Gildan Activewear Inc (GIL) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2010 Gildan Activewear earnings conference call. I will be your operator for today. At this time all participants are in listen only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions). I would now like to turn the call over to Ms. Sophie Argiriou, Director Investor Communications. Please proceed.

Thank you, Louisa. Good afternoon, everyone. Thank you for joining us. Earlier today we issued our press release announcing our earnings results for the first quarter of fiscal 2010 and our interim shareholder report containing management's discussion and analysis, and consolidated financial statements. These documents will be filed with the Canadian securities regulatory authorities and the US Securities Commission and are also available on our website at www.Gildan.com. I'm 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.

At this time I would like to remind everyone that certain statements included in the 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 would now like to turn the call over to Laurence Sellyn.

Good afternoon. This afternoon we announced our results for our first fiscal quarter which reflected a strong recovery from the first quarter of fiscal 2009, and were slightly ahead of our internal expectations as well as a consensus estimate of analysts filing with first call. EPS was slightly higher than the Company's internal forecast as the impact of lower than anticipated promotional activity in the US wholesale distributor channel and more favorable product mix more than offset the impact of the timing of replenishment of the US wholesale distributor channel which is benefiting activewear shipments early in the second quarter of the fiscal year. In addition, we reconfirmed our business outlook in sales and margin assumptions for the full fiscal year which we had provided in December.

Results for the first quarter continue to reflect the positive momentum begun in the third quarter of fiscal 2009. Before a small $0.01 restructuring charge related to the consolidation of our US retail distribution activities at our new retail distribution center at Charleston, South Carolina, EPS of $0.24 were significantly higher than $0.04 per share in the first quarter of last year when our business first experienced a significant impact from the economic downturn. And we are at the same level as the first quarter of fiscal 2008 which had represented our record earnings performance for the first quarter of a fiscal year for Gildan. Compared with the first quarter of fiscal 2009, the recovery in EPS was due to strong growth in activewear unit sales volume in spite of weak overall industry demand, significant gains in manufacturing efficiencies, lower cotton and energy costs, and more favorable activewear product mix, partially offset by lower activewear net selling prices.

Sales from the first quarter of fiscal 2010 amounted to $220 million. Up 19.8% compared to the first quarter of last year. Sales of activewear and underwear increased by 32% and sales of socks were essentially flat compared to a year ago. The strong growth in sales of activewear and underwear primary reflected 31.5% increase in activewear unit sales volumes due to higher market share in the US wholesale distributor channel, lower seasonal inventory destocking by distributors within the first quarter of fiscal 2009, and increased penetration of international and other screen print markets. The strong growth in unit volume sales was achieve in spite of an 8.9% decline in overall industry unit shipments from US distributors to US screen printers. The higher volumes, together with more favorable activewear product mix, were partially offset by an approximate 3.5% reduction in net selling prices for activewear compared to the first quarter of fiscal 2009.

Market share for all product categories combined in the US distributor channel based on the S.T.A.R.S. Report increased significantly to 61.3% in the first quarter compared to 57.1% in the fourth quarter of fiscal 2009 and 53.3% in the first quarter of last year. Unit shipments in international and other screen print markets increased by over 80% compared with the first quarter a year ago. And accounted for close to 25% of our total screen print unit sales in the quarter.

The rate of year-over-year decline in overall industry shipments in the US wholesale distributor channel appears to be moderating. Preliminary S.T.A.R.S. data for the month of January 2010 indicates a 1.5% decrease in overall industry demand combined with a further significant increase in Gildan's market share with our overall market share for all product categories combined increasing to 64.3% from 61.3% in the fourth quarter. Overall industry inventory from the US wholesale distributor channel at the end of the first quarter were in good balance. Distributor inventories decreased by 15.5% compared with last year and the availability of supply in the channel may be pressured if industry demand continues to stabilize. In addition, Gildan's share of distributor inventories was 49.8%, compared with our market share of 61.3%. So that screen printer demand for our brand significantly exceeds our share of inventories in the channel.

Sales of socks in the first quarter were essentially flat compared to a year ago in spite of the impact of discontinuing unprofitable sock programs and elimination of baby apparel and layette programs under licensed brands which did not fit with Gildan's business model. The impact of eliminating these programs was fully offset by the performance of continuing programs including the strong performance of a new Starter men's sock brand introduced by Wal-Mart during fiscal 2009.

Consolidated gross margins in the first quarter were 29.8% compared to 21.1% in the first quarter of fiscal 2009. The increase in gross margins compared to last year was due to significant gains in manufacturing efficiencies and lower cotton and energy costs which together increased gross margins by approximately 950 basis points. As well as more favorable activewear product mix which increased gross margins by approximately 270 basis points. These positive factors were partially offset by lower net selling prices for activewear which reduced margins by approximately 300 basis points as well as the impact of additional inventory provisions.

Our cost of cotton consumed and our cost of sales in the first quarter was approximately $0.60 per pound. Which continued to be higher than industry competition due to our decision to fully cover our fiscal 2009 cotton requirements before the plunge in cotton and other commodity costs in the latter part of 2008. Cotton costs in Q2 2010 will be slightly lower than Q1 and are expected to increase in the second half of the fiscal year in line with the recent increase in market prices for cotton which are impacting the apparel industry.

Selling, general and administrative expenses in the first quarter were $34 million compared to $33.5 million in the first quarter of fiscal 2009. The slight increase in SG&A expenses from last year was due to the impact of the higher value of the Canadian dollar on corporate administrative expenses and higher performance driven variable compensation expenses. Partially offset by the nonrecurrence of provisions for doubtful receivable accounts recorded in the first quarter of fiscal 2009, as well as lower legal and professional fees. As a percentage of sales, SG&A expenses declined significantly to 15.4% compared with 18.2% a year ago.

We generated EBITDA of $44.4 million and free cash flow of $42.5 million in the first quarter after investing $34 million in capital expenditures and paying $13 million for the provincial component of the Canadian tax settlement which had been recorded and fully provided for as a charge against earnings in the fourth quarter of fiscal 2008. Accounts receivable were reduced by $82 million compared with the fiscal year end. And we continue to be comfortable with our credit exposures. Inventory levels increased by $43 million during the quarter, primarily to build finished goods inventories of activewear in order to be well positioned to capitalize on demand in the peak summer selling season for T-shirts.

The main capital expenditure projects in the first quarter were the new retail distribution center and office building in Charleston, South Carolina, which was announced in December. And the ramp up of a second sock factory in Honduras, Rio Nance. Both of these investments are being undertaken to support our projected sales growth in retail and to continue to drive further efficiencies in our cost structure. During the first quarter we continued to make exciting progress in implementing our strategy to become a major full line supplier of basic family apparel for mass market and regional retailers. We are currently shipping the new strategic underwear program which we announced in December. This is a first underwear program under the Starter brand for Wal-Mart which is already available in certain key store locations and which will be rolled out nationally over the next month. The other major new program switch we announced in December and which are also currently being shipped to retailers are a new Starter performance sock program, three additional new sock programs for dollar General, and a private label boys underwear program for Target under the Cherokee brand.

As stated in our press release we are in active discussions to supply further new programs for mass retailers and other regional and specialty retail chains. These further programs under discussion include important programs to supply activewear as well as socks and underwear, as well as back to school promotions for the fall of 2010. Based on opportunities under discussion, we are comfortable that we are positioned to maintain strong sales growth in retail in fiscal 2011.

We believe the mass retailers now recognize and accept Gildan's unique positioning and advantages as a manufacturing partner as they consolidate their supplier base and introduce new private label brands. These advantages are as follows. Firstly, driving strong retailer sales to consumers due to incorporating enhanced quality features. Two, providing our retail customers with quality products at globally competitive prices which allow retailers to generate attractive margins. Three, strategically located large-scale capital-intensive manufacturing and efficient supply chain to provide flexibility and quick response in supplying large replenishment program's. And fourthly our excellent reputation for corporate social responsibility and sustainability which is an important element in the branding of retail products for consumers. In this regard, the packaging for the majority of our new private label programs carries Gildan's logo for sustainability and social responsibility and directs consumers to the web link www.GildanCSR.com. In addition to our private label programs for national mass retailers, we are continuing to make steady progress in expanding our Gildan branded products in approximately 1,700 retail outlets in regional retail chains as well as Wal-Mart stores in Canada.

We have reconfirmed our business outlook and sales and margin assumptions for the full fiscal year which we had previously provided in December. We have continued to base our outlook and assumptions on a continuation of weak overall economic conditions. And are therefore projecting zero growth in overall industry demand from US distributors to US screen printers for the balance of the fiscal year. Therefore we continue to expect to achieve full year sales revenues in excess of $1.2 billion, up approximately 17% from fiscal 2009. We also continue to be comfortable with assuming gross margins for the full fiscal year of approximately 26% which reflects the assumption that higher cotton costs in the second half of the fiscal year are not passed through into higher selling prices.

We have assumed a reduced level of promotional discounting in the US wholesale distributor channel compared to our previous forecast. We are now assuming that net selling prices in the US wholesale distributor channel will decline by approximately 4% from fiscal 2009, compared to our previous assumption of approximately 5%. This benefit is assumed to be offset by the impact of short term incremental manufacturing and transportation efficiencies resulting from the disruption of production in Haiti plus the cost of our aid programs which are together estimated to impact EPS by $0.02 to $0.03 per share, additional training and ramp up costs as we integrate more new retail programs into our manufacturing operations and the impact of the recent decline in the value of the euro.

Although Gildan has put in place short-term contingency plans to insure that it can continue to fully service its customers while the rebuilding process continues in Haiti, the Company has committed to play a proactive role in supporting its contractors and their employees, and to maintain our important strategic presence in the country as part of our global supply chain. Our contractors in Haiti have restarted production or are rapidly implementing plans to do so, including Palm Apparel whose main building was entirely destroyed in the earthquake resulting in significant loss of life among its work force. Palm is planning to restart production imminently at two new locations. All buildings for all contractors are being inspected and approved by Gildan. Our sewing capacity in Haiti is expected to be at approximately 90% of pre earthquake capacity by the beginning of our third fiscal quarter with the balance being replaced by the acceleration of the ramp-up of our Dominican Republic sewing facility.

In addition to support for contractor and Gildan employees, Gildan is providing financial assistance to its contractors to assist in the process of restarting and rebuilding their operations. In the absence of a market for bank financing in Haiti, Gildan has provided working capital and equipment financing to its contractors to support the process of rebuilding and providing employment in Haiti. Gildan's aid efforts in Haiti are being primarily directed towards providing direct assistance to our contractors and employees, the families of the workers who lost their lives in the collapse of the Palm facility, and our own team of approximately 40 employees who monitor quality control at our contractor operations and insure compliance with our code of conduct for labor practices. All our Gildan employees have been accounted for and are confirmed to have survived the earthquake without physical harm. Our aid and relief initiatives are outlined in detail in a separate press release which we issued this evening concurrently with our first quarter earnings release.

Our capital expenditure forecast for fiscal 2010 has been increased from approximately $130 million to approximately $145 million. Due to the acceleration of planned sewing capacity expansion projects required to support the Company's projected sales growth, planned further expansion of the Rio Nance IV sock manufacturing facility and additional investment in the biomass project in Honduras which is expected to generate further incremental cost savings. We continue to expect to have approximately 60 million dozens of production capacity for activewear and underwear in place by the end of fiscal 2010. And we continue to be comfortable to proceed with our investment in the Rio Nance V facility based on our confidence in our plans to penetrate the mass retail market.

We continue to expect to generate free cash flow in fiscal 2010 after undertaking our capital expenditure program. And as stated in December, during the course of this fiscal year we will evaluate our capital structure and options for the deployment of our cash balances in order to achieve maximum value for our shareholders.

In conclusion, we are pleased with our first quarter results and with our current momentum. We are continuing to increase market share in our screen print business and it appears that industry demand may be stabilizing. In addition, we are excited that the same competitive strengths and business model which have made Gildan successful in the screen print market are now being recognized by mass retailers. We continue to be confident that even without the possible benefit and potential upside of a turnaround in economic conditions and recovery in industry demand we are positioned to sustain strong sales and earnings growth in fiscal 2010 and throughout our current planning horizon.

Thank you, Laurence. Before moving to the Q&A session, I would just like to remind everyone to limit your questions to two or three 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 now ready to begin the Q&A session.

(Operator Instructions). And your first question comes from the line of Martin Landry with Desjardins Securities. Please go ahead with your question.

Good evening. In terms of your market share gains for January, the preliminary numbers at 64.3%, it looks like it's up 300 basis points sequentially. That's pretty strong. Have there been any unusual situation at your competitors that enabled you to gain such market share?

No, that is just basically just the momentum that we have behind our brand and we continue to gain market share quarter after quarter. It's just a continuation of just momentum we have today in the market.

Okay. On the international market it seems like it's been a little bit of helping you out to gain some sales. Do you have any numbers in the local currency you can give us or in terms of units that could give us little bit of color as to your performance?

No. I think we prefer to talk about it in aggregate, Martin. We mentioned the growth when you take the other screen print markets outside of our screen wholesale distributor channel in North America reflects growth of over 80% and in the quarter represented approximately 25% of our overall sales. But we are strong in all markets. I'm happy to say that it is not driven by one geographical area over another. All regions are showing comparable strong growth.

This is all part of our development. Since the downturn, we've put a big emphasis on developing these markets and we put the resources and inventory in the market required to support the sales, and this is just the momentum, again, we have in each one of the markets. And the opportunity is much larger and we believe this is going to be a growth opportunity for the Company as we go forward.

Great. Last question, any time line on Rio Nance V you can share with us?

We are in the process of starting the building. We will start construction most likely at the end of the second quarter. And then it's going to take approximately 9 months to 12 months for the shell and then equipment will be installed and we will be in the ability to start production. The facility will be a little more suited for our retail business particularly in the underwear category. As we grow our share and our volume in underwear, this will allow us to maximize our cost efficiency on that product category like we have been able to do in all the other product categories in wholesale, and continue to drive cost out of producing underwear and obviously make us more effective and more efficient in the long run.

Great. Thank you very much.

Your next question comes from the line of Sara O'Brien with RBC Capital Markets. Please proceed.

Hi, guys. Impressive market share in the wholesale channel. Just wondering, Glenn, how much do you think there is room to grow there, and is that contingent on continuing promotional pricing through the year? Or do you think with the market share you have now with stabilized pricing you would be comfortable holding it there?

I really don't want to answer that question. I think as far as we are concerned we are happy with our positioning in the market. What we have been able to do with our pricing is actually to bring stability to the market. Since the beginning of the year we have actually had probably the most stable pricing we've seen in a long time. And we are hopeful that our market share will continue to grow. We are not just focusing on this one market but we're focusing on our international markets which we put a major emphasis on again and all of the other markets which you see are growing significantly, and there's lots of opportunity in the other markets as well. And, of course, retail is a big big opportunity for us where we're continuing to grow. We will continue to grow everywhere and I'd rather not just pinpoint where we think our opportunity is.

Okay. And can you just comment on the international sales growth? When you ship to international is there a big push initially and then it's every quarter or so? Or is it constant replenishment the same way you would with your US market?

It's constant replenishment like our US markets. But one of the reasons why we haven't really pushed in international yet up until now is we never had inventory to support it. And really only when the downturn back in 2009 happened that we actually had inventory available to actually supply these markets. Since then we've actually allocated inventory, we've put the resources in place. And each one of these markets has grown, like Laurence said, we grew over 80% this quarter. We think that is momentum that is mounting, and everything is in place to continue driving the existing markets. But as well we are looking at new international markets, as well. We are not positioned today in Central America, for example, which is a market we are looking to expand into this year, and we have free trade into that marketplace. It's quite a large T-shirt market. We will continue to develop other markets as well and grow the ones we're in. That's really, we believe, a growth opportunity. Over time these markets could be as equally as large as even our current US wholesale distributor market.

Great. On the retail front, can you talk a little bit about the underwear program. I haven't seen the actual program that is in Wal-Mart now. But just wondering are you using regular open end cotton knit for that product? Or is there some kind of ring spun edition or some kind of different fabric?

Everything we have done basically in terms of our success with retail is obviously to offer better quality features, better margins to our retailers., and have a replenishment scheme and also market ourselves through a CSR platform. And where we positioned this program basically is probably the best value within their store today at the price they are offering it at. I'd rather not talk too much about it. The products are available in the store for everybody to go and see. We believe it's positioned perfectly with all of the characteristics that will make us successful in retail.

And last question on margin at retail, given that there is an enhancement to this product, would you expect to be able to ramp up to your traditional kind of gross margin expectations in the wholesale channel with your retail products over a year or so? Or is that a longer term or shorter term kind of process?

I think with the longer term we will definitely make the same type of margins in retail as we do in wholesale. Right now we are experiencing some startup costs in terms of developing and training the labor. There's a lot of people and resources that have been put into developing this program. And also there's some things that are a little bit longer term. Like, for example, when we build Rio Nance V, it will be the most state of the art underwear plant probably in the world, just like we have done in our sock facilities. There are other things that we will do to continue reducing our costs as we go forward. But some of them are a little bit bigger in nature in terms how we will be specific, and that's what our strength in the Company is, is building these big plants that support low cost production. And this is something that will be on-line and will continue to reduce our costs. The labor piece will take less time to enhance our margins but ultimately not only will we be able to support the program we have now but we're looking to support much bigger sales as we go forward, and this is just a base to lever off as we go into the future.

Great. And just clarification, the underwear program is across all Wal-Mart stores in the US?

It will be by the end of Q2, it will be shipped to all stores in the United States.

Great. Thank you and congratulations.

Your next question comes from the line of Jessy Hayem with TD Securities. Please proceed.

Thank you. Just continuing on the margins at retail, Glenn, would you be comfortable in any way providing what the margin differential is currently maybe in basis points relative to where your wholesale activewear margins are?

At one point we will cement out the margins. But at this point what information we provide externally we treat our whole business as one segment and I think it's premature for us to give out segmented margins. But activewear margins in the wholesale channel are somewhat higher than our overall margins, and the retail margins are a little bit lower.

Fair enough, thanks. And then just a clarification. Is this Target's first underwear program under private label as well?

No, they have other programs. Target has very extensive private label programs in general in terms of the whole branding strategy. But this is something new in terms of its pricing and its position within the store.

I'm sorry, in terms of the pricing and?

Under the Cherokee brand it's something new but they have had other brands, Morona and other underwear brands of private label that they currently carry in the store in the past.

Okay. Laurence, could you tell us what the additional inventory provisions relate to in your explanation for the offset to the positives in the gross margins in the quarter?

It was nothing really major in the inventory provisions. There was nothing really major in there. A lot of it related to products that are being replaced by new brands that are being phased out and that are being promoted.

Okay. And then finally, is there anything you can share with us as to your hedging position, whether you've started doing anything regarding cotton for the second half of the year?

We have at this point largely covered our cotton for the second half of the year.

You have. And just so I'm sure I'm understanding, you have lowered your expected promotional activity in terms of lower selling prices to 4% from 5%, you've assumed in your assumptions that the higher cotton costs prevail but you haven't assumed it's packed on into higher prices, is that correct?

No, we haven't. Right now, as we are assuming 4% less pricing, negative pricing as we go through the year and as we go through the balance of the year, we are obviously going to have higher raw material costs so that the margins will descend from where they are today, let's say, for example, through 2, 3, and 4.

Okay, thank you. I will circle back.

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

Good afternoon. Can you comment on the current replenishment of the US wholesale distributor channel which is supposed to benefit shipments in the second quarter? Is it stronger than anticipated and do you expect the demand to remain in the following quarters?

Typically in Q1 distributors are watching their inventory towards the end of the year. But as you can see our inventory in the channel was much lower than our share. We had 50% versus the 61% share of market share. Basically as we go forward, distributors need to bring inventory based on a go forward sale and as we go into Q2. So obviously there is going to be some demand, inventories that need to be helped up, for example, to support the go forward sales. Even in January our inventory position was still relatively in the same position because we also actually gained a little bit more market share.

Okay, thanks. And just to be clear, assuming restocking demand remains strong in the second half of the year, can you give us a sense of how much of the higher cotton costs you can pass through?

Right now our plan is not to pass them through as to absorb those higher costs of cotton. And that's where our plan is today. Right now we don't have a long term visibility in terms of where cotton is. It's really going up and down. In the last two days it jumped back up $0.05. It was on a downward trend. We don't want to be in a position that we knee-jerk pricing, for example, and all of a sudden cotton drops $0.15 a pound. We just need to have a little more exposure and it's premature at this point in time to make any conclusions on where pricing is and where pricing is going. One thing for sure is that we right now have good stabilized pricing in the marketplace and we'd like to see the commodity side of it stabilize, as well, which is pricing cotton as well as energy and so forth before we'd make any decisions of moving price up.

And Glenn, how much of your requirements have you purchased for the second half?

I think we've covered a large portion of our cotton for the balance of our fiscal year cost of sales.

Okay. And then last quick one, can you comment on your international expansion initiatives and which market are you targeting right now and where will be the most growth? Thank you.

Right now all our markets are growing pretty good. We're in Mexico, Europe, UK, Japan, Australia. We have some sales today actually in China although in a small amount but we are looking to actually grow that market, as well. And like I said earlier, we are looking to expand into Central America and we're looking to develop new markets at the same time. So all the markets have actually grown significantly. I think it was pretty well across the board. We had the 70% to 80% increases almost in every single one of these markets in the last quarter. It's not one market that's been fantastic. It's actually all of them working together.

Excellent. Thank you very much.

Your next question comes from the line of Omar Saad with Credit Suisse. Please proceed.

Thanks. Good afternoon. I wanted to ask for a follow-up question on the pricing that you discussed in your opening remarks. It sounded like the language softened a little bit. It sounds like the tone in the industry softened a little bit. You went from 5% to 4%. Is there a change happening in the industry relative to last quarter? Are the inventories getting cleared out a little bit quicker? Has there been some competition that's left? What's given you the comfort to back off the pricing dynamic a little bit?

I don't think we're backing off. What we've done is we basically, we set our prices at the beginning of the year to be aggressive. And not just to be aggressive in pricing but also just to stabilize pricing in the market which we have achieved. We spent a little less in discounting in Q1 because we stabilized pricing, which is a good thing. And part of the difference between our original projection and the new projection is going to be offset by the loss we had in Haiti, potentially a little bit on the euro, and as well as some additional small manufacturing costs for the startup of our underwear program. We don't have a crystal ball at this point in time. We think we are heading in the right direction in terms of stabilizing the market. And the wild cards are we don't know where raw materials and energy will go. As we go through this year we will see what happens and we will adjust our pricing accordingly.

Great. A follow up question, too, on the new retail programs you discussed in more detail in the release and in the prepared remarks, as well. Can you talk about in a little more detail about the program itself. The underwear program in Wal-Mart, is it one style, is it a number of styles, is it different colors and price points or sizes and men's and kids? Can you give us just a little bit more?

You will see it in the store. Basically it's a men's program. It's a T-shirt, a V-neck, a boxer -- two versions of the boxer, let's say. And it's also an athletic performance sock. That's primarily the program that Wal-Mart under the Starter brand, the new program we have under Starter.

All under the men's category.

It's in the men's category so far, yes.

Excellent. Great. And then you also mentioned, I think Lawrence did in some of his opening remarks, about some of the offsets coming from ramping up some of the infrastructure to support the retail. You talked about other programs, Target and some of these other things. Can you talk about those SG&A line items, things you need to add and have been adding, and building the infrastructure to support a much bigger retail business in the future?

We aren't really talking SG&A infrastructure, Omar. We are talking about integrating the retail programs into our manufacturing and ramping up sewing for different kinds of products.

Understood. So the SG&A side of it is pretty run rate kind of equation where we are now?

Yes. We feel we have infrastructure in place to drive our --

We have a couple of add-ons in personnel but we have a lot of synergies we will create through our distribution consolidation. In fact, we're actually going to reduce SG&A somewhat on the shipping side as we consolidate both our Martinsville distribution center and [crewette] distribution center into our new state of the art building that would be located in Charleston. And so overall we will continue to look for cost reductions from the distribution side. And there are going to be some ongoing development people who will need to keep growing the volume we have based on the opportunity we have at retail in terms of personnel sales and merchandising, et cetera.

Got it. Thank you. Good luck.

Your next question comes from the line of Bill Fisher with [Temagami], please go ahead with your question.

Hi, guys. Question for you. If the market improves a little bit from here and you are able to raise cost to cover your increased cotton costs in the second half of the year, what would be the rough earnings impact of that?

As far as we are concerned right now our model is to continue to keep pricing, like we said, where it is. It's premature for us to make any of those decisions right now. We need to go through the next two, three, four months to see where the commodity pricing will end up. And then from there decide we can decide what the strategy is going to be So we would rather not commit on what the upside would be.

Fair enough. Follow up question for you. On the Wal-Mart opportunity, I'm trying to just measure the sizes of the different buckets in terms of socks, underwear. And I know you aren't in fleece yet, but just to know what that opportunity set is as well. What are the relative sizes of each one of those relative buckets? Like, is underwear the same size as the socks, and is fleece the same side? How do they all differ?

You can go to a store and have a look and you can see the space allocation that each retailer has to each one of the different product categories. It will give you a good reference of the opportunity. But it's not really for us to comment on what the positioning and how our retailers are going to drive their store strategy. All I can say is that we believe that with our cost position and the method we have at retail, all of what we have to offer retailers, which is the enhanced quality features, the better margins, the replenishment and mass scale, and our CSR initiative, we believe there is significant opportunity continuing going forward. It's continued building on our momentum. And secure additional programs, hopefully, for the back half of this year that will incrementally increase our volume and keep the momentum going for next year, and I think that's really what we are focused on right now.

Thanks.

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

Thank you. Good afternoon. Couple of questions. First one, the state of the art underwear facility, Rio Vance V, what kind of capacity will it have? I assume it will be more since you need less fabric for underwear?

I'd rather not discuss that right now. One of the things we are trying to do, Claude, is we're going to hopefully have an investor trip between now and 12 months where we can bring you in and we can explain to you a little more what we are doing. But it's going to be large state of the art. It's going to be similar to our approach in terms of socks where we will have the globally lowest cost competitive facility allowing us to enhance our quality features and make better products at a better price. That's really our focus and it will be geared strictly to support our growth in the underwear category.

If it were to do T-shirts, would it have the same capacity as the two other textile factories over there?

The answer would be similar, but it would be a little bit different type of equipment we will have in the facility.

The other thing is I was looking at your inventory at the end of the quarter versus the same date last year and it's down probably 11%, 12%. Can you talk about it? Do you feel good about your inventory?

It's down in dollars but it's not down in units. And units, it's in very good shape because the costs is down on a year-over-year basis. It is actually up a couple million dozen.

Thank you very much.

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

Most of my questions have been answered. But I am curious if you can give us some of the expected savings from the biomass project in Honduras at current fuel levels.

We won't have any savings this year from the biomass in Honduras. The biomass in the DR is up and running now, which started in early January. And it's running at full blast as we speak. The two facilities, we have two biomass facilities going in in Honduras that probably will start this year but won't impact really our P&L until next year. Biomass is a big savings relative to [bunker], let's say for example, and it could be basically anywhere between $35 a barrel, let's say for example.

Thank you.

Next question comes from the line of Jim Duffy with Thomas Weisel Partners. Please proceed.

Thanks, good afternoon. Most of my questions have been asked as well. I did want to follow up a little bit on pricing. What are you seeing from competitors in the screen print channel? Are they following your lead on pricing?

Like I said earlier, pricing has stabilized, and so far pricing has stabilized. And we believe that it's a relatively good market right now. We are typically the price leader in the industry. So we will see what happens from this point on.

Historically when you've seen big swings in cotton pricing how has pricing from suppliers through the screen print channel reacted?

What's historically, cotton has been trading at a much slower level. What's important is that for our purposes as long as cotton goes up and stays consistent, it's going to be good for everybody because those costs will be passed on. What we don't want to do is have something that's going up and down too fast because that just makes it for a tough market and that could make for a disadvantage or advantage. But more of a consistent approach, I think, is something that would be passed on into the cost of goods sold over a period of time.

I understand. Final question, you may have mentioned this but what's the timing for the opening of the Charleston facility?

Charleston is actually open now. We are in the process of moving, we have two major distribution sites right now. One of them will be moved in the next couple months and then the second will be moved and everything will be in place before the back to school shipping.

Great, thank you. Good luck.

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

Good afternoon. Congrats on a very nice quarter. Just a follow-up on the international business and the direct to screen print business. Coming into the year you thought you might be looking for a million dozens incremental versus last year in each of those two channels which is, call it, $40 million. With the run rate in Q1, obviously it looks like you will achieve a lot greater. I was wondering if you could give us, perhaps, your updated thoughts on how much you can pick up in incremental dozens versus last year in each of the channels and maybe remind us what the dozens were sold last year.

Maybe we can get back to you in terms of the dozens sold last year. But I can say that the big momentum here is really in our international markets. That's where we are seeing the biggest momentum. Europe on fire. Mexico on fire, like I said before. Australia, some of these markets are up even 100%, 150%. That's really where we are seeing the biggest opportunity right now. And Laurence can get back to you on the exact numbers after the call.

So obviously you are looking at picking up a lot more than a million dozens this year in international?

We are excited about our opportunity. It's a little bit early. It's early in the year, let's say for example. So we have huge momentum and hopefully we will get some extra dozens. We just aren't sure at this point in time. It's early days.

And just one last question if I could. The Li & Fung deal with Wal-Mart, I know it's early in that stage and it's a relatively small percentage. I was just wondering if that changes the competitive dynamics at all, and how active they are in the categories that you compete in.

I don't really want to answer for Wal-Mart, that's a question for them. But I think that what they've said is that they are looking to consolidate their vendor base to fewer vendors and this is maybe one of their strategic moves basically to reduce the amount of vendors that are supplying them. I guess that's what they had in mind with Li & Fung.

Good luck. Thank you.

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

Good evening, gentlemen. I just want to touch on the second quarter here for a second. If we assume flat unit growth year-over-year in the second quarter and you improve your market share by, say, 1,000 basis points, and you have obviously this inventory, you're 50% of the inventory channel but you've got a 64% market share, that would translate into some pretty strong growth year-over-year in Q2, would it not?

We are projecting strong growth in Q2, yes.

But would it be in advance of the year-over-year growth in Q1?

I don't think we are providing quarterly guidance unfortunately, Doug.

Just on the international, I know it's been touched on a lot, is it around $35 million? Is that the number I get?

I didn't hear the question.

International, in the quarter you said it was 25% I think of your total sales or the wholesale sales. I get ballpark around $35 million? Is that in the ballpark?

For dollar sales for international?

Correct.

What are you including in international?

I think your sales were, you said $153 million in the activewear and underwear if you assume the underwear is retail. I'm just trying to get 25% of that.

I think 25% of that number is ballpark. That's ballpark.

Is it too early, even relative to talk about what your market share on an international basis is?

We don't have the same type of ability to get same market share information like we have in the US market. There's no formal process like in S.T.A.R.S. But we know that we are one of the one, two type suppliers ready in a lot of these markets, and maybe one, two or three I would say in each market that we are in today.

Would the rest of the world be equivalent about the size of the US wholesale channel?

I think the rest of the world is probably much larger at the end of the day than the distributor channel. We have done some preliminary work, just to give you an example, in China. We just had a study and the actual activewear market in China is larger than the US screen print market. The direct markets in which we're directing today, which is Mexico, we think that that market, in some of these markets there is markets that we can obtain because there is business which we can get, and there's just certain business that's very difficult to get because a lot of it is underground. Like in Mexico, for example. But I would say that overall the market opportunity for us is equal to our US distributor market for sure.

And would you anticipate the year-over-year growth to trend the same level for the rest of the year in the international market?

I would probably say maybe not because once we get to the height of the summer selling in the US basically it will be a larger portion of our percentage sales. But we're going to have significant growth relative to what we sold year-over-year in each one of those markets, I think is the way to look at it. So the same type of momentum will be there. But as an overall percentage of the market of our sales it won't be as significant.

And just a clarification, when are you going to actually start shipping product from that facility?

We will actually start the plant towards the, probably May 1, is probably a really good date that we're going to actually physically be in production, and then the plant will be wrapped up from that point on in stages as we go.

Perfect. Thank you very much.

Your next question comes from the line of Scott Rattee from CI Capital Markets, please proceed.

Great, thanks for very much. I just wanted to follow up on the last question here. When you were referring to the fact that the rest of world could ultimately be larger than the US distributor channel, the rest of world, is that specific to the markets you're currently in when you see the opportunity to grow there? Or is that actually every single market, the ones that you are in and the ones you aren't in?

That's just the ones we're in now.

That's just the ones you're in now. Great. Second question on SG&A, as a percent of revenue it's 15.4%. I think on the last conference call, I think Laurence had indicated that your long term goal is around 11% and that for this full year it would be something around 11.5%. Is that still what you're thinking?

Yes. The reason it's higher in Q1 is because of the seasonality of the sales, as we pointed out. The first quarter is the lowest seasonal quarter for activewear sales so SG&A is a higher percentage. But we are still good with our full year numbers.

Okay. And just on the CapEx with the incremental.

The only thing that would change that would be fluctuations in the exchange rate which would benefit or which would have a corresponding offsetting impact on sales. If the Canadian dollar increases or decreases our SG&A.

Okay. That's great. And then another question on the CapEx, the $15 million increase that you got. Just so I get an idea what the driver was, does that cover off the shifting demand from the sewing capacity that was interrupted? Or is that more a reflection of just basically looking out and seeing stronger demand and realizing that you need to develop and build to meet that?

It's more to build a demand. What we are doing right now is we are actually wrapping up our production so that we will be at an average run rate of 60 million dozen a year by the end of September. So our annualized production at the end of September will be roughly about 60 million dozens in activewear and underwear, and this extra sewing is to support that sales ramp up. And obviously a large portion of that is to support our big retail opportunity.

Okay, that's great. Thanks very much and great quarter.

Your next question comes from the line of Vishal Shreedhar with UBS. Please proceed.

Hi. I just want to get a sense of wholesale volumes. One of your peers said that wholesale volumes could snap back. That's obviously in contrast to your understanding that there is flat unit growth. I want to understand, if wholesale volumes did snap back would you have the capacity so source that?

I would say two things. Right now we are still in a very good inventory position. Would we be able to handle the whole snapback when the market has declined significantly? I think in the short term, if it came back all in one time next week, it would be a frenzy of T-shirts, but I don't think that's going to happen. But with all of the added capacity we have coming online, as we go forward, we definitely will be able to support additional capacity opportunities. In the short-term it would definitely firm up pricing for sure. If the market did come back in a big way.

Okay. Is it in your experience that the market is unpredictable and it could snap back at any moment, or do we have fairly good clarity here that it will be flat for the year?

I think that basically the market has stabilized. I think we will start seeing a pulse a little bit that we will start to see a little bit of spending against, because obviously the part of the market that shrank is not the everyday type business. A lot of it is the corporate promotional spending from major companies. And as that frees up and people start to spend again we will start seeing the market bounce back. Right now at least we have now stabilized the market. It is no longer declining and hopefully from this point on we'll start seeing an uptick as we go forward into the future.

Okay. Thank you.

With no further questions in the queue, I'd like to turn the call back over to Sophie Argiriou for any closing remarks.

Thank you. Just before ending the conference call, I'd like to remind you that management will remain available tonight to take any follow-up questions. As tomorrow, you may know that Gildan will be holding its annual shareholders meeting at 11 AM Eastern time in Montreal at the Centre Mont-Royale. With that, we would like to thank everyone for joining us and we look forward to talking to you again at our next earnings conference call. Thank you and good night.

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