Gildan Activewear Inc (GIL) 2008 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the fourth quarter 2008 Gildan Activewear earnings conference call. My name is Geri, and I will be your operator for today. (OPERATOR INSTRUCTIONS) As a reminder this conference is being recorded for replay purposes. I would now like to turn the call over to Sophie Argiriou, ma'am you may proceed.

Thank you, Geri. Good morning, everyone. Thank you for joining us. Earlier this morning, we issued two press releases the first announcing the satisfactory resolution of the Canada Revenue Agency audit, and the second announcing our earnings results for the fourth quarter and fiscal year 2008. These documents can be found on our web site and will be filed with the Canadian Securities Regulatory Authorities and the US Securities Commission. Joining me today 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 US 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 US Securities and Exchange Commission, and Canadian Securities Regulatory Authorities that may affect the Company's future results. I now would like to turn the call over to Laurence.

Good morning. I will review first, the settlement of the income tax audit, then our results for our fourth quarter of fiscal 2008, and then our outlook and guidance for fiscal 2009 which we provided today. Yesterday, we reached a final agreement with the Canada Revenue Agency to settle the audit which they have been conducting for the 2000-2003 fiscal years. Even though the 1999 fiscal year is now statute barred, we have agreed to pay tax on a negotiated value of the transaction that took place that year to transfer our international wholesale business, and the working capital assets which support the business from Canada to Barbados. In 2007 when transfer pricing for the 1999 fiscal year became statute barred, we reversed our tax provisions relating to the original transfer as required by GAAP. We agreed to this one-time tax payment and the resulting charge of approximately $0.22 per share in order to avoid continuing uncertainty over our low consolidated tax rate which is clearly an important element in the earnings profile and economic value of the Company. If we had not accepted the charge, it is likely that the CRA would have attempted to challenge our 2000-2003 transfer pricing, even though we would have been highly confident at sustaining our position this would have involved protracted litigation which would have created an overhang over Gildan shares for a lengthy period.

Under the settlement, the CRA has accepted our transfer pricing at income tax rates, as reported for the 2000-2003 audit period, other than for the one-time charge.

Based upon the outcome of the audit and our discussions with the CRA, we are confident that our transfer pricing and tax structure will be accepted on an ongoing basis, and have agreed to the settlement for that reason. So no additional tax provisions are being recorded for our fiscal years subsequent to 2003. Our one-time charge makes full provision for provincial taxes on the same basis as the CRA settlement. The settlement will also require the cash payment of approximately $17 million of tax liabilities which have been previously recorded and accounted for as part of our tax rate in the fiscal years covered by the audit. I want to emphasize that our low overall consolidated tax rate reflects the operating structure of the Company under which all of our sales, marketing, and manufacturing functions are carried out in low tax rate jurisdictions in the Caribbean Basin and Central America with only corporate head office functions based in Canada.

Moving on to our results for the fourth quarter of fiscal 2008, we have reported EPS of $0.41 before the impact of the tax charge and restructuring charges for the ongoing carrying costs of North American manufacturing assets, up 14% from $0.36 per share in the fourth quarter of last year before restructuring costs and prior year tax adjustments in the fourth quarter of last year. The growth in adjusted EPS compared to the fourth quarter of last year was due to higher activewear selling prices, higher unit sales volumes, increased manufacturing efficiencies from the consolidation of textile facilities, and the accretive impact of the acquisition of Prewett, partially offset by higher cotton and energy costs and increased SG&A and depreciation expenses. We were at the low end of our forecast fourth quarter EPS range, implicit in our most recent full-year guidance, due to lower than projected activewear sales in the fourth quarter of 2008 as a result of inventory constraint, more unfavorable activewear product mix due to lower proportion of sports shirts and fleece, lower than planned back-to-school retail sales, and a doubtful account provision of $1.5 million, partially offset by lower than forecasted promotional discounts.

Sales were up 27.4% from the fourth quarter of last year to $324.7 million. Excluding the impact of the Prewett acquisition, sales increased by 8.7% due to an approximate 10.2% increase in activewear unit selling prices and an 8.5% increase in unit sales volumes for activewear and underwear. Market shares increased in all product categories within the US wholesale distributor channel, reaching 54.4% in T-shirts, 49.9% in fleece, and 37.8% in sports shirts. Due to our higher market share, sales of our brand from distributors to screen printers increased by 7.2%, even though overall industry shipments declined by 3.1%, with the overall decline being due to a significant decline in demand for basic white promotional T-shirts.

Gildan sales into the channel continued to be constrained by lack of inventory during the quarter. Due to the production issues earlier in the year in the Dominican Republic facility, which also limited our ability to service distributors in Europe with our new [Ringspun] product lines.

Gross margins were flat compared with last year at 32.1%. The positive margin impact of higher activewear selling prices and increased manufacturing efficiencies from the consolidation of textile facilities was offset primarily by higher cotton and energy costs, more unfavorable activewear product mix, and a higher proportion of socks due to the Prewett acquisition. Socks manufactured in the US generate lower gross margins than the Company's activewear and socks products, manufactured in our modern technologically advanced facilities offshore.

SG&A expenses increased to $39.1 million or 12.1% of sales versus 10.9% of sales in the fourth quarter of last year. The increase in SG&A expenses was due to the impact of the Prewett acquisition, higher distribution and transportation expenses, and higher corporate infrastructure costs, as well as the $1.5 million doubtful account provision. For the full year, EPS before restructuring charges and the special income tax charge amounted to $1.45 per share, up 18% from $1.23 in fiscal 2007 before restructuring charges and income tax recoveries included in the prior year results. The Company generated free cash flow of $148 million in fiscal 2008, after capital expenditures of $97 million. The Company's internally generated free cash flow in fiscal 2008, therefore financed the cost of the Prewett acquisition, which was approximately $125 million plus contingent payments of up to $10 million. We ended the year with only $45 million of bank debt, and significant unused debt capacity under our committed revolving bank credit facility.

I will now discuss our outlook and earnings guidance for fiscal 2009. Since mid-October, overall economic conditions, consumer confidence, and consumer and corporate spending patterns have dramatically deteriorated. Demand in the screen print channel, which we had believed would remain relatively stable in an economic downturn, has been significantly impacted by the rapid and unprecedented change in the macro environment. STARS data for October indicate that a 12.5% decline in overall industry shipments from US distributors to screen printers. And preliminary November data indicates the decline of close to 20% in overall industry shipments. Shipments into the channel have declined even more precipitously as distributors have reduced inventory levels due to declining screen printer demand and an increased focus on managing their working capital. The decline in unit sales volumes has led in early December to the onset of significant promotional discounting.

As a result of reduced unit volume shipments, lower pricing in December compared with December of last year, significantly higher cotton costs compared with the first quarter of last year when cotton costs and Gildan's cost of sales were at their lowest point in the year, and the consumption of inventories produced when energy and commodity costs were at peak levels, Gildan is projecting a material decline in sales and EPS in the first quarter of fiscal 2009 compared to a year ago. We expect EPS for the quarter to be in the range of $0.00 to $0.05 per share, compared with adjusted EPS of $0.23 in the first quarter of fiscal 2008.

It is extremely difficult to forecast the market environment for the balance of the year, due to the current unprecedented economic uncertainty and volatility, and the speed with which market conditions have been changing. However, even though the first quarter is seasonally the lowest sales quarter in the fiscal year, I may not be indicative of full-year trends for the industry. We believe that very weak market conditions will continue, and are projecting approximately a 10% decline in overall industry shipments from US distributors to screen printers for fiscal 2009 as a whole. Industry shipments have declined by approximately 6% so far in calendar 2008, including the data for October and November. And we believe that the projected decline in industry shipments for the full year is a realistic scenario.

This is a much more severe decline than in 2001, when overall industry shipments for T-shirts declined on a calendar year basis by 3.4% according to STARS. However, the severity of the economic downturn, and the impacts in our industry of the assumed decline in corporate and consumer spending currently appear to be far more severe in 2009 than in 2001. Based on the assumption of continuing unfavorable market conditions resulting in a 10% decline in US screen print industry shipments, and a reduction in distributor inventories, the Company is initiating EPS guidance for fiscal 2009 with a range of $1.10 to $1.30 which reflects the following specific main assumptions.

Firstly, an increase of approximately 8% in Gildan's activewear and underwear shipments compared with fiscal 2008 to approximately 48 million dozens. As the Company is currently implementing strategies to maximize volume growth in the balance of the year in both US and international screen print channels. In addition, Gildan is pursuing sales opportunities in the mass retail channel. Secondly, promotional discounts in the US screen print channel are assumed to more than offset the benefit of industry price increases implemented during fiscal 2008 and at the beginning of the 2009 fiscal year. And result in an approximate 7% to 9% decline in average activewear selling prices in fiscal 2009 compared to fiscal 2008. No selling price increases are forecast in the retail channel.

Next, we are assuming an approximate 10% increase in cotton costs in fiscal 2009 compared to fiscal 2008 reflecting the company's forward purchase commitments for the majority of its fiscal 2009 cotton requirements at cotton prices in excess of current spot prices for cotton. We are projecting increased manufacturing efficiencies, including the improved productivity and operating cost performance of the Dominican Republic facility, the benefit of consolidating a higher proportion of our sock manufacturing operations in our new facilities in Honduras, and lower energy costs. And finally, we are assuming the non-recurrence of acquisition integration issues in charges which occurred in fiscal 2008.

The assumptions underlying our guidance reflect management's current outlook for fiscal 2009 based on information and visibility which we have at this time. It is possible that a change in economic and business conditions may result in earnings in fiscal 2009 which are more or less favorable than the Company's current guidance range. In the assumed economic environment, we will manage our capital expenditures prudently but without compromising our ability to drive our continuing growth strategy. We are undertaking incremental capacity expansions at our Dominican Republic facility and at Rio Nance One, which together will provide approximately seven to eight million dozens of additional annual capacity at a low capital cost. Our confidence in investing further in the Dominican Republic, where we are also building a plant to produce steam from biomass for the textile operations and developing a new sewing facility reflects the success of our new management team in the Dominican Republic in turning around the performance of the facility.

We are still intending to proceed with our major capital investments to build the Rio Nance four and five facilities in Honduras. Although the incremental expansion of existing facilities will allow us to proceed more slowly and cautiously with Rio Nance Five. We are announcing today our intention to phase out of our sock finishing operations in the US which will be consolidated in Honduras by the end of June, in order to remain globally competitive in the current economic conditions. We sincerely regret the impact on our US employees affected by this consolidation, who have many years of experience and expertise in manufacturing. All employees will be treated fairly in line with Gildan's past practice and commitment to being a socially responsible employer.

Gildan is now projecting capital expenditures of approximately $115 million in fiscal 2009, and our objective is to remain cash positive in fiscal 2009 after capital expenditures, after approximately $70 million of projected additional working capital to support our planned growth in fiscal 2010 and the cash payments resulting from the settlement of the CRA audit.

In spite of the economic environment we are currently facing, our management team feels very positive and confident about the future of our business. While the current environment in our industry is uniquely challenging, we believe that we have an opportunity to further reinforce our leadership position, in the US screen print channel. And continue to increase our penetrations in our international screen print markets. Also, we believe that we are positioning the Company well to achieve our goal to become a major, strategically located supplier of low cost, high quality products, for mass market retailers, and to support individual retailers plans to upgrade and enhance their private label brands as well as to selectively introduce Gildan-branded products. We are confident that we have put behind us the acquisition integration issues which impacted us in fiscal 2008, and we are maintaining consistent high service levels with our retail customers. All of our manufacturing operations in Honduras and the Dominican Republic are running well. And Rio Nance two and three have ramped up successfully.

Many of you have recently had an opportunity to visit our large scale technologically advanced manufacturing facilities, and to see the quality and commitment of our manufacturing management in Honduras and the Dominican Republic. In addition to our competitive strengths within our industry, we are also positioned at this time of unprecedented economic turbulence and constrained credit and liquidity, with a strong capital structure, and we are comfortable that we will continue to have sufficient liquidity and financing flexibility to pursue our ongoing growth strategy.

Thank you, Laurence. Before moving to the Q&A, in order to allow everyone the opportunity to ask a question, we ask that the questions be limited to two per caller, and time permitting we will circle back for a next round of questions. Thank you. Geri, can you give us the logistics of the Q&A?

Certainly. (OPERATOR INSTRUCTIONS) Your first question comes from the line of Sara O'Brien with RBC Capital Markets. You may proceed.

Hi. I guess the question I'm getting the most from investors this morning is, what gives you the confidence that -- particularly on the back of the wholesale market decline of 20% or so in November -- how do you see the confidence to project an 8% volume increase going into this year?

Good morning. It is Glenn. If you look at our growth strategy, we have opportunities in various markets. If you take last year for example, from the months of March through August, we were carrying over 3.5 million dozens of open orders that partly which was missed opportunity in the marketplace. Our current market share is running roughly about 54% in the screen print market, and we believe and what we stated, is that the potential market share is to be increased significantly, in the neighborhoods of 60% plus. If you combine that with the opportunity for us in all of our international markets, which we really did not allocate any inventory to last year. Last year, we actually stopped shipping products, and we actually divested our inventory just because of the fact that we were so short. If you take some of the opportunities, for example in Europe, the largest competitor in Europe, which is a competitor that we also compete with in North America, is over 2.5 times our size, but we just have not been able to penetrate that market because of lack of inventory, and particularly because of lack of our ability to bring on our new product lines into the European market. So, we expect that the opportunity in Europe is in excess of over 5 million dozens from our current base of today. As well as last year, we just started selling product into Mexico. And this market is highly fragmented and is a large opportunity. We believe that the opportunity upside in Mexico is over 4 million dozens from our current base of fiscal 2008. And we have also made a strategic move to move into Asia. We have some business in Japan and Australia, and as we go forward into the Asian market, very conservatively, we can see an opportunity there in excess of 2 million dozens in the short-term. So, we have over 11 million dozens of opportunity today, just in our international markets from where we stand, that we just have not serviced because of our lack of capacity. And, if you look at our inventories at the end of fiscal 2008, they have never been at a lower level in the Company's history.

Glenn, I understand the opportunity, but how long does it take you to get to that? Do you have agreements in place, or is this something you can do -- just divert shipments. And, all of the sudden, Q2 we can start seeing these volumes go through?

We have started moving and allocating a significant apartment of inventory to these markets. What has happened really, let me just go through the opportunities, and I will address that as the second question.

Okay.

We also are pursuing right now, going forward the screen print private label market which is over $1 billion opportunity which we have not serviced before which is going after large programs of screen printers that provide or have required private label. And that is an area which we can allocate production capacity relatively quickly. And what we have done right now is in the months of October, November are really in our Q1, the impact of destocking was quite significant, but the actual lost revenues in terms of the market decline were not that significant because if you take, let's say for example, the average market, let's say in the first quarter, is down 15%, but it is typically the lowest quarter of this fiscal year. So what we have lost in terms of actual revenues to the screen printer based on the market decline right now is probably not more than 800,000 to 900,000 dozen. What we are doing is, we are actually in the process of moving aggressively our inventories to all of the warehouses we have around in these other various export markets. And, we are very confident that we could increase our business there. We have already seen in the month of November, our shipments in Europe increase because we now have all of the products in place, and combining that with our aggressive pricing strategy in these functional markets, we feel very comfortable that we will be able to increase our unit volume by 8%. It is not a lot of dozens, Sara, at the end of the day, if you look at the overall opportunity, in each one of these markets including penetrating in the existing market with more market share. It is not that significant. It is pretty well spread out.

Okay. So it is --

Also the last point, Sara is that, we are looking to pursue, we haven't been pursuing retail opportunities this year because we are anticipating not having the capacity. Because of our lack of service last year, we are sold out in all of our marketplaces. We didn't want to divest ourselves and lose, and have -- and risk another bad year of service. But now that we know that we have additional capacity, not only for the balance of this year because, we are -- if you look at our capacity in terms of what we are producing we are still producing approximately 50 million to 51 million dozens this year. Part will go into restocking our inventories, and as well, potentially have some upside in the back half of the year. But at the end of the day, what we are going to continue to do now is not only, we are going to look to continue pursuing new retail opportunities in the back half of this year. One of things we are doing with the capacity expansion in the Dominican Republic and Honduras, it will allow us to bring on capacity earlier. Because if you were in Honduras, and you saw the facility. It was coming on at the end of our fiscal 2009. Then it would have to have a ramp up period. But the reality is that now, we are bringing on this incremental capacity, in the year which we will probably have all of the equipment installed some time in around June. That's also going to allow us now to have more confidence to pursue other retail opportunities in early 2010 that we would not launch, would not have been able to do before. So, overall we feel very comfortable with our capacity. We feel comfortable with the levels of opportunity we have, and we are feeling comfortable bringing on additional capacity sooner to support 2010.

Just to be clear, Sara, the retail opportunity is not included in the 48 million. That would be upside over the 48 million that we would have the capacity to support.

Okay. And can I just ask on the retail opportunity, if you are building this, or bringing in new equipment in Honduras and DR for that, for early 2010 production, are we talking underwear or fleece or T-shirts or all of the above?

All of the above.

Okay. And then, Laurence, this is a second quarter where we've had a pretty significant hit on bad debt expense. Does your guidance assume that you are going to be taking more such hits in this credit environment, and are you preparing, taking more bad debt reserves at this point for the rest of the year?

We haven't included any specific bad debt provisions in our guidance for next year. We've reviewed the credit position of all of our customers very carefully at the year-end, and we have provided against the one situation where we feel that we have some foreseeable exposure.

Can I just ask if your, if payment terms have changed at all with Gildan? Are you collecting at the same rhythm? Or are things slowing down since November?

We haven't had any issues with collections. Or any changes in collection patterns.

Okay. Great. I'll circle back. Thanks.

Your next question comes from the line of Jessy Hayam with TD Securities. You may proceed.

Thank you. Laurence, can you just help me reconcile the fiscal 2009 guidance? Am I correct in thinking that the base that we should be looking at in fiscal '08 is essentially adding back about $0.30 of nonrecurring issues that you had related to the Dominican Republic and integration issues for the real base, to look at in 2008 is closer to call it $1.78?

Yes. Our guidance does include -- does reflect the fact that we have turned around the issues that impacted our results and performance in 2008, and caused us to lower our guidance. And, the fact that these issues will not affect our performance in 2009. To walk you through -- I am going to walk you through the numbers from the $1.45. Then, we can address the $0.30, and where that fits into the picture.

That would be great.

So this year, we are reporting $1.45. The impact of higher wholesale volume, the benefit of the increase in wholesale volumes to $48 million contributes approximately $0.20 to our EPS. Higher cotton costs in '09 versus '08 negatively impacts EPS by about $0.20. Our manufacturing efficiencies year-over-year, which includes the positive impact of the improved performance in the Dominican Republic, contributes $0.40 to our projected EPS. Higher depreciation is negative $0.05. The positive impact of the selling price increases we implemented, the carry over effect of last year's selling price increases, plus the price increase in October contribute about $0.55 to EPS. And then what is causing the decline in EPS is an assumed range of $1.00 to $1.20 per share from the 7% to 9% increase in reduction in average selling prices. That's what is causing the reduction. I think if you do that math, it will bring you to $1.15 to $1.35. There's $0.05 of other small negatives that are also impacting our EPS.

That's helpful. Just to follow up on the previous question again, Glenn, I guess just again trying to understand with the international markets, Europe or Mexico, can you really quickly just start delivering? You mentioned you're aggressively filling your DCs in the respective areas to start shipping. But, is the demand there for your product? How quickly can you displace some of your competitors in these markets?

Well, because -- we have had a lot of demand for our products in every one of our markets going through all of last year, we just didn't service them. So the demand is there. The question for us is to bring the inventory to the market, and position ourselves aggressively to get that business. So, we feel very comfortable. If you take all of the market opportunities together, it is not significant in one market that is really going to make or shift the opportunity. We have to do a little bit in every market to achieve a mere 8% volume growth. It is not a significant amount of volume at the end of the day. We are looking at lost sales last year probably in the neighborhood of 3.5 million dozen just in the US wholesale market. We are very confident about the opportunity, and with the promotions that we have launched in the North American market, we have already seen significant increases in sale through the distributors even here in the United States. So, we are very comfortable about our volume assumptions at this point.

Okay. And then, what kind of capacity -- exit capacity should we be looking at in fiscal year '10 now that you are slowing down a little bit your expansion in Rio Nance FIve although you are going ahead with it? If you can just an idea of what we should expect as an exit capacity in fiscal year '10?

What we are doing right now, we are going to produce in the year this year, in the neighborhoods of between 50 million to 51 million dozens which is pretty close to our previous forecast. We are bringing on the capacity in the DR and Honduras that will be installed toward the end of our third quarter, and start running in the beginning of Q4. So, we have some flexibility, depending on where the market is. If the market opportunity is there, we can accelerate that a little bit and take some advantage of it. But at the end of the day, we are in a position now to quickly ramp up to what our required sales would be for 2010. And that actually, I think that the point here is -- that we are going to enhance our opportunity now by for 2010 with this incremental capacity expansion. And, we will have enough capacity in 2010 to produce and ship very close to 58 million to 60 million dozens of required. And, we are also going to have a little larger inventory base ending 2009 going to 2010. So those factors will allow us to, for quite a large sales opportunity. As far as the Rio Nance FIve is concerned, we are still building the facility. What we are going to do is just be a little bit more cautious, and the plants will start to be built at the end of this fiscal year. Because we still have a lot of work to do in actually moving earth and getting the preparation of the land and feeling ready. Then, what we are going to do is build that plant during the course of 2010 to bring it on for 2011.

Great. Just what is the cost for the incremental capacity expansion, that 7 million to 8 million dozen?

It is about $8 million.

Okay. Thank you. I'll circle back.

Your next question comes from the line of David Glick with Buckingham. You may proceed.

Yes. Good morning. Laurence, just a quick question, if you can help me understand the cotton issue a little better. Obviously you have to buy forward, but I wanted to get a sense for what your earning power would be for fiscal 2009, and again this is a theoretical question, but it helps us understand how to think about your earning power going forward. But what if you could satisfy your needs at the spot price today for 2009? And if you could help us quantify the -- what kind of earnings impact it would be so we can think about your earning power going forward?

Well, the difference between the prices at which we have filled our cotton as we booked our commitments for 2009, and recent prices for cotton would translate into an annual impact of between, depending on what price you use, between $0.70 and $0.85, positive impact of lower cost cotton if current prices were to continue.

That's $0.70 to $0.85.

Yes.

Thank you. That's helpful. Also, I just wanted to clarify -- that you said that a $1.00 to $1.20 negative impact from lower selling prices? Previously, I had thought of every 1% change in selling prices, and in the past we have been talking about selling price increases. But for every 1% it is about $0.09, and this relationship it looks like it is more like $0.13 or $0.14. So I was just trying to understand the difference, and maybe the mistake of my assumption?

These are the right numbers for what the difference in average selling prices is between what we're currently projecting for '09 and '08. The EPS impact is what I've said. As far as the math -- the sensitivity for every percent change in selling price, that changes as the base changes. From a lower base, every percent is lower, so that's why your math isn't working.

I see. And then just to clarify, are these, if you can comment, are these changes in catalog prices? Or is this discount activity, or both?

It is not, this is discounting of the list prices including the October price increase.

Okay. Great. Thank you very much. Appreciate it.

Thank you for your patience. (OPERATOR INSTRUCTIONS). We will pause for just a brief moment. Please stand by for your next question. Your next question comes from the line of Eric Tracy with BB&T Capital Markets. You may proceed.

Yes. Good morning. Maybe just a couple of clarifying questions. With respect to the 8% unit volume increases in the 48 million dozens, just to clarify? The assumption is that you do pick up that full 11 million dozens from the international opportunity?

No, no. The 8% assumption is, that's the opportunity for the international, we don't -- .

We have about 1.5 million dozens from the international markets.

I'm sorry. So, 1.5 million is what is assumed for '09?

It is 1.5 million of the potential 11 million.

Okay. And then, what are the assumptions around, what the market share gain in the US market would get you to in '09? What the assumptions are around that unit volume increase? What does that get you to from a market share perspective at the end of '09?

That is a competitively sensitive question, Eric, that I think we would prefer not to answer.

Okay. Fair enough. And then, just a follow-up on the cotton as well. In the previous question, talked about the opportunity of, if prices stay where they are today. Yet, you are assuming that there will be a 10% increase as it stands now, correct? From cotton?

We're assuming a 10% year-over-year increase in our cotton costs going through our cost of sales in '09 compared with '08, yes.

Okay. And then, in terms of the other kind of commodity costs or input costs? Be it, oil, freight, anything that you could quantify there in terms of the potential pick-up you may get in '09?

We assumed approximately $70 a barrel for energy costs is the important assumption.

Okay. Great. I will circle back. Thanks.

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

Thank you. You gave us some -- your assumption as far as the wholesale market, and I think you mentioned that you don't expect pricing to go up in retail. What are your assumptions as far as retail in terms of volume? Do you expect a market that is stable, that's down? You talk about no pricing fees, but is it possible that we could see some price reduction in retail, considering the amount of price reduction you are seeing in wholesale?

We don't think there will be any price reduction because all our programs are placed right now, and they are all locked in for the fiscal year. We didn't obtain price increases, but we definitely are not reducing our pricing. And --

But. And on volume, you think that the market will remain stable, or that you will sell everything you want in retail?

All of our programs are doing very well in retail. We have actually seen significant increases in most of the programs that we have on a go-forward basis. We definitely consolidated some of our sock sales this year going into next year as we divested from unprofitable legacy programs that were obtained by KDH. We have gotten out of a licensed, branded sock line that we had which is called Fisher-Price that we are not selling into next year. So we are going to have some slight volume reductions, but they're mainly in programs that we divested ourselves or were not profitable that we walked away from.

Okay. And going back again to cotton, hopefully, it is going to settle this. When you say that your cotton costs will be up 10% fiscal '09 versus fiscal '08, that is because you're pretty much completely hedged for the year, and it can't be lower than that, or you think that it could be up less than 10%?

I think there is limited upside from that number, Claude, in fiscal 2009.

But it is not very material?

Not very material.

Okay. Thank you.

And your next question comes from the line of Steve Wilson with [Lapetus]. You may proceed.

Good morning. Just a couple of questions. I just want to make sure I understand the pricing scenario as you have outlined, your long cotton for fiscal '09 at higher high prices. The reason there's such pressure in the market, is that because your competitors are not in that same situation? And so basically, they have got much lower cotton costs, and they're passing that through, and you are forced to match? What is going on in the marketplace, is that why there is such a discrepancy in terms of the gap that you have just defined?

We say that that is definitely not what is driving the pricing, the pricing is a function of the industry supply-demand as a result of the weak demand in the quarter from screen printers and destocking at the screen printing distributor level. At this point, we don't believe that we are disadvantaged at this time in cotton. And, that's not a factor in the promotional discounting that is taking place in the market.

But the way you've defined it, you expect that to last the entire fiscal year? To have that severe an impact on your cost realizations?

It continues to be driven by our outlook that we are painting for supply demand in the marketplace.

Okay. When you talk about the opportunity at mass, are you defining more penetration in your key customer there, or are you looking at this scenario and saying, now is an opportunity to gain access to significant programs at other mass retailers, that to this point you really have not penetrated?

Well, we have done a great job in penetrating in the sock segment. And our objective all along has been to leverage that opportunity into other categories like underwear, sweatshirts, T-shirts, for example. But we've never had capacity to support those other segments. So obviously, as we have available capacity, we are going to pursue that segment more aggressively. And, as we bring on our incremental capacity, sooner in this fiscal year, we will be more aggressive into 2010 as well. So it is going into areas where we didn't have capacity but will fall into our same strategy with the existing customers that we are already selling socks to -- our objective is to sell them as well the underwear, sweatshirts, and T-shirts.

In terms of transitioning the socks that are manufactured in the States down to Honduras, you have been clear about the cost differential. Just wondering how quickly you are going to be able to make this transition such that, that lower cost product starts showing up through your P&L for the millions of pairs that you have been producing in the States?

What we said is we are going to make that transition by June 30th of this year. On all of the packaging, which is the high labor component of producing a sock.

So by June 30th, all of your production will be Honduras-generated?

All of the finishing and packaging of all the socks, all of everything in Rio Nance is very integrated. We are going to continue to knit in the United States, but send the product to be finished, which is the labor component which is, represents 70% of the overall cost structure of making a sock other than raw material. That will be produced in Honduras. By June 10th -- by June 30th.

My question was, is that something that gradually happens month by month as you increase and move it? Or is it more of a sudden, it's only right near June that you push everything over?

No, we are slowly moving it right now, but it will be fully moved by the June 30th time frame as we ramp up the production.

Okay. Thank you.

Please stand by for your next question. Your next question comes from the line of Susan Sansbury with Miller Tabak. You may proceed.

Hi. Yes. Thanks very much. Laurence, the question is about the tax rate on a go-forward basis. Are the Canadian taxing authorities, or do you anticipate that Canadian -- what is the tax rate going to be on a go-forward basis? And, could you update me on the status of any future audits with respect to that tax rate?

Firstly, as far as our tax rate, including our retail business, we are looking at an overall consolidated tax rate that is reflected in our '09 budget of around 6%. B, we are not making any change in our tax provisions for the year subsequent to the audit, and we are fully confident of sustaining our low tax rate for that period, in an ongoing basis based on the outcome of the audit and our discussions with the CRA. And we would not have agreed to the settlement if we weren't satisfied with being able to sustain that tax rate on an ongoing basis.

Okay. Great. Thanks very much.

Your next question comes from the line of Doug Cooper with Paradigm Capital. You may proceed.

Hi. This is Alisa Beach speaking on behalf of Doug. Just a few quick questions for you. I was wondering if you can provide me with your average cotton price for all of 2008?

We haven't given that number out, Alisa.

Okay. And what about your T-shirt equivalent volumes sold, for both activewear and socks. Maybe a ballpark number?

Well, what do you mean by -- T-shirt equivalents is a hard number. It is a theoretical number. I'm not sure how to answer that question, Alisa.

Million dozens sold in both activewear and socks for 2008.

For the full year of 2008, our activewear dozens are about 44 million dozens, a bit more than 44 million dozens, and our, you can actually back into it by taking 48 and the growth rate that we have given. And our sock volumes are about 50 million.

Okay. Thank you. And also, could you provide me with a little bit more color on the timing for both Rio Nance 4 and 5. I think you mentioned for 4, you hope to have all of the equipment in there by June? Or is that just for your incremental capacity?

Yes, no, Rio Nance 4 will be up and running in our third quarter. What we are doing is we are actually training and developing production in an off-site facility right now so that when it gets ramped up we can actually move those employee into the building. So we are going full blast with Rio Nance 4, and Rio Nance 5, I said before, was going to be built at the end of this fiscal year, at the end of '09 and will be completely build by o'10 and to support o'11 capacity expansion.

How long might -- ?

Just to clarify, apparently I said 50 million for socks, it is a bit north of 60. I misunderstood the question.

And what is the ramp up schedule like for both Rio Nance 4 and 5? I know you are training people now for 4, but can we expect a full year of capacity for Rio Nance 5 in 2011? Or 2010 for 4?

We are going to have capacity -- the first incremental expansion in DR and Honduras, Rio Nance 1 that will be complete in the third, at the end of the third quarter beginning of the fourth quarter of this fiscal year, will support roughly between 58 million and 60 million dozens of production on a go-forward basis. And when we build Rio Nance 5, and it comes on-line for 2011, it will support what we feel comfortable in terms of our sales objectives, but that plant is obviously quite large. And will have abundant capacities to support the -- all of our growth initiatives in the future. Those plants are roughly the equivalent of about 20 million dozens when we build them. We hope it will support growth based on the opportunity we see at that time. And as far as Rio Nance 4 is concerned, we are ramping that facility. All of the finishing, the high labor content, labor content products that are being produced today in the US, will be phased out of the US, and be fully 100% integrated into Honduras by the end of June.

Okay. Great. And then one more question, in terms of percentage of revenues, how do you see wholesale versus retail in 2009?

There's not going to be a huge change. We didn't project huge incremental retail sales in 2009, only because we did not have the capacity, and we didn't pursue any new retail programs earlier in the year. We have some incremental capacity in fiscal 2009, so we are going to aggressively try and pursue new opportunities. But retailers work quite far in advance, so we still have some opportunity to bring us some incremental business. But, I would say that 2010 will be our opportunity, and now that we are bringing on our capacity earlier, our textile capacity, we have more confidence in actually going out and pursuing programs for 2010 at an earlier date than we originally anticipated.

Okay. Great. That's it for me. Thank you.

Thank you.

And your next question comes from the line of Mary Gilbert with Imperial Capital. You may proceed.

Yes. I wondered if you, and I'm sorry if I missed this earlier in the call, but where is the weakness in demand coming from in the screen print channel? Is it all end-markets, meaning, clearly we know on the corporate side? Is it also in resort? If you can give us a little more details there? And then, also with the discounting, that heavy discounting is going on in the screen print market? It has already started? And what level of discounting are you seeing in terms of prices?

Well, first of all I would just like to say that the market for the up until the end of November was roughly down from January 1st of '08 through November. On a year-to-date basis, it was down roughly about 6%. Up until the end of September, the market was down 3%. So, we have been in a recession listen to the economy for last twelve months. So basically, we have always felt that we were quite resistant to economic downturns, and that was reflected really in this year of 3%. I think what happened in the month of October, I mean business was actually quite normalized at the probably the clip of the minus 3% through October 15th. And I think from October 15th, there has been a shock of the credit system. Customers watching their inventory. The customer end-user watching their inventory, and just the whole philosophy of rethinking and people getting nervous within looking at their net worths shrinking. So what has happened is that really the market actually went down in October, it was down 13%, but in the first two weeks were actually pretty normalized. And it was the last two weeks that were severely down, and that kept going through November. Now, this is our seasonally our lowest time of the year. A lot of the sales that we lost were in again in white promotional volume-type programs. We are starting to see a little bit pick up now that we've actually had promotional activity in the month of December. But what is important to remember is that if you look at the seasonalities of our business, there are some big volume programs that could be susceptible to a downturn. But at the end of the day, when you go through the height of the December selling season, Little League baseball is going to come back. All of the events that drive our segment, the job runs in the summertime, and etcetera. People might not be traveling, let's say for example, abroad, but they're going to go to the beach. And they are going to buy a T-shirt. It is still a good feel item. We still find it -- I think we have taken a conservative approach to what we think the market will be down next year. But we think that the really, the worst of this situation is really in this fiscal time frame. So, we have seen the combination of the market somewhat floating these last six weeks, and combined with the liquidity issues I think people are looking to manage their inventory better. And most of those things combined have really brought us to the situation we are in now.

What about with discounting, and also, you pointed out that it was in white T-shirts, right? What about color T-shirts and the demand dynamics there? Could you talk a little bit about that as well?

We are currently discounting all of our products right now, and this is also something that is going to support our distributors because our distributors right now will buy our product. There are also other producers in the market that actually sell direct and bypass our distributors. Part of what we are doing right now with our pricing policy is, we are going to give the ability to our distributors to reach more people and be more successful in selling our products. So hopefully that will also generate incremental volume, not only for us, but for our customers.

How is that going to allow them to reach more people?

Well, because there's certain manufacturers that actually sell direct to printers that don't use distributors to sell their products. And with our pricing strategy right now in the marketplace, it is going to open up new doors for our distributors. That's what we have seen already since we started this promotion. We have seen sales pick up, and hopefully, we will create some opportunity not just for ourselves, but even for our customers.

And what is the magnitude of discounting that is going on?

Mary -- sorry to interrupt. If you can call us with follow-up questions -- .

Okay.

We can give the opportunity for others to ask questions as well.

Great. Thank you very much.

Your next question comes from the line of Candice Williams with Genuity Capital Markets. You may proceed.

Hi. Can you just explain to us what the weakness in the wholesale channel could do to some of your wholesale customers? Particularly, the more levered people? And, if some of them were to fold, how quickly could you reallocate your product?

Well, we don't feel at this point in time that any of our customers are at risk financially. Basically, a lot of the promotional activity that we are providing is going right through the end-user, so we are absorbing those margins, not our distributors. At the same time with this pricing strategy, we are hoping -- and what we think will happen -- is that we are going create opportunity for them to make them healthier and give them the ability to actually get business where they didn't get before. So, we feel pretty comfortable with the situation of our distributor base at this present time.

Okay. Thank you.

You bet.

And your next question comes from the line of Sarah Hughes with Cormark. You may proceed.

Hi, guys. In your guidance, you indicate that your estimate for selling price decreases of about 7% to 9% in '09. Just wondering if you can give us a bit of detail on how much they have come through in October and November?

Right now, we are, I think it is to take December in account, we have -- we are selling our products at we have launched what they call a promotional discount, and on the average T-shirt we are promoting the product at roughly about $3 a dozen off. Which is going directly to the end-user.

And this is just started in December, Sarah. This did not -- the discounting was not in place, in October and November.

We discounted some other product lines like fleece in the month of November, but T-shirts really started in the month of December.

Okay. And then, how has pricing going in the international market?

Pricing has been stable there because they don't operate in the same manner as we do here in North America. But saying that, one of our opportunities of growth there, so we are going to pursue aggressively those markets as well.

On that note, I am just trying to get a sense of how pricing compares internationally versus North America, and therefore your competitive advantage going in, being more aggressive in the international market?

It is pretty similar, I guess, because we are globally competitive as a Company. I would say that there's not a big difference between pricing in any one of our markets today.

Okay. Great. Thank you.

Thanks.

Your next question comes from the line of [Vishual Schreider] with [Guilden]. You may proceed.

Hi. Thanks. All my questions have been answered.

Thank you.

Thank you. At this point, I would like to thank everyone for joining us. I believe we have covered a lot of the issues and your questions. I'd like to remind you all that we will be available during the day to take additional questions. So with that, thanks again for joining us, and we appreciate your interest. We look forward to talking to you again at our next earnings conference call. So, thanks and have a good day.

This concludes your presentation. You may now disconnect. Have a good day.