a lot of price pressure at retail, and the -- if cotton stays up at these type of levels, it will definitely work its way in to the retail market. In our cases, a lot of our programs are new. So we can price these programs appropriately, based on where we think cotton is. And we have been very aggressively pricing, so we can control really the pricing that we're offering to these retailers because it's new business. Existing business is a little bit harder to increase, but over time, those price increases will be passed along if cotton stays where it is today.

Just to be clear, Claude, because we're talking different periods and different guidance, but if you are asking in our current full-year guidance for '08, does the positive impact of the price increase offset the negative impact of assumed higher cotton costs of the full year, the answer to that is yes, the price increase is more than the impact of the higher cost cotton.

Okay. Thank you.

And our next question will come from the line of Anthony Zicha with Scotia Capital. Please proceed.

Hi, good afternoon. Relating somewhat to Claude's question, how much time does the general price increase take to be absorbed into the wholesale channel, if you compare it to the retail channel?

Typically in the wholesale, when we do increase pricing, we normally allow a 30-day period and advise our customers 30 days prior to instituting a price increase. And then basically that gets flushed through to the channel immediately.

And what would be your expectations on the retail side?

Retail is more cyclical in the sense that there's buying periods. So typically, you price your product once or twice a year, and it would have to be within that window.

Okay. Thanks very much.

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

Thank you, good afternoon, congratulations on the quarter. Just to drill down a little bit more on cotton prices. If prices stayed where they are right now, how -- what percent would you have to increase wholesale prices in '09 to offset cotton at the level it is? You said one -- 1% for every $0.04 per pound, but can you give us some context of exactly what they would mean if the market stayed where it is now?

Yes. I think that's a hard question to answer, because I'm not sure which prices to use. I mean, you can track -- and I know you do track -- the future costs for cotton. I don't know what is going to end up being our cost of cotton for '09, but if you just follow that formula I gave you of assuming 1% increase in price for every $0.04 increase in cotton, that will give you the correlation you are looking for.

But it's a fair to say, obviously it would be more than 1 or 2%, it might be 3 or 4 type of number?

Well, it depends what the cost is, David. I don't know that the current future prices -- it depends for what period we take in the future will be what the actual prices will be when people come to buy cotton for consumption and manufacturing. A lot of the current futures prices is influenced by speculators. So I really -- we haven't provided any guidance on our cotton costs for next year. I guess in one of the earlier questions, probed into that information, and we're really not in a position to speculate on what that would be at this point.

Okay. And just real quick on the tax rate, what was the source of the surprise and why do you think the tax rate will be coming down in '09?

Well, there are two reasons. One is that our -- our structure for our retail business is relatively inefficient at this stage of the evolution of our retail business and will become more efficient -- or is projected to become more efficient as we go forward. And secondly, we have a higher proportion of profits that are being captured in Canada this year, based on our ability for our Canadian business. Thanks a lot. Good luck.

And our next question is a follow-up question from the line of Eric Tracy with BB&T Capital Markets. Please proceed.

Just real quick, I was wondering if you all could talk a little bit about the underwear program at mass retail in terms of sort of number of doors and how, if at all, the constrained capacity would preclude you from not being able to ramp that business, should it perform well?

There shouldn't be any concern in terms of ramping underwear, because underwear does not take a lot of material, and that's where our capacity constraint is. And I would rather not discuss exactly how many doors, because this is still confidential until we actually start shipping the program.

Okay. Thanks.

To be clear, we would allocate capacity to support that program. As we said earlier, one of our priorities in '08 is to service that program very well.

Okay. Thanks.

And our next question will come as a follow-up question from the line of Jessy with Desjardins Securities. Please proceed. I'm sorry, he has removed himself from the queue. Our next question is a follow-up question from the line of Richard Piticco with CIBC World Markets.

Just wanted to circle back again on Prewett accretion. If I recall correctly you had reiterated your previous guidance of about $0.02 to $0.03 for the year, even after and excluding the capitalized impact of the inventory. And it looks like it generated about $0.02 on a normalized basis this quarter, if we back out the unusual inventory impact. Does that suggest that it is really quite running ahead of schedule or is there something happening in Q2 onwards that would suggest that it's not going to be accretive?

No. I think we were conservative with our accretion assumptions for Prewett and there's no question that -- we should at least expect the subsequent quarters to have as positive of an impact as the pro forma impact on Q1. That may be offset by slightly less accretion from KDH as we work our way through the high opening inventories, which we might have underestimated, but definitely the Prewett side of the equation is going to be more accretive than what we originally projected.

Okay. And, Laurence, just I guess on that high inventory, can you just remind me the -- is it just the delay in shipping production from the U.S. to Rio Nance plus the outsourcing in the U.S., is that what is driving the high inventory cost from KDH?

No, these were -- if you recall that we very quickly obtained our two major new sock programs in '07 before Rio Nance was ramped up, so we had to supply these programs and build up a big buffer of inventory to service these programs using inefficient outside contractors in the U.S. and also using high-cost manufacturing facilities that have now been closed. So that resulted in a big buffer of inventory that we're working through in the first half of this year, and we'll look forward to benefiting from the cost structure of Rio Nance for socks, which is running in line with the objectives that we have always had for the facility.

Okay. And then just second, wanted to clarify your earlier comment with respect to the upper end of your guidance, you are assuming full price increases maintained for the balance of the year, which I think you had previously quantified as a $0.14 per share delta. Is that what's now included in the 190?

No, if you do the math, there's a little bit of that that is not pulled into the guidance at this point. And as I said, we're comfortable with the guidance range we've provided. There will be upsides, one of which would be the balance of the price increase, and then potentially there will be negatives that we haven't foreseen. We think the top-end range of our guidance is at this point with the visibility we have, a very realistic goal for us for this year.

Okay. Thanks.

Our next question will come from the line of [Ron Calbox] with Griffin Investment Council. Please proceed.

Gentlemen, could you comment on your international side and especially with regards to your future entry to Japan and China, both from a sales point of view and a manufacturing point of view?

Okay. Well from sales point of view, we've -- we've just actually started working with a third-party logistics company in China to start providing distribution of our products. We have brought in inventory into the Chinese market to start selling to the print industry. We have a sales individual that is actually soliciting printers and selling our products. So we're really going through the same approach as what we've gone through in all of the other markets, Europe and Mexico and Australia and Japan, when we entered these markets. We haven't really forecasted any of that volume in our plan for this year, because we just don't know what the opportunity is until we actually start selling. And as we go into the year, we will have a little bit more visibility, so there could be potentially upside on volume for China.

And as far as your capacity, we're in the process now of evaluating the next stage of our capacity which we committed that during the course of 2008. We're evaluating where we are going to locate our capacity, and when we will bring on additional capacity will be to support -- will be to build it in 2009 to support our 2010 sales objectives. So we have enough capacity right now overall as a company to support our growth that we think will project for 2009, as we ramp up Rio Nance 1, 2, 3, and the DR, and bring on Rio Nance 4, and the next big textile capacity will come on-line for 2010 sales.

Thanks, Glenn.

Our next question will come from the line of Sarah Hughes with Cormark. Please proceed.

Hi, Glenn, just a bigger picture question for you. On previous conference calls you talked about trying to convince KHD and Prewett customers to switch from the private label to your brand product. And I was just wondering what is the biggest challenge or most common challenge or issue you get from the -- from your discussions with retailers about that move?

It's always the passive resistance, obviously to make a change. So I mean, as far as making the change, we have been very successful in most of the customers that are regional retailers. There is still a couple more that we are working on in this fiscal year to convert. But objectively, most of the regional retailers will be converted within the next, let's say six months at the latest. We're also starting to focus even on Prewett accounts as well. It's -- the selling proposition is really what makes a difference, because what we're doing with these customers, we're offering them better value product at a better price and higher margins than they are currently getting on their private label, obviously, in order for them to make the switch. So it's a win-win scenario for everybody.

Okay. And just quickly, Laurence in your guidance, did you assume the highest percentage tariff rate, like that 13.5%?

Well, as I said, Sarah, we have made a provision for the potential impact of the tariff, which is included in our guidance. I don't want to say what the provision we did. The consultations are going on now between the respective parties. They are sensitive discussions and I don't think it is appropriate for us to be making assumptions that might be interpreted within the context of these discussions.

Okay. Thank you.

Our next question will come from the line of [Mark Marinucci] with (inaudible). Please proceed.

Yes, hi. Just one point of clarification. I thought originally you had said the Prewett acquisition was going to add $0.02 for the year? And then on a later question you said that no, it was going to be more like, maybe something like $0.08?

That's exactly what -- what the discussion was with Richard's question, yes.

Okay. So the accretion is going to be more like $0.08 as opposed to the $0.02 that you had said.

What I said -- I mean, I suppose it amounts to the way you are summarizing it. But what I said is that the pro forma impact in Q1 was $0.02 and there's no reason to suggest that the future subsequent quarters will be worse than the first quarter. They should be at least as good. So, definitely there is some upside to the impact of the Prewett acquisition, part of which is being offset by consuming higher cost inventories from KDH. And as I said, there are upsides and down sides, but further accretion from Prewett is an upside, and obviously we're going to try and maximize our profitability as we go through the balance of the year.

Okay. So that's included or not included in the $1.90?

More than the $0.02 accretion is included in the $1.90, but for the moment, you can assume that the combination that we had projected from Prewett and Kentucky Darby is similar to what we had in our previous guidance.

Okay. So the net of the two would be more like the $0.02.

The net of the two would be more like the $0.22 that we had factored in to our guidance.

Okay. All right. Thanks very much.

And our next question is a follow-up question from the line of Sarah O'Brien with RBC Capital Markets. Please proceed.

Hi, Glenn, just to follow up on the sock gross margin right now. Did you say that it was running at greater than 30% in Rio Nance?

The socks are being produced in Rio Nance, even during its buildup have margins of 30%. So that's -- being that the plant is not totally efficient at this point in time.

Okay, that's -- you commented it's about 65% efficiency at this point.

No, that was Rio Nance 2 actually is running at 65% of its ramp-up. Rio Nance 3, which is the sock facility, it's running a little bit higher than that. Remember, we had different phases at Rio Nance. Our first phase, which at the time was originally designed to produce roughly about 27 million dozen pairs of socks, and we will be at that run rate in March. And then we -- we're going to be adding additional equipment to take it up to the next level by the end of Q3.

Okay. Great. And can you give just a target for that gross margin coming out of that facility by the end of the year?

Our target is about the same type of margins as in the wholesale market.

Okay. And just again to clarify on the gross margin for socks, the 16% you gave, Laurence, overall, that's -- that's basically your bottom line, including all of the negative impacts this quarter?

The 16% was -- included the impact of consuming higher cost opening inventories of socks, but it doesn't include the -- the charge that we took for liquidating the discontinued items.

Okay. The $0.02 worth.

The normalized number, but a normalized number that's basically reflective of a high proportion of the high cost opening inventories being consumed.

Okay. And when you talk about gross margins objective for year end being similar to activewear, that's just for the Rio Nance facility or is that all socks combined?

That's Rio Nance, but by that time, we will have consumed all of our opening inventories, Sarah.

Okay. And do you have a target for all socks combined at that point, like by year end?

We have a target to not have any opening inventories that we are still consuming, so that should be --

But we won't have that type of margin on the Prewett side.

KDH and Prewett combined.

Yes, I'm talking for the -- yes, I'm not talking for Prewett. The Prewett margin side really, I don't want to give you any projection on that at the moment.

Okay. Thanks a lot.

And we have time for one last question. That question will come from the line of Jim Chartier with Monness Crespi. Please proceed.

Did you say that the gross margin for activewear was 41%?

Yes.

And so that's it for sock margins to eventually get to 41%, is that correct?

You know, for certain products --

The bulk of the products, could they get there?

Pardon me?

Could the bulk of your sock products get to that 41% range?

The socks that we're producing in our cost structure at Rio Nance potentially can get to that rate, yes.

Okay. And then, you previously indicated that you expected about 5 million dozens of activewear capacity coming online in the second half of the year that you hadn't sold or included in your guidance. Is that still out there or is that getting pushed out to 2009?

I would say some of that is being pushed out to 2009. We're ramping up right now. We are going to be very tight in inventory to service our existing forecast for June and July. We still will have some incremental capacity coming on in the last quarter of the year. But it depends on the seasonality, when the people need the product. But what we're doing is we're ramping up all of our textile facilities, so by the end of 2008, everything will be running at 100% of its capacity to support our 2009 projections.

And as I mentioned earlier, it's not just a capacity issue. We're consuming a lot of the capacity to support higher growth in wholesale channel than what we'd projected, what we'd predicted at least.

Okay. And so -- that's why your -- your unit volume is still the same at 14% growth, then, but since fleece is higher price points, your sales should be higher than originally expected? If you're using some of this incremental capacity for fleece and your unit volume target is still the same.

There will be some impact.

Okay. Thank you.

And that concludes the question-and-answer session. I would now like to turn the call back over to Sophie Argiriou for closing remarks.

Thank you. Thank you all for joining us. At this time, we'll be ending our call. As you know, we are preparing also for our annual shareholders' meeting tomorrow. And I would just like to thank everyone for joining us once again, and we look forward to speaking to you again at our next quarterly conference call. Thank you, and good might.

Thank you for your participation in today's conference. This concludes your presentation. You may now disconnect. Good day.