Gildan Activewear Inc (GIL) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Second quarter 2009 Gildan Activewear earnings conference call. My name is Chenelle and I will be your coordinator for today. (Operator Instructions) I would now like to turn the presentation over to your host for today's call, Ms. Sophie Argiriou. Please proceed.

Thank you, Chenelle. Good morning, everyone and thank you for joining us. Earlier this morning we issued our press release announcing our earnings results for the second quarter of fiscal 2009 and our interim quarterly shareholder report containing management discussion and analysis of consolidated financial statements. These documents are available on our web site at www.gildan. com and will be filed with the Canadian Securities Regulatory Authorities and the US Securities Commission.

I am joined here today by 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 will 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 would now like to turn the call over to Laurence Sellyn. Laurence.

Good morning. EPS for the second fiscal quarter was $0.06 per share, down significantly from $0.35 in the second quarter of last year. The decline in earnings was due to four factors: weak demand for active wear in the screen print channel due to the overall economic conditions, further distributer destocking as a result of our decision to limit our credit exposure to our largest wholesale distributer as it undertook a process of debt restructuring, a lower proportion of higher volume active wear products in our active wear sales mix and the consumption of previously manufactured high cost inventories in our cost of goods sold in the quarter. As a result of these factors, net sales in the second quarter declined to $245 million down 17% from $294 million a year ago, and gross margins in the quarter were 15.8% compared with 28.8% in the second quarter last year.

Unit shipments of active wear into the US screen print channel declined by 14.8% or 1.6 million dozens. Approximately 1.2 million dozens of this decline was due to an 18% decline in overall industry shipments from US distributors to US screen printers as reported by STARS. A further 1.4 million dozens decline was attributable to distributer destocking primarily as a result of our decision to limit inventory replenishment to Broder which significantly depleted its inventories during the quarter. These negative factors were partially offset by increased market share in all product categories which positively impacted our unit volumes by approximately one million dozens. Our market share in T-shirts was up from 50.7% last year to 58.1%. Our share in fleece increased from 48.8% to 56%. And our share in the sports shirts category increased from 35.5% to 37.7%.

As a result of our higher market share, unit shipments of Gildan branded active wear from US distributer to screen printers declined 5.5% compared to 18% for the industry overall. The difference between the 5.5% decline in shipments of Gildan product to screen printers and the 14.9% decline in our unit shipments into the US distributer channel reflects the impact of the destocking due to our lower shipments to Broder. In addition to the impact of lower unit volumes, active wear sales in the quarter were negatively impacted by a lower proportion of high volume fleece and long sleeve T-shirts and a higher proportion of sales of second quality T-shirts. Irregular tee-shirts are a normal part of the screen print business, but our irregular sales in the second quarter were abnormally high as we significantly reduced inventories of second quality product which had accumulated over time.

Sales in the Canadian market declined by 45.9% compared to the second quarter of last year due to weak demand, distributer destocking, and the decline in the value of the Canadian dollar. Sales in international markets were negatively impacted by the decline in value of local currencies, compared to the US dollar. Higher unit sales in western Europe, the UK, the Asia Pacific region and Mexico were offset by the temporary suspension of distribution in eastern Europe which had been a growing market in fiscal 2008.

Sales to mass market retailers were essentially the same as in the second quarter of last year. The impact of the rationalization of our soft product mix and the elimination of unprofitable soft product lines during fiscal 2008 was essentially offset by growth in our continuing soft programs in spite of the weak overall market conditions. Point of sale data for mass market retailers reflecting our soft sales from retailers to consumers reflect strong growth during the second quarter. Underwear sales in the mass mark retail channel also increased significantly from a very small base a year ago.

Gross margins for the quarter declined significantly to 15.8% compared with 28.8% in the second quarter last year. The decline in gross margins was due to the more unfavorable active wear product mix which negatively impacted gross margins by approximately 500 basis points. And higher commodity and manufacturing costs which together reduced gross margins by approximately 800 basis points. The increase in manufacturing costs was due to consumption of the balance of inventories produced when energy costs were at their peak with oil at $140 a barrel, and also reflected the cost of the transition and soft private label brands which is now complete. In spite of these transitional inefficiencies in sock manufacturing, gross margin per socks in the quarter were higher than margins for active wear products. The improvement in sock gross margins reflect the rationalization of soft product lines, the completion of the integration of our first sock acquisition and the successful ramp up of our sock manufacturing operations in Honduras.

We are planning for is second half of the fiscal year on the basis that the current weak overall macro-economic conditions will continue resulting in a continuation of very weak active wear sales demand in the screen print channel and severe selling price competition. Preliminary STARS data for the month of April which is still to be confirmed indicates that a decline in overall industry unit sales of approximately 17%. In spite of the continued weak industry conditions, gross margins in the second half of the year are expected to improve compared with the second quarter due to lower energy and transportation costs, lower commodity and raw material costs, the nonrecurrence of factors such as the transition to the new private label sock brands which impacted margins in the second quarter and more favorable active wear product mix in line with the normal seasonality of industry demand. We have good visibility on the positive trends impacting our cost of goods sold as we will-- as we will be selling products already manufactured and currently in inventory.

In addition, all of our manufacturing operations in both Central America and the Caribbean base are operating very efficiently. The above factors are projected to positively impact gross margins in the balance of the year, compared to the second quarter by in excess of 10%, before the impact of possible further selling price discounting and production down time. We utilized approximately $62 million of cash in the second quarter to finance the $78 million increase in receivables. Mainly due to higher seasonal active wear sales in the second quarter due to first quarter and approximately $13 million of capital expenditures. Inventories at the end of the second quarter were slightly reduced compared to the end of the first quarter. The impact of increased unit quantities of active wear finished goods was more than offset by the reduction in active wear unit costs which will benefit gross margins in the second half of the fiscal year, lower work in process inventories and low inventories of socks.

The Company entered the quarter with net indebtedness of just under $100 million. While we continue to have a very strong balance sheet and significant unutilized financing capacity under our revolving bank credit facility, we are planning to completely eliminate our bank debt in the second half of the fiscal year. In particular, we expect to significantly reduce active wear finished goods inventories during the peak summer selling season for T-shirts in spite of the assumed weak industry demand by scheduling further production down time as required. Net capital expenditures are now projected to be in the range of 60 to $65 million. The planned incremental capacity expansion projects at existing textile facilities are now being deferred to fiscal 2010. We believe we will be able to quickly ramp up this additional capacity for active wear and underwear as well as the new Rio Nance IV sock facility to meet demand as required and support our business plans for next year.

Within the next 24 hours we should know the outcome of Broder's's negotiations with its bond holders. If Broder is not successful in achieving the minimum tender condition to convert its notes into new debt and equity instruments, Broder indicated in its most recent press release that it is taking the required steps to be able to proceed with a Chapter 11 filing. If Broder files under Chapter 11 we may be required today provide for nets receivable from Broders which currently amount to approximately $12 million compared with approximately $18 million at the end of our first fiscal quarter. However, at this stage we continue to be optimistic that Broder will be successful in implementing its exchange offer to its bond holders. Regardless of the ultimate outcome of the Broder restructuring process, inventories in the US distributer channel are very low and we anticipate that industry shipments into the channel in fiscal 2010 will benefit significantly from non-recurrence of the distributer destocking which has had a significant negative impact in industry sales in the current fiscal year.

Glenn and I would like to end our formal comments by emphasizing that while the macro economic environment continues to have a negative impact at our industry, our management team at Gildan feel positive and confident about the operations and future potential for our business. In addition to further consolidating our leadership position and further increasing market share in our core business in the US wholesale distributer channel, we believe that we are currently well positioned to pursue our growth opportunities in a mass retail channel and other screen print markets over the next 12 months.

We have continued to make key additions to our sales organization to serve these markets and we are achieving excellent service in overall performance levels with our existing retail programs including the introduction of our new private label sock brands. The achievement of new retail programs is a major focus of the Company's energies at this time although you will understand at this time we didn't comment on specific programs we are pursuing and discussing.

Thank you, Laurence. Before moving to Q&A as always I would ask everyone try to limit their questions to two or three if order to give everyone the opportunity to ask a question and time permitting we will circle back for a next round of questions. Thanks. Operator we are ready for the Q&A session.

(Operator Instructions). Your first question comes from the line of [Jessie Hingham of TD securities].

Thank you. Good morning. First question is on the manufacturing down time that you appear to have taken in the second quarter, how many weeks was that? And was the impact as expected about 3 to C$0.03.5 to earnings?

We took about five extra days against our original plan in the quarter. And we have taken a little extra time during the shut down in April which is planned shut down during Easter. So we took another six days in the April which is Q3 basically so far. And the weekly cost to us after closer analyzing the situation now has become a reality it is closer to 2.5 to C$0.03 per week of shut down.

Okay. So just to make sure I am clear you said five days in total in the second quarter; right.

Second quarter, yeah. And then other than the normal Easter shut down we took an extra six days so far in April.

Okay. Great. And then I suppose I guess the C$0.0 2.5 sensitivity would hold for the coming weeks or --

(inaudible) C$0.03 is a good working number in term of weekly shut down costs.

Okay. Okay. Great. My second question is on, I'm just a little surprised to see still C$12.5 million in accounts receivable outstanding with Browder seeing that you had, you mentioned tightening shipments in the quarter, how many days were these particular receivables outstanding and can you also comment on the health of the total outstanding receivables, how much of that C$176 million you have is over 60 days.

Browder is current with receivables at the end of the quarter. So, the receivables that are on our balance sheet at the end of the quarter reflect new sales as the previous receivables were fulfilled.

Yeah. And the receivable number is the days outstanding is a little higher due to a small dating program of basic T-shirts in the quarter to support the inventory we thought we needed in the channel. That number should work itself out and be back to normal at the end of the quarter.

Okay. And then does that mean that you have resumed shipping at somewhat normalized rates to Browder so far in the current quarter?

Well, we are waiting to see what they announce within the next 24 hours.

Okay. Great. The final question is can you remind us how early do you guys typically start to cover your cotton requirements for the upcoming fiscal year and have you started covering for fiscal year '10? If so what percentage is covered and if possible a price indication on that as well?

Well, we manage that in the context of the market and the circumstances at the time. We will clearly have a significant carry-over of '09 cotton into '10 because of lower volumes this year. We have covered a little bit of cotton for 2010, and even with the carry over from '09 into '10, we would expect our cotton costs in the first half of '10 to be significantly below the first half of this year.

Okay. Great. Thanks. I will circle back for more.

Your next question comes from the line of Sarah O'Brien of RBC Capital Market.

Hi guys, can you talk Glenn about your production levels now, sort of expected as a percentage of your total capacity and remind us exactly where us on total capacity potential right now.

We are still running at our capacity level which is, hasn't changed. It is between 51 and 52 million if we ran on 49 weeks of the year. That's our existing compass thety, and what we are doing is managing our inventory based on market conditions and we will take weeks out appropriately as we see fit and taking a week out at that time basically to-- based on the outcome in the marketplace. So we haven't changed really our overall capacity at this point in time.

Can you talk about what is your expectation at this point in terms of number of weeks production shut down for the back end and maybe just to comment on a number-- I know your inventory is stable but if units it is up. How many weeks of units do you have on hand versus last year?

Well, I mean it is, I really don't want to get into that but I would say.

Both of these questions, Sara, are obviously a function of our sales projection for the second half of the year and we don't want to-- item sales we don't have the visibility to

The only thing I would say is in unit ship, unit volumes we needed more inventory at the end of fiscal 2008 our inventories were excessively low. So we needed more unit volume to support our ongoing business based on the share we have in the market today. But in pure dollar value our objective is to get pretty close to the end of 2008 inventory numbers is a good target for us.

Okay. Can you just talk, Glenn, I mean if Browder does gets its exchange offer today and you continue and you see restocking next year do you think under normalized conditions excluding any new retail programs you would be able to fill out the 51 to 52 million dozen capacity or would you expect to have to take some shut down next year.

The way we look at it, we feel that to now, I mean we destocked in Q1 significantly, we have now destocked again in Q2. The total de-stocking is roughly about three million dozens which year over year we believe will come back next year. If you--.

Three million dozen for Gildan.

Yeah, three million dozens just for us. let's say on a year-over-year basis which has been de-stocked because remember our sales to the distributors is much lower than the actual sales to the end user because we de-stock the channel by three million dozens.

Right .

If you look at the market, let's say for example, which we are conservative when we say the market could grow by-- let's say for example 5%, come back by 5%, that would add another million and a half dozen of opportunity for us next year. If we picked up another couple of points of market share, that could add, just over 700,000 dozens and we put a big emphasis right now on going after direct business which is those big private label companies and that should conservatively-- we have just hired two sales people this year, that's a growing part of our business and that we believe could add another million dozen for next year and then if you look at our international growth with all of the different markets, that probably conservatively would be a million dozens on a year-over-year basis.

So, if you look at just go forward, and not really a big rebound in the market, we believe that adding seven million dozens to the base of this year is probably a realistic target for us. That's what any type of retail wind fall that we're really pushing hard right now. We have put in additional sales people to support and build our sales team, and we are working very diligently today with all of the major retailers to get placement. And so if you take all of this in account we are pretty optimistic we could fill our capacity out next year.

Also just refreshing your memory, we also made plans to make incremental capacity expansions on our existing facilities if we wanted to expand our capacity from 52 million to the 58 to 60 million level with the very insignificant capital investment of just about 7 to C$8 million also with the lead time probably about four months to be able to do that. So we have lots of time to increase our capacity past the C$52 million but at this point in time we feel comfortable with our existing capacity level and also we are going to have enough inventory at the end of this year, in unit volumes to support the ongoing business basically. So we also feel very comfortable with that as well. So, we have a lot of flexibility. We are very optimistic. We are navigating through these times right now, and we are really looking forward to the future and next year.

And the other thing is that I think you have to add on to that is we are also working hard ton margin front although we were disappointed with the margins now, for this quarter, we have a lot of cost initiatives that are happening, we're going to have margin expansion as we go into the back of year. But going on a year-over-year basis especially the first half of next year, we have much lower cotton energy costs, and as well as we are in the process of moving all of our sock finishing off shore, which will be complete by the end of the third quarter. And that also will help our margins as we go into next year and our objective is that in retail especially if socks we will have our margins equal to or better as we go forward into the wholesale market. So, all of those things combined we are pretty optimistic and I don't know if that answers your question.

It is pretty complete. Thank you. Maybe just a last question, you talk about severe selling price pressure, how bad is it going to get and are you the leader on this? Is it to stimulate demand or eliminate competition.

Right now it is partly because there's nowhere to hide in the industry. Just like we have continued to manage our credit exposure with Browder, I think the whole industry is in the same position. So people are I would say desperate in certain cases to move inventories. So that's probably created a lot of price pressure and in the event that Browder is successful with their bond offering that will alleviate a little of the price pressure because that will just help the dynamics in the industry. We feel that our market share is going to grow and hit our objectives and without a massacre in the pricing in the market, so we are trying to manage as best as possible the-- obviously our pricing in the marketplace.

We don't think that there's more units being sold because of this aggressive pricing. It is somewhat a futile exercise, and hopefully we will get some stability but because the market is down so significantly, it is obviously and as well as largest distributer, in his situation I think this has compounded the issue. So we will see what happens as we go forward. But obviously, we'll plan for the worst.

And when I don't you talk the worst, are you talking another 8% decline or more like half that?

No, look I think that the pricing is pretty well at floor today. Things are being sold pretty cheap. So, I think where we are now, maybe a little bit. My gut feeling is we are sort of at where pricing needs be today.

Can you tell me where that is relative to last year? I thought in your press release you said pricing was pretty flat.

That's what we said. I don't think we can really have visibility or can guide on pricing. It may be.

There can be a couple of more percentage points to come out of it but that's, it is where it is at.

Okay. Thanks a lot. I will circle back.

Thanks.

Your next question cops from the line of Kendric Tyghe of CBIC.

Good morning. I wanted to follow up you mentioned the 1.4 million dozen units distributed the destocking impact in the quarter. Appreciating that the majority of that would have been Browder, can you give color around the order of magnitude that was attributable specifically to Browder, versus the numbers of two, three and four in the market?

By far the majority of it was Browder and a small portion in the Canadian market as well.

That was just the US number.

So Browder was by far the majority of that number, Kenric.

All right. Thank you.

Your next question comes from the line of [Martin Landry, of (inaudible) Securities].

Good morning. Can you give us a bit of color on prices of active wear during the quarter? What-- were they down year-over-year?

No, the selling prices were a little bit more favorable than the second quarter of last year. In other words, the increase in gross selling prices were offset by higher promotional discounting but the net effect was slightly more favorable. On top of that we had lower realizations in our international sales because of currency, when you factor that into overall pricing including the international site was flat compared with last year.

Okay. And going on the international front, can you tell us how was your sales performance in local currency?

Well, we were up significantly as we say in the press release, from a small base in Mexico and Asia Pacific. We also grew even in weak markets in the UK and western Europe. And the only area where we were down is that we didn't continue sales in eastern Europe which was a very growing market in the first half of last year and where there are significant economic issues.

Okay. And lastly you have taken a provision of C$2 million for severance costs in central America. Can you give us a bit more details on that?

Sorry?

I have read in your notes that you have taken a provision for of C$2 million for severance costs during the quarter. Can you give us a little more details on that?

That's just an on going legal provision that we always take that is required in Honduras as part of the local labor compensation practices. There's nothing different about that.

Okay. All right. Thank you.

And your next question comes from the line of [Omar Phet ] of Credit Suisse.

Hi. This is [Spencer Hill] at Credit Suisse, Omar's team. Morning, everyone.

Morning.

We were just hoping you can discuss the notion of screen printing as kind of a late cycle category, and I think it is prudent to plan conservatively for the rest of year but as we start looking at eventual recovery we are curious about the cadence of that recovery. Do you anticipate whether it tends to be a V shape or a longer slower rebound that lags the business cycle?

We are projecting a slower curve but if you go back to 2001 it bounced back right away. So there's a, the following year the markets came back pretty strong. But, obviously we don't think that, we think that the economy today is much more severely affected this time around versus the 2001 recession. But one thing is for sure is that if you look at the marketplace today and talking to our customer base, is that the actual order quantity which is the orders that they take hasn't really deteriorated. And what has happened in the market is that the bigger orders, big quantities promotional products, say for example that's really the part that's being affected.

So the everyday business is still there, and the order counts are still at an adequate level. And basically it is just a question of bringing back the bigger pops that really drove the volume in the marketplace. That's what is missing so far. So when that comes back the industry will come back relatively quickly.

Great. Thank you very much.

Thanks.

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

Hi. Good morning. In the event of a bankruptcy with Browder, what are your contingency plans? How long would it take to replace this business volume in terms of timing?

Well, the way the market works is that we have, we believe sufficient --

Before we answer that, Glenn, we should say Anthony that Browder does not seem to be envisioning a liquidation scenario. We are optimistic they're going to be successful in completing their exchange offer and we will know the results of that very shortly. So that's scenario number one and failing that, they have indicated they're preparing to go into Chapter 11 not Chapter 7, and as part of that, that would involve getting financing to be able to operate under Chapter 11. So a liquidation is,not plan A or plan B but what we have always said in that kind of a situation is that end use demand in the market will not change from screen print distributors and other distributors would ramp up to feel the void in that eventuality which we don't foresee happening.

Okay. With reference to Rio Nancy Five and Four, are you still deferring construction of Five and do you, when do you plan to have it back on? And with reference to the Rio Nancy Four, are you still deferring the ramp up and utilizing as distribution, how long will it be back on line?

We have, before Glenn answers we have in our, updated capital expenditure estimate that we have, we have further expenditures before where we are putting in infrastructure for the expansion of the facility. So we are still planning to move ahead with Rio Nancy Four, it is just a question of timing. And Rio Nancy Five is not in our capital budget for this year.

Okay. Thank you.

Your next question comes from the line of [David Glick of Buckingham Research Group. ]

Morning. Laurence just a clarification on gross margin, you said that it would improve by potentially in excess of 1,000 basis points in the back half before the impact of discounting and down time. Are we to assume that it may not improve on a net basis by that amount? I am just trying to get some clarity on what you really mean by that. Obviously it is up on a gross basis but on a net basis--

Well what I said or intended to say was that on a gross basis, we would expect to achieve in excess of 10% improvement from a combination of improved manufacturing costs and more normal product mix. That would be that plus 10% number would be offset by down -- shut down costs of production down time we take in the second half. And if there is further discounting in excess of what we experienced in the second quarter.

Okay. Any possible range of impact that you could give us just some, some sense of how much of that could be offset?

I think, you know, we don't have the visibility to be able to say that. Glenn did give you some comments on what he thought pricing pressures would amount to. But in this unique environment that we are in, we don't really have visibility and I don't think it would be appropriate for us to try to guide you better than we are doing.

All right. Fair enough. Then then on the SG&A line, that was a lot better than certainly than we were forecasting. Can you, I would think you would have a little more visible on that line. How should we think about the SG&A dollars for the balance of the year? Should we still think of them as being down similar to a level they were down the second quarter?

Well, we are-- some of the SG&A is volume related. But also, we have placed significant emphasis on cost control and we are achieving efficiencies in our supply chain and distribution costs which are also favorably impacting SG&A. Plus another factor is that the negative impact that you are seeing on the sales line with currency fluctuations is partially offset by the benefit in SG&A due to the impact of the lower Canadian dollar on our corporate administration costs.

So, at least through out the third quarter we would see that benefit. Is it the fourth quarter where that FX benefit starts to subside?

Depends on what happens to exchange rate is --

Given where they are now.

I would say that we should be potentially looking at lower SG&A in both the third and fourth quarters.

Okay. Great.

Versus last year.

That's helpful. Thank you have very much. Good luck.

Thanks.

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

Good morning. I want to concentrate on the market share gains, it looks this is the biggest market share leap I have seen I guess in quite some time. What do you attribute it to? Are people having financial issues? Or who you do you think you are taking share from?

Well, I think it is contributed to the momentum we have in the market and the strength of our brand amongst its distributors. It has taken a long time to build the reputation, the quality in the channel. This just a reflection of the 15 years of consistent delivering best quality value relationship in the market. And we believe that there's still further upside in terms of our share, and that's really what it is contributed to.

So the other thing is at that we are very large in the T-shirt area, and 100% cotton T-shirts but the 50/50 category is growing still a growing opportunity for us. We only moved that product offshore when we built Rio Nancy Two. The current market share there is under 40%, high 30s. As we continue to get traction in that product that's going bring our overall share of T-shirts up. In fleece we have huge momentum in the marketplace.

Again because of the quality of value relationship we have been able to achieve through our Rio Nancy Two facility and the product enhancements we have made over time. And the really area where we still see lots of opportunity, actually believe it or not is the sports shirts where we haven't achieved the same type of share as we have in T-shirts and fleece. That's going be a big emphasis for us as we go forward. We believe there's still continued opportunity and we are very excited about the outcome.

So you used to talk about 60% being the target I think, you are at 57% today. So are you ahead of schedule? And how do you see the industry evolving over the next say three or four years in terms of the number of players in it?

It's hard for us to say, to be honest with you, and I don't want to comment on other players in the industry. All I can say is I think there's a little upside for us, definitely upside for us in term of taking more share, and that's what we are going to position, how we are going to position our company.

Okay. In terms of cotton costs, what is the delta you think year-over-year in terms of cents per pound 2010 versus-- or first half of 2010 versus first half of 2009?

I don't think I really want to give you a number, Doug. But what we have said is as we go through-- what we said at the beginning of this year is as we go through the year our cotton costs will come down significantly between the beginning and the end even though not as low as what cotton reached at the bottom of the commodity cycle. So but our cotton costs are coming down, and the carry over of the lower cost cotton from the second half of the year into the first half of next year will result in significantly lower cotton costs in the first half of next year compared with the first half of this year.

Just one final question on the retail side. The sock program is the private label program with Wal-Mart I'm assuming that's going well.

All of our programs are doing pretty good. I mean Wal-Mart is doing extremely well. Most of our programs, basically, on a-- if you take a program which is on a year-over-year basis, something that is consistently sold to a department or within a retail store, on average we are up anywhere between 6 and 8% on the existing program. So, we are very excited. We did a lot of work on rationalizing our product lines over the last 12 months, and streamlining our manufacturing in central America.

And although our margins have increased in socks there's still a lot of upside on margin but I think more importantly what is happening is that the price/value relationship at retail is very good and that's what is driving our market share in the hosiery area and we are looking for new programs as we go forward and also leveraging the sock opportunity and success into other categories like underwear and active wear as we go forward.

So just on that, are the major retailers are they migrating to private label business from socks to active wear.

Well, I mean our thrust is clearly to build on our strong market position in socks to achieve our targeted penetration in other product categories and be a full line supplier of basic family apparel.

Okay. Just one final question ton Glenn you were talking about the big sort of, the big unit I guess orders, on the screen print channel is what is necessary to get this thing going again. Is that mostly on the corporate promotional side, as opposed to say tourism or sports teams and so forth?

It is a combination because it is basically the auto industry a little bit. You have it in promotional products, you have it everywhere basically. So, the thing which I think is important is that the order count is a big criteria in terms of making sure that everyday business is there, and the volume that has disappeared from the market are these larger type programs: once the economy turns these programs should come back and that's what we saw in 2001 and hopefully we will see the same rebound again. But we are still projecting conservative-- in my mind, I am still conservative only because of the severity of this rescission but hopefully things will come back a lot quicker than we think.

So 2010 you are forecasting the market will still be 10% plus which is where it was in 2008.

We haven't made our forecast yet so it is hard for us to say, but my mind what I feel today is it will bounce back to last year's levels. I still find it is going to take a little longer than that only because of the severity of the recession because we believe it will bounce back. The question is when.

The you very much.

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

Thank you. Good morning.

Hi, Claude.

First question just to make sure that we are have the right figure you are talking about a thousand basis points of improvement in gross margin, not the 10% improvement?

We are talking about a thousand basis points, yes.

Okay.

Which is a 10% increase, not 10% of 15, but. 10% of 100.

Okay. Just to clarify. The other thing is you said before down time and potential additional pricing pressure are you factoring in the six days of down time you have already taken in the second half or that's going to reduce the thousand basis points? That's C$0.06.

That's right. That's in the base.

You mean.

That's in the Q2 base.

Okay. You mean it is a thousand basis points including the impact of the six day.

No it is a thousand, including the equivalent after what down time we took in Q2. So additional down time on top of that if it is required in the second half of year will reduce the impact of the positive manufacturing costs and the positive product mix along with any increase in selling price reductions.

Okay. I thought that I understood you had already taken some in the third quarter?

Some what.

Took six days in April.

Okay. And lastly, I mean you step up the effort to sell more in Mexico, Europe and also the direct selling to those big private brand screen printers. How much of that impact is in the Q2 and suppose we will feel a lot more impact in Q3 and Q4. Is it fair to say that.

Well, that's a growing business for us and it just doesn't happen overnight but I think one thing for sure is that these other markets have been adversely affected from the recession as well, so we have actually seen growth except for that one market in Hungary other (inaudible) markets have actually grown but the actual markets themselves have gone significantly backwards. So our share gains in unit volume is exceptionally well relative to the overall market performance. So we have done very well in penetrating these markets.

They may be down equal to or even worse than the states. We don't know at this point because they don't have from same type of data from S.T.A.R.S. as we have in the United States. So, but we are going to continue to penetrate. These are longer term thing and what I said, before was that this will be part of, of the piece of the puzzle that will continue our overall volume increase on a year-over-year basis and contribute growth to the company.

Okay. Thank you.

Thanks.

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

Good morning. If I could just follow up on the Browder Brothers assuming that gets done could you talk about sort of the restocking expectations for the back half and the terms in which you would sale or deliver product to them? Can we assume that would be profitable sales or just maybe talk through that dynamic?

We would see no reason why we wouldn't resume normal trajectory of sales at, and the margins have been and would continue to be reflective of our overall margins.

Okay. And when you say normalized levels, Laurence in terms of that, is that sort of to the mean there or are we still, are they in a position would the cadence be still a little bit slower there.

The margins with them would be consistent with any one of our other customers. So it would be no difference. I mean if that answers your question.

Okay. Are we possible just to follow on this gross margin to get the quantification of the impact of the down time plus the lower selling prices in Q2 of that-- call it 13 percentage points year-over-year decline, which, how much came from the lower selling prices and down time?

Well, as far as selling price, I don't really want to say more than what we have already said which is that the deductions offset the majority of the gross price increase that we implemented during the course of last year and there was a slight net benefit in the second quarter. And the down time, you can extrapolate from what Glenn has said that we, to-- given you the amount of down time and the cost per week.

Okay. Okay. And then maybe just talking, I know you had a really strong fleece program last year, and Glenn I think you mentioned that you still have huge momentum in that category. Could you talk a little bit about the visibility you have for the back half for fleece?

We, in terms of share and market share we believe our share will continue to grow. The only thing I would say is that up until now and we have actually-- are managing again our credit exposure. So typically in fleece we do major dating programs and so that may reduce a little bit the sales in Q3 let's say for example. But those sales will still-- will appear just at a later date. So there's a little bit of a timing switch I would say from quarter to quarter but ultimately we will sale an increased volume of fleece for this fleece season.

Okay. So the expectation is a shift from Q3 to Q4?

Yeah, and maybe some of it even to Q1 because the fleece season really happens in, from August through December, January is when the season actually transpires.

Okay. So last year was just an early delivery?

Typically it is early every year. And we will have some early sales but more of the portion of the sales will be sold when the garments are required in season.

Okay. And maybe just lastly Glenn for you in terms of strategic tunes, you've had success with the sock programs at retail. Any thought to-- I know you are pushing off capacity expansion, but kind of why not given that success transition some of that capacity and trying to accelerate or penetrate retail a little bit quicker? Is there something else going on there that--.

No we are working very diligently on penetrating retail as fast as we can. We have the capacity right now, and we also have the ability to incrementally increase capacity relatively quickly. Which we did not have a year ago. So, the stars and moon are aligned right now, between our service, leveraging our sock business, and building up our sales team, and also this overall company exposure with the major retailer.

Now we are in a position to capitalize on our success. So this is what is going to happen. It just takes a little bit of time. Unfortunately you just can't walk in overnight. Retailers plan anywhere between 12 to 18 months in advance as they determined their planning strategies or placements on the floor. We are there today we expect to penetrate business for next year, and we are basically feel comfortable with our positioning. The cart doesn't come before the horse but we are comfortable and committed and this is the major emphasis on the company today is to be successful in launching our retail initiatives.

Okay. Great. Thank you all.

Your next question comes from the line of Sara Hughes of Cormark Securities.

Hi guys a few quick questions. Laurence can you tell us what your average cotton cost was this quarter?

It was close to C$0.70.

C$0.70. Okay and then just gross margins on the stocks-- you indicated they were above active wear. Wondering if they're getting close to where the active wear margins were prior to the downturn?

They're not that high but as we go through the year and improve our active wear margins we expect the sock margins to-- and the sock business to be equally profitable to the active wear.

We can see at that.

We are very happy with the way the economics of our sock business is developing as we have ramped up our facilities offshore and completed the integration of our sock acquisitions and the rationalization of our product mix.

Okay. And then just lastly, just on the international market, I know Glenn you indicated that going in 2010 you can potentially see a million dozen improvement there. Wondering if that depends on a return on western Europe or if that remains weak, you can still reach that target.

I would say that's a conservative number and we feel that within all of the markets we are servicing, that's something that is very conservative for us.

Okay. Great. That's it. Thanks.

Thank you. Your next question comes from the line of Candice Williams of Genuity Capital Markets.

Good morning. I am wondering if you can tell me what your new CapEx plan includes and what you have excluded from your previous projections.

The three projects the main projects in our capital plan for this year are are the money that we have spent and are continuing to spend on Rio Nancy Four, the DR bio mass project, and the transition to the new office as we expand our infrastructure in Barbados.

Great. And when you speak about the seconds producing 2008, can we assume those are from the DR production issues? To go back to that time, were there other issues that came up through the year that had you producing a greater proportion of seconds that you otherwise like?

This had accumulated over time and we took the, we had opportunities to blow out irregulars and significantly reduce our inventories.

Okay. And then my last question would be on China, there has been some interesting news articles out lately sort of outlining plans that may not have come from you and I was wondering if you can give us an update on your progress there.

We are still making our plans. We are continuing to sell in Asia. It was a growing market for us this quarter. That's a market under development right now and we are continuing to assess the market and we have hired again a couple of individuals. We have inventory in the market there and we are going to continue to drive our strategies in Asia.

Great. Thanks.

Thanks.

Your next question comes from the line of [Randy Philip of EOS Partners].

Hi. Most of my questions have been touched upon but I was just curious, seems like you are doing a pretty good job in Wal-Mart in particular. In addition to that I heard you say on the call that you were doing better in the underwear category. So a couple of questions. Do you expect that it sounds like their share gains going on in the big box retailers, would you agree that you are taking share and do you expect that to continue? And sort of what is the basis of your ability to take that share?

Well obviously, the more unit volume in which we sell to these retailers is taking share from somebody. I mean we are not sure where and who the share is actually coming from today. But, based on our value, quality relationship that we put together, really it is the same-- we believe we have the same opportunity like in wholesale. I mean what's made us so successful in wholesale is the best value product for the price.

Those are the same dynamics that we believe that we can offer these retailers. As retailers continue to look at expanding their margin, enhancing their stores and the brands in their stores, we believe we can capitalize on that and share in that opportunity. That's really the crux of our whole retail strategy. We are going to combine that strategy in terms of helping them with their own brands as well as supplying our brand to regional retailers which is also been very successful and we have seen significant growth in every one of those accounts.

So again we feel comfortable. We are positioned where we need to be and as we lever this opportunity from our success in our socks, this will give us an open door to other new programs and active wear and underwear at big box retailers.

Thank you. Are there one more question, is there any big opportunities ahead either bids for chunks of business or anything like that at Wal-Mart or any of the other big retailers that you are either involved with or would like to be involved with?

Again we are not knot going specify any type of programs, we are working building a long term relationship and a long-term base. And I think we have covered exactly our positioning so far.

Okay. Well, it sounds like you guys are doing a good job. Thank you.

Thank you.

Your final question comes from the line of [Videl Shuda] of UBS.

Thank you. I just have a few quick ones. In the MD&A you mentioned that there's increased likelihood of credit concerns with your other wholesale customers, can you talk about that.

I think that that's in the risk factors as a risk exposure. But we do not see-- we do not have any specific concerns about credit in any of our wholesale distributors.

Can you talk about what gives you the confidence that Browder is going be able to restructure. Obviously you say that margins are going to improve in H2 the implication is that Browder is going be there. So can you talk about that.

Well, in their, press release, they talk about the fact that they're close to their tender target for the bond exchange and hopefully they will get over the hump and I am only really going by what they have indicated if their public announcements. They also have said if they don't achieve that increment to meet their target they are preparing to go into Chapter 11 which implies having all of the-- everything in place to continue to operate under Chapter 11 and based on what they're saying hopefully that is what will transpire, that they will be able to achieve the-- implement the exchange offer and failing that operate under Chapter 11. They have a good business that they built up over the years.

So does your guidance of 10 points of margin proven in H2, does that also contemplate scenario where they go into Chapter 11?

That number is not sensitive to what happens with Browder

Okay. And last one, last quick one on what is your maintenance CapEx?

I would say there's probably, , 5 to 10 million in our capital expenditures for this

Okay. Thank you.

Thank you.

Ladies and gentlemen, that concludes the Q&A session. I would now like to turn the call back to your host, Ms. Sophie Argiriou.

I would like to thank everyone for joining us today. We appreciate your interest and we look forward to talking to you again at our next earnings conference call. Thank you and have a good day.

Ladies and gentlemen, that concludes the presentation. Thank you for your participation. You may now disconnect. Have a great day.