Gildan Activewear Inc (GIL) 2008 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2008 Gildan Activewear earnings conference call. My name is Karen, and I will be your coordinator for today. At this time, all participants are in 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 your host for today's call, Ms. Sophie Argiriou, Director of Investor Relations. Please proceed.

Thank you, Karen. Good evening everyone and thank you for joining us. Earlier today we issued our earnings release and our quarterly report to shareholders for the second quarter of fiscal 2008. These documents can be found on our web site at www.gildan.com and have been filed with the Canadian Securities Regulatory Authority and the U.S. Securities and Exchange Commission.

With me here to review our results 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 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.

Good evening. Sorry to have kept you all waiting for a few minutes there. We were waiting because there was a lot of people in the queue to dial into the call.

Our EPS for the March quarter was $0.35 as preannounced last week, up $0.04 or 13% from last year, but $0.07 below our projected EPS for the quarter of $0.42. The increase in EPS from last year was due to a 7.5% increase in unit sales volumes for activewear in the wholesale distributor channel, an approximate 3% increase in activewear unit selling prices, and more favorable activewear product mix.

These positive factors were partially offset by increased selling, general and administrative depreciation and interest expenses, a higher effective income tax rate, the $0.04 per share impact of additional costs incurred to service mass market retailers during the integration of our information systems, and a $0.03 per share charge to write down soft inventories in order to accelerate the liquidation of discontinued product lines.

Results for our wholesale distributor business were in line with our previous earnings guidance, as the impact of lower than projected sales due to production problems in the Dominican Republic textile facility, was offset in the quarter by the favorable impact in the wholesale channel of lower promotional discounts and more favorable product mix. The miss in our guidance was the result of an impact of the issues arising from the retail systems integration and the soft inventory write down.

Sales for the second quarter amounted to $294 million, up 26.5% from last year. Activewear sales increased by 14.7%, due to increased market share in T-shirts and fleece in the U.S. wholesale distributor channel, together with the impact of the selling price increase and favorable product mix. However, the production issues in the DR, including delays in the introduction of new high value, ring-spun T-shirts and sports shirts, prevented us from fully capitalizing on demand in the quarter, and has also limited our growth this year in Europe where we had to delay the introduction of a major launch of ring-spun T-shirts.

Demand for our products in the second quarter in the U.S. screen print channel continued to be strong and has continued to be very strong in the third quarter to date. We had a record open order position during the second quarter which has significantly further increased in April.

The 5.9% decline in overall industry shipments from U.S. wholesale distributors to screen printers in the second quarter, which is indicated in the S.T.A.R.S. report, is attributable in our view to unseasonably cold spring weather and timing delays in screen printer purchases of promotional white T-shirts due to increased pricing. We do not believe that at this time overall demand for activewear products in the U.S. screen print channel is being materially affected by the weakening of overall economic conditions and the downturn in consumer spending.

Our sales of socks essentially doubled in the second quarter due to the impact of the Pruitt acquisition, a new retail sock program attained in fiscal 2007. Partially offset by the impact of exiting unprofitable sock product lines, which did not fit with Gildan's strategy to focus primarily on high volume basic sock programs. In addition, average selling prices for socks were lower due to the lower proportion of small run specialty products and the pricing of new high volume mass retail programs, which is based on the ramped up cost structure of Rio Nance 3.

Last week we revised our EPS guidance for the full fiscal year from a range of $1.85 to $1.90, to $1.45 to $1.50, up 12 to 16% from last year compared with 42 to 47% in our previous guidance. The $0.40 per share reduction in full-year EPS is primarily due to the production problems in the Dominican Republic, which are expected to reduce our previous full year EPS guidance by slightly over $0.30, primarily in the second half of the year.

The retail integration issues which were the primary reason for the $0.07 EPS shortfall in our second quarter EPS, are projected to have an approximate $0.12 per share impact for the full year.

The third factor negatively affecting our guidance is the approximate $0.06 per share impact of higher energy and transportation costs in the second half of the year. These negative variances to our full-year forecast totaling cumulatively $0.49 per share, are expected to be partially offset by the $0.09 per share positive impact of the recent price increase in the U.S. wholesale distributor channel, which will benefit results in the second half of the fiscal year.

The $0.30 negative EPS impact of the Dominican Republic issue is due to lower unit sales, primarily in the peak summer selling season for T-shirts in the third quarter of the fiscal year, as a result of the shortfall of production. And the impact of higher manufacturing costs and supply chain inefficiencies, such as additional (inaudible) and distribution costs resulting from the issues of the Dominican Republic facility.

Inventories of activewear finished goods at the end of the second fiscal quarter are down by close to 1 million dozens compared to a year ago, due to the shortfall in production from the Dominican Republic.

EPS for the third quarter is projected to be slightly reduced from adjusted EPS of $0.47 per share in the third quarter of fiscal 2007, which included the benefit of an income tax recovery of $0.05. The impact of the lower sales volumes and higher operating cost resulting from the Dominican Republic issues will be primarily reflected in the third quarter. The company will be in a better position to service demand in the wholesale distributor channel in the fourth quarter.

Our ability to support growth and demand for fleece is not expected to be constrained by the lower production for the Dominican Republic facility, as fleece requirements are being produced at Rio Nance 2, which has been ramped up successfully and is exceeding our objective for production and manufacturing efficiencies.

Over the past month or so, we have carried out a detailed analysis of the root causes of issues and formed an action plan to quickly turn around the performance of the Dominican Republic facility. The facility is essentially a mirror image of the textile facilities in Honduras, with essentially the same technology and equipment, and should deliver comparable results in terms of production, cost structure and product quality. There are no structural problems in the Dominican Republic.

We are already seeing a rapid improvement in the morale and performance of the facility and are tracking to achieve a running rate for production in the fourth quarter, including ring-spun products, of approximately 18.5 million dozens.

We expect our shareholders to be impressed when you have the opportunity to visit the facility in October, and we are fully confident that the Dominican Republic issues will not detract from our EPS growth in fiscal 2009.

With the projected 2009 production from the Dominican Republic, combined with the completion of the ramp up of Rio Nance 2, we expect to have sufficient capacity to support our projected unit sales growth in fiscal 2009. The full capacity for activewear and underwear is expected to be approximately 52 million dozens, based on our planned product mix.

However, new capacity will be required in order to meet projected demand in fiscal 2010. We have therefore announced today our intention to begin construction of a third large scale, vertically integrated textile facility in Honduras, where we can leverage our existing infrastructure and management resources. This facility will be similar to our other facilities in Honduras and the Dominican Republic, and require a total capital investment of 100 to $110 million.

In addition, we have also announced our intention to construct a third state-of-the-art distribution center on the same site in Rio Nance as our textile and sock manufacturing facilities. In addition to supporting our projected sales growth, the new distribution facility will permit direct shipments to both wholesale and retail customers in both the U.S. and Europe, as well as provide a lower cost structure to handle labor intensive activities for retail customers, such as product packaging, preparation and merchandising displays.

I believe the shareholders are aware that the Honduras socks safeguard issue has been finally resolved. On April 21, 2008, the USTR informed the government of Honduras that the U.S. would impose a tariff of 5% for a period of six months, which will impact Gildan's EPS by approximately $0.01 in both the fourth quarter of fiscal 2008 and the first quarter of fiscal 2009. The letter from the USTR also confirmed that the U.S. would not extend the tariff beyond December, or subsequently reimpose a safeguard in accordance with the terms and conditions under CAFTA-DR.

We also want to draw your attention to note 12 in our second quarter financial statements. The company has been undergoing a tax audit by the Canada Revenue Agency, as is normal for a company of our size. The audit covers the fiscal years 2000 to 2003.

The audit is now progressing to the next stage where, in the third quarter, we will meet for the first time with the CRA to discuss transfer pricing and explain the roles and responsibilities in our foreign subsidiaries, where the majority of our taxable income is earned and which is the basis for our low overall tax rate.

Although they have periodically met with our tax department over the past four years, the CRA auditors have not met with Gildan's management during their audit, including the management of our offshore subsidiaries which are responsible for our sales and manufacturing operations.

Our allocation of taxable profits between Canada and our foreign subsidiaries, reflects the roles and responsibilities performed at each entity and is based on annual transfer pricing studies carried out by external experts.

Our auditors have reviewed and continue to be comfortable with our tax rate and tax liabilities in our second quarter financial statements, as well as those of previous fiscal years. And we are confident that the audit will not result in any material adjustments.

Although GAAP note disclosure is not a requirement at this point, we have decided to initiate disclosure and include a financial statement note at this stage of the audit discussions with the CRA because of the importance of our low overall corporate rate. We will provide further disclosure at such time as there are any material developments in the audit process, which may not occur for a lengthy period of time.

We feel strongly that the issues that have impacted us this year are short-term, and that our competitive strengths and our strategic opportunities position us well to achieve our long-term objectives for top line and bottom line growth. Also, we have maintained a strong balance sheet which gives us a financial capacity and flexibility to invest in capacity expansions to support our growth strategy, and undertake selective acquisitions to compliment our organic growth.

Thank you, Laurence. Before moving to the Q&A, given that we have a large number of analysts 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, at this time, can you please open the call to questions?

(OPERATOR INSTRUCTIONS). And your first question comes from the line of Sara O'Brien with RBC Capital Markets. Please proceed.

Hi, guys. Maybe just a general question, that the biggest question I get from investors over the last week is, how do you ensure going forward that if there are production delays that you have a read on them in a really timely fashion? Is it, like was it a system issue that was the problem getting the information to you or is there something a little bit deeper in the production and how do we know that going forward this will come to light much quicker?

Sara, it is Glenn. We have put a plan together obviously to identify the root cause of the issues in the plant, and the bulk of the problems were related to obviously management, which we have now changed and the management that is now running the facility is watching closely and we are also monitoring the ramp up.

Since the time where we really I think, peaked in terms of our weakness in performance, I would now, have turned a corner, we are roughly about 85% efficiency in terms of getting to the 100% level, which we plan to achieve by July. And we feel that the bulk of the problems are behind us at this point in time.

But Glenn, can you comment just on your systems, was that part of the problem, and was it management just not telling you about the issues or do you have a read from head office as to what's going on production-wise in DR?

The bulk of the problems really occurred in March, we had some shortage of production, let's say for example earlier in January. But, it was not material, and as we went into the facility and dealt with the management issues and we found out that the underlying problems were going to be greater than we anticipated, that's when we, we realized that we were going to be in a worser position in terms of the output at the facility.

So we have the information to monitor and track the plant from a systems point of view and a production point of view. But when we found out, we went into the plant, we actually had to take a step backwards in prevent and maintenance and other processes and retraining some of the people. So we anticipated actually, and planned what the remediation would be for the facility, and like I said, we are now back on track and we're at 85% efficiency and we're managing it very closely.

Our management group, our manufacturing management group and we are monitoring the situation very closely, Sara, and as I indicated in my comments, we are seeing very immediate rapid improvement. But we are continuing to monitor it very closely and we are very confident in executing the turn around.

Okay. Maybe if I can just sneak one in. In terms of the management team being from Honduras, overseeing it now, now that you are ramping up a third plant, do you feel that you have the management power to do all of these tasks at once-- fix DR, oversee current facilities in Honduras and start building a new one?

Yes because the building process is really the engineering department that runs and builds these facilities, and simultaneously as we build the plant, we're going to continue to start training, just like we built Rio Nance 2. We built Rio Nance 2, it took us about one year to actually build the facility and one year to have it totally ramped up because right now, we are almost running at 100% of its capacity after 12 months of operation.

The ability for us to be right in the vicinity allowed us to hire, train, staff, the individuals so that when the plant actually started, we had the trained supervisory, mechanical and direct labor people available for us. The timing is going to work out perfect for us. And our plan in the DR is to be on track by July and we have basically 12 months from the time we construct this facility to train and develop the personnel responsible for Rio Nance 5.

Okay, and what's the capacity of Rio Nance 5 expected to be.

Like Rio Nance 2, in terms of its overall volume and obviously mix will change it, but it will be in the same scale of production of Rio Nance 2, which all of the plants are roughly similar in size I would say, within five or 10% of each other.

Okay. Great. Thanks a lot. I will circle back.

Thanks.

Your next question comes from the line of Anthony Zicha with Scotia Capital. Please proceed.

Hi, good afternoon. At what capacity is Rio Nance 1 and 2 running now, and in the event that we would have a shortfall in Bella Vista, can these facilities pick up the slack?

Well, right now we are running them at fully ramped up. We are a little bit ahead of schedule of Rio Nance 2 as we speak today. The shortfall is already happened because of the fact that we are going to pass the high December selling season which is really the May, June timeframe. So basically, if you even take the production levels that we are currently running at, it will support the back half of the year. So, unfortunately, the timing in terms of when the shortfall is hitting our opportunity to sell in the higher summer selling season, that's really what's affected our shortfall in unit volume for this fiscal year.

And we are going to need the fully ramped up capacity of all three facilities in order to support our planned growth in fiscal 2009, and as we have said, we are very committed and confident to achieving our production objectives at the DR, which we are going to need to support our sales objectives in 2009.

Okay. And with reference to the new facility you announced, will you be strictly producing activewear, and how much and when do you expect it to come on line.

We are going to start to construct the plant and it should come on line at the end of 2009 to support 2010 sales.

Okay.

And it will be mainly activewear type products.

Okay. And quickly, can you please comment on the large retail programs like, have you seen a slowdown in orders?

In terms of what?

Any signs of slowdown, like -- .

No, I mean actually our business is very strong right now and we have, we are in a great position in terms of huge order flow right now in both wholesale and retail. So we are very comfortable with our order position and we are in the process of rolling out our first major large underwear program which will be rolled out in May, which is on track, in stock and ready to be shipped.

Okay. Well, thanks, Glenn, and thanks, Laurence.

Your next question comes from the line of Kenric Tyghe with CIBC World Markets. Please proceed.

Good evening. Laurence, a further question for you with regard to the Bella Vista facility in the Dominican. You have touched on the delays in the introduction of the ring-spun line, can you confirm for us what the exit capacity will be once that line is up and running as it should be for that facility for '08, and what your target exit capacity is on that facility for '09, please.

Well, I mentioned in my comments that we expect during the fourth quarter to be running at a running rate for production of 18.5 million dozens at the Dominican Republic facility, and that will be its full capacity with the planned product mix unless we make further capital investment in the facility.

Thank you.

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

Hi, Laurence, just on the sock side of things, can you talk about at Rio Nance 3, what capacity you are running at now and what kind of margins you are generating. I know last quarter you talked about 30% growth margins.

I will answer the margin side and Glenn can answer the capacity side. The margins from production, that's originating from Rio Nance now at its current stage of ramp up are in the mid-30s.

And the current capacity is approximately just under 27 million dozen right now on an annual run rate.

What's the full capacity of the plant?

We still have some more equipment that's going to be coming in as we did a phase 2 expansion which will be installed and running by June, July. The capacity will be based on ops and mix because even within socks there's a little bit of a mix between like an ankle sock and a crew sock. But it will be between 30 -- I would say an average of 33 million is a good number based on the way our mix is selling today.

Great. Thank you very much.

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

Hi. Thanks. Going back to the exit capacity, the DR for the fourth quarter, what was the, what was your production rate or capacity or shipment rate at the end of the second quarter, and what is it going be at the end of the third quarter?

Well, basically you can say we are running at the end of the second quarter roughly about 70% of its capacity of the 18.5 million dozens, I would say is a good number to use, because it was up and then it went down, okay, that's what happened. We were running at a higher run rate at the beginning of the year and it dipped down to about 70% efficiency. We are currently running around 85% and we will be running at 100% on the annualized run rate of 18.5 by the end of September. Hopefully by, July is really our target.

Okay. Great. Thanks so much, I will get back in the queue.

And your next question comes from the line of Jim Chartier with Monness, Crespi, Hardt & Company. Please proceed.

Hi. Just on the demand side, I'm curious why the screen printers would be delaying orders in the face of price increases.

On the basis of it might not hold.

Okay. And then does your order book -- .

Particularly in the white T-shirts.

Which is the most price sensitive product in the market.

Okay.

Which is where the short, where the reduction in the S.T.A.R.S. demand came from. It was only in that segment of the market, the rest was all pretty flat with last year.

And does your current order book reflect a pick up in white T-shirts so far for third quarter?

Well our order book basically is consistent. I think we are selling the same proportion of white as we normally would sell let's say based on our forecast. And really, we are picking up a lot of our business obviously in the whole product line itself. But white is basically in balance based on our forecasted mix.

Okay. And then have you picked up any new retail programs?

Well, we are continuing to add product into the original retailers and that's part of our long term strategy, and we are rolling out the major product line for underwear that's being launched this spring, and we are continuing to pick up selective programs along the way but nothing of a significant nature.

Jim, as you realize we're capacity constrained which is our whole issue this year. So the worst thing we could possibly do is pursue programs at this point that we couldn't support from a production point of view. So our focus is insuring that we do service very well the sock programs that we have and the new underwear program.

Okay. Thank you.

Your next question comes from the line of Eric Tracy with BB&T Capital Markets. Please proceed.

Yes, good afternoon. I was wondering if you all could touch a little bit on some of the integration issues with retail, it sounds like those are above and beyond the DR capacity or management issues, maybe just provide a little bit of color. It looks like it was $0.07 in Q2, probably $0.05 in the back half of the year, just provide a little bit more color on that and if there have been any disruptions in terms of fulfilling product with those retailers.

Well, $0.04 of the $0.07 came from writing down inventory of discontinued specialty sock product lines that, sorry, $0.03 of the $0.07 came from writing down inventory of discontinued sock specialty product lines that didn't fit into our manufacturing business model, and that we are going to liquidate in the third quarter. And we wouldn't foresee any further issues like that or we ought to be writing them down now which we are not.

And the other issue related to integrating the Kentucky Derby retail order entry system into Gildan, into the new system that Gildan was developing, we had some integration issues at the beginning that resulted in additional costs which impacted the second quarter. We had additional freight costs, we had charge backs from retailers for missing sales.

We believe we have turned the corner in that and that our fill rates with the major retailers have now improved significantly, and to the feedback we've had from the retailers that they're pleased with our progress.

Okay. Fair enough. Maybe just real quick a follow on to that, Glenn, if you could touch on in terms of the retail strategy going forward, sort of balancing, continuing to penetrate the regional retailers while obviously taking on some of the larger programs at mass retail, maybe just touch on that and sort of what the opportunities and how you see it private label versus branded at retail.

Well, we are continuing to drive our branded strategy as well as, we have a significant amount of private label business that we currently have today. Really going forward to next year, we are going to make our plans accordingly, we're still going to have a somewhat to be tight on capacity next year. So I think our focus is going to be to manage that.

So primarily to continue to focus on building, consolidating our sock business in terms of building additional major basic programs as we streamline that part of our business and driving our Gildan brand strategy. And moving more product into Gildan and less product into the private label category.

We are going to focus on still building with the original retailers. There's a lot of opportunity out there. All that business is really driven through Gildan's brand strategy and that's really building the foundation that ultimately will allow us to bring our brand to the major mass market retailers as we continue to grow in the future.

Capacity is definitely going to be something we need to manage next year with the growth we have in wholesale as well as international. I think our focus on retail is going to continue to focus on the underwear segment and looking at building new additional programs in that category as it takes less fabric to make undergarments let's say for example than it does to make sweatshirts.

Also, our business in wholesale, our fleece business is on fire right now. That's also using up a lot of capacity between our fleece and our ring-spun right now, it has used up a lot of our capacity and I think Laurence mentioned in his script, we roughly are going to have a run rate of about 52 million dozens into next year.

Okay. Great. Thank you all.

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

Thank you. Good afternoon. One question with two sides to it. It is about the system that serve retail. I was wondering, I mean were you trying to run or did you try to run the old system of KDH at the same time as introducing the new Gildan system to avoid the issue or you had just to move to the Gildan system. And the other side of my question is Pruitt, have they switched to the Gildan retail system or do you have to do that down the road?

Well, what the issue was, was really we made a cut off from the KDH system into the new Gildan order to cash system, and like any other cut off it never runs smoothly, but today basically the whole acquisition of KDH is now fully integrated into Gildan and running on Gildan systems.

The systems are adequate to support retail as we go forward. There's a couple of still small mods and things we are doing that will be complete by the end of June, beginning of July. So we now have the infrastructure in place to really have a long term infrastructure to support retail on our platform.

And as we go forward, we have not yet integrated Pruitt into our systems but that will be the next step. We are taking our time with Pruitt because we just wanted to make sure we got everything under control in terms of the full integration with KDH, and then once we feel we have a very good reliability and visibility which I think we are getting to the point right now, we will start the integration as a second step.

That could be by the end of the year or it is too early to say.

We haven't decided yet Claude, so rather not say right now.

Okay. Thank you.

Your next question comes from the line of David Glick with Buckingham Research Group. Please proceed.

Thank you. Good afternoon, I might as well ask the cotton question since it hasn't been asked, could you give us some sense on how you approach your buying strategy for cotton for '09, at what point do you start hedging, is there any way you can utilize the spot market more cheaply to support your '09 cotton needs. Can you walk us through how you are thinking about that at the moment?

I'm not going to say too much about that David, for competitive reasons, but like other participants in the industry, we believe that the high cotton futures are driven primarily by financial investors and aren't supported by the fundamentals of supply and demand. So we have generally stayed short.

We are trying to be opportunistic about buying cotton on downturns and we have purchased some cotton now for '09 at prices we think are attractive.

Okay. And just a quick follow up, is there any reason you can foresee now that you wouldn't be able to recover this roughly $0.40 in lost earnings based on the issues that you discussed that are, seem to be more transitory in nature. If you continue to move smoothly with the integration of systems and you get back up to capacity at DR in the timeframe that you are forecasting?

Well, we've clearly said in our preannouncement and in all the discussions we had with shareholders subsequent to the preannouncement, that we absolutely believe that both of these two factors, the Dominican Republic shortfall in production and the transitional issues relating to completing the KDH integration are both short term in nature and should not impact our earnings and performance in '09.

So whatever EPS growth we achieve in '09 should be off a base that isn't impacted by these two factors.

Great. Okay, thank you very much and good luck.

Thank you.

Your next question comes from the line of Jessie Ham with TD Securities. Please proceed.

Thank you. Laurence or Glenn, just wondering why the higher CapEx for the new facility. Usually the spend is about 65 million or so. Are you building it to be, already to take into account potential expansions or -- .

No, it's primarily because of the, most of the equipment is purchased in Euros so the cost of the increase in the Euro, as well as we've projected additional costs in steel and costs associated with building today in Honduras, and those are really the two reasons for the additional cost.

Okay. And then, as far as the shortfall in units out of the Dominican Republic, that represented, how many dozens that affected your second quarter?

Well, the total shortfall in production relative to what we have forecast for the year is about 3 million dozens, so some of that would have gone into inventory and it has probably resulted in missed sales opportunity of 1.5 to 2 million dozens in fiscal 2008.

Okay. And then just one final question before I go back in que, in terms of the fill rates, Laurence, you mentioned they've already improved with retailers, can you give us a sense of what they were at the height of the problems and what they are now?

I don't think we want to give out that data for competitive reasons.

Fair enough. Thank you. I will go back in queue.

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

Hi. Can you give us an idea of the ramp up in the new Honduran facility, I know you said it would be production on line for 2010. But just, how it sort of goes through and if we say estimated 20 million dozens, when is the start date for those to be produced and sold?

Well, the plant will be up and running sometime August, September in '09. And we can ramp that plant up, up in -- Rio Nance 2 took around 12 months to ramp up. So based on demand at that time, we can ramp it up to the point of full capacity within 12 months.

Okay. Great. And just wondered, with the new DC in Honduras, it sounds like it is for retail and wholesale but that's different from your strategy in the U.S. where you have two separate DC's. Do you think, are there any sort of potential problems with doing retail and wholesale, or is there a reason you are doing both in the same facility.

The retail, the distribution center is a combination of also supporting all of international markets. So basically, we are shipping today to Mexico, Europe, Australia, Japan, China, we have product moving to all of these different products.

So if that's going to facilitate one aspect of our consolidation and reship, and in order to ship these markets effectively because of the way we make our production lots, we have to store and stage inventory specifically for those markets, and secondly, we're going to develop a retail processing center for all the added value work for retailers. If you're selling fleece products, you have to put the goods on hangars, bagging, putting stickers, tags, as well as doing display cases on packaged goods let's say for example for the promotional periods, and that's very labor intensive so that also will be done there as well.

And as we get into the height of the season, let's say for example we are right now, we are bringing goods into our distribution center, putting them up in our racks and basically shipping them to our customers, so we are just going through the cosmetics of receiving and shipping where we can ship direct to market and get goods there faster, save costs and be more effective.

So for all of those reasons that's how we are going to position this distribution as well as give us additional capacity that we are going to require by the time the facility is built.

Okay, great. And can you just give me the total CapEx expectation for 2009 now.

No, we'll do that when we initiate guidance, Sara.

Okay. Thanks.

Thanks.

This concludes the question-and-answer session of your call. I would now like the turn the presentation over to your host, Ms. Sophie Argiriou, for closing remarks.

Thank you all again once again for joining us. We appreciate your interest and we look forward to talking to you again on our next earnings conference call when we review our third quarter. Thank you very much and good evening.

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