Gildan Activewear Inc (GIL) 2010 Q3 法說會逐字稿

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

Thank you, Lacy. Good morning, everyone, and thank you for joining us. Earlier this morning we issued our press release announcing our earnings results for the third 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. Joining me this morning are Glenn Chamandy, our President and Chief Executive Officer, and Laurence Sellyn, our Executive Vice President and Chief Financial and Administrative Officer.

Laurence will be providing you with overview of our third quarter financial results and our business outlook. Before we begin the call, I would like to remind everyone that certain statements included in this conference call may constitute forward-looking statements within the meaning of the US Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve unknown and known risks, uncertainties and other factors which could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. We refer you to the Company's filings with the US Securities and Exchange Commission and Canadian Securities Regulatory Authorities that may effect the Company's future results. I will now turn the call over to Laurence.

Good morning. Today we are pleased to announce another strong quarter. EPS was a record for a fiscal quarter at $0.54 per share, up 45.9% from last year and up 68.8% after adjusting last year's results to exclude the $0.05 impact in the third quarter last year of a prior year income tax recovery. Net sales revenues of $395 million were also a record for a fiscal quarter and up 28.4% compared to the third quarter of fiscal 2009. Our record quarterly results reflected the strong recovery in market conditions in the US screenprint market, with overall industry demand increasing by 10.5% compared to the third quarter of last year. Gildan's market share was 63.9%, up from 55.7% in the third quarter of fiscal 2009, in spite of further depleting activewear finished goods inventory levels. Due to our low level of inventories, we ended the quarter with a significant backlog of open orders. Our share of distributor inventories at the end of the third quarter was 52.5% compared with our market share of 63.9%.

Overall inventories in the distributor channel as reported by S.T.A.R.S. continue to be down compared to the end of the third quarter of last year in spite of the growth in end use demand. The tight supply demand balance of the industry combined with inflation in cotton, spun yarn and other purchase cost inputs, such as polyester, chemicals and dye stuff, resulted in low promotional discounting. Net selling prices in the channel increased by close to 2% compared to the third quarter of last year, in spite of the reduction in list selling prices, which took effect at the beginning of the fiscal year. In addition, a selling price increase averaging approximately 3% was implemented on July 5, 2010, although we are not applying the increase to back orders placed before the effective date of the price increase. Some of the growth in shipments from distributors to screen printers at the end of the third quarter was likely due to anticipation of the July selling price increase. Preliminary S.T.A.R.S. data for July shows a 2.8% increase in industry demand for T-shirts.

Sales growth in our international and other screen print markets, including non-retailer private label, continue to be very strong with unit sales growth of approximately 60% compared to the third quarter of fiscal 2009. Unit shipments of underwear and activewear for retailers more than doubled in the third quarter compared to a year ago. The growth in activewear and underwear sales was partially offset by lower sales of socks, primarily due to short-term servicing issues due to increased reliance on third party contractors during the ramp-up of Rio Nance IV and the initial ramp up of the new Charleston retail distribution center, combined with the approximately $2.5 million impact of lower pricing due to our shift towards a more basic sock product mix, which fits with our high volume basic manufacturing model.

In spite of the lower year-over-year sock sales in the third quarter, we continue to be satisfied with the sell through performance of our major continuing sock programs. July has been a strong month for sock programs produced by Gildan, with sales growth of approximately 15% compared to last year. We have significant placement in both socks and underwear in back-to-school and we are forecasting that sales in all retail categories in the fourth quarter will be significantly higher than the fourth quarter of last year. We have continued to obtain new retail programs for fiscal 2011 and have now secured new programs in all categories for fiscal 2011, which are expected, together with our projected growth in the screenprint market, to fully utilize our planned production capacity in fiscal 2011.

Gross margins in the third quarter were 27.1%, up from 24.4% in the third quarter of last year, as the impact of more favorable activewear net selling prices and product mix, together with slightly lower cotton cost, more than offset the negative impact of the initial ramp up of new retail underwear programs. Supply chain inefficiencies due to the temporary outsourcing of sock manufacturing and continuing supply chain inefficiencies related to the Haiti earthquake. SG&A expenses were also negatively impacted by inefficiencies due to the initial ramp up of the new retail distribution center.

We would like to discuss in greater detail the impact of the Haiti earthquake and the inefficiencies effecting the short-term profitability of our retail products. When the Haiti earthquake first occurred, we expected that we would continue to have sufficient inventories to service anticipated demand in the screenprint channel in the second half of fiscal 2010, even though we recognized that we would incur inefficiencies due to factors such as the need to take production downtime in our Dominican Republic textile facility, overtime in our central American sewing plants and additional transportation and duty costs. However, the sudden and unforeseen recovery in market demand in the US screenprint channel occurred before inventories could be rebuilt, resulting in lost sales opportunities in the second half of the fiscal year. We estimate the total negative impact of lost sales opportunities and supply chain inefficiencies due to the Haiti earthquake to amount to approximately $19 million or $0.16 per share in the second, third and fourth fiscal quarters, of which a maximum of $8 million or $0.07 per share is recoverable under our insurance policies, so that the net impact in earnings in fiscal 2010 will be approximately $0.09 per share after the proceeds from the insurance recovery. We are currently assuming that the insurance recoveries will be approved and recorded in the fourth quarter.

The retail inefficiencies in the second half of the fiscal year relate to the initial ramp up of new underwear programs, the transition to the new retail distribution center and the requirement to outsource sock programs due to current internal capacity constraints. These inefficiencies impacted Q3 by approximately $0.04 per share and are projected to negatively impact Q4 by approximately $0.05 per share.

It should be noted that the additional costs incurred in fiscal 2010 due to the Haiti earthquake, the introduction of new retail products and the ramp up of the Charleston distribution center are not expected to recur in fiscal 2011. In spite of the stronger than expected sales of activewear in the third quarter, we have maintained our projected sales revenues for the full 2010 fiscal year at approximately $1.3 billion, due to low activewear finished goods inventories to service demand in the screenprint channel in the fourth quarter. Full year unit sales volumes of activewear and underwear are projected to be up approximately 30% compared to fiscal 2009 and unit sales of socks are now estimated to be flat compared with last year, due to lower than projected sales of socks in the third quarter. We had previously projected the sales of socks would be up approximately 6% over fiscal 2009.

Gross margins for the full year are now expected to be approximately 27.5%, up from our previous full year forecast of 27%, reflecting more favorable activewear selling prices and product mix than previously forecast, partially offset by the lower than projected benefit in the quarter from the July 5th selling price, which has not been applied to back orders. Results in the 4th quarter are assumed to include the proceeds from the insurance claim.

Although it is premature to provide sales or margin assumptions for fiscal 2011, we continue to believe, as we previously stated in our Q2 conference call, that higher selling prices combined with the impact to projected manufacturing efficiency gains from new capital investments, and the nonrecurrence of inefficiencies incurred in fiscal 2010, including the improved profitability of new retail products, will fully offset increases in the cost of cotton, energy and other purchase costs inputs. The cost of cotton and cost of sales in the first quarter of fiscal 2011 is projected to be approximately $0.78 per pound.

As indicated in our Q2 conference call, we expect to exit fiscal 2010 with production capacity for activewear and underwear of more than 60 million dozens in our Central American and Caribbean Basin manufacturing hubs, plus a further 2 million or 2.5 million dozens of capacity in Bangladesh. We currently estimate that approximately 2 million dozens of our planned production in fiscal 2011 will be required to rebuild activewear finish goods inventories back to more optimal levels to service demand. We have begun the development of the Rio Nance V facility to support our projected further sales growth in activewear and underwear beyond fiscal 2011. The ramp up of the Rio Nance IV facility is still planned to be completed by the beginning of the fourth quarter of fiscal 2011, which will provide end year sock manufacturing capacity of approximately 65 million dozens in fiscal 2011.

We are currently building up the production and operating efficiency of our Bangladesh factory, which we are developing as a low cost manufacturing hub to drive our international sales growth in Asia and Europe. Bangladesh was selected as the initial site for our Asian manufacturing hub because of its low manufacturing cost structure and duty free access to its freight logical geographical markets. During the third quarter it was confirmed that Bangladesh now has duty free access to China. Our operations in Bangladesh have not been affected by the recent labor unrest in the country.

We generated $82 million of free cash flow in the third quarter and ended the quarter with cash and cash equivalents in excess of $200 million. It is still the Company's intention to discuss our capital structure and use of cash in our December conference call, after we have completed our strategic plan update with our board. In conclusion, we have reported strong quarterly results with record sales and earnings and significant free cash flow generation. We've increased our market share, market conditions in the screenprint markets have recovered and are now very favorable, and we believe that we remain on track with all of our growth strategies, which we have communicated to shareholders.

Thank you, Laurence. We are now ready to start the Q&A session. In order to give everyone the opportunity to ask questions, please limit the number of questions you ask to two to three and we will be happy to circle back for another round of questions as time permits. Operator, please walk us through the logistics.

(Operator Instructions) And our first question comes from the line of Jessy Hayem with TD Securities. Please proceed.

Thank you, good morning. I was looking for a bit more color, Laurence, maybe, on the decline in sock sales in the quarter. You mentioned, I guess, obviously the increased reliance on third party that affected your sales, but did you, were there any loss programs in any way or did this affect your relationship with retailers in any way?

Hi, Jessy, it's Glenn. No. What occurred is that as we delayed initial build up of Rio Nance V in '09, part of our projected production this year was to go out and use third party contractors to support our sales volumes that we anticipated and using outside third party contractors. And we were a little late on delivery, these contractors were a little late on delivery on products to us during our third quarter, which affected a little bit our in stock levels at our retailers but that is sort of behind us now. So we missed a little bit of opportunity. In the big scheme of things it wasn't that much, that many dozens, let's say for example, in our overall capacity. However, we did provide and supported all of our initial launches to back to school on time as planned. And our initial sell through in July is up 15% on a year-over-year basis.

And we believe there is continued upside based on the amount of promotional activity that we have for back to school in this season. So we don't think we -- we have gone over the hump. It was a short-term blip in terms of our service and it was also combined with the fact that we went and consolidated four distribution centers into our new state-of-the-art facility in Charleston. That impeded our ability just to get the products on time to service some of the demand. But that is all behind us right now and our service levels and our in stock levels as we speak are all in the high 90% levels. And we 100% completed all of our major back to school shipments with retailers.

Okay. And then just, I guess, a clarification on that, you are though still using third party contractors until the end of this quarter until your Rio Nance IV is ramped up, I guess.

Yes, we will.

Okay. And then just a clarification, I guess, on the price realization, again, on the socks. I thought we were pretty much, we had pretty much lapped this, I guess, going to more basic mix issue in the second quarter. Am I correct in that and are we lapping this then, this past quarter in Q3 or do we still see that effect in the coming quarter?

There was one other big program which was the last major program that we exited at the beginning of this quarter. So, I think we can say now that we have anniversaried all of the discontinued programs.

Okay. Just one more (inaudible) go back, you mentioned, I guess, you secured new programs in all categories at retail for fiscal 2011. So do we read into this, I guess, that there has been expansion into activewear programs at retail.

Yes. The way we project next year is that we are going to have a significant growth in activewear. Activewear volumes should be probably threefold next year relative to this year. And we are projecting at least double on our underwear sales and socks we'll be able to fill the capacity that we stated on our end year capacity should be filled and sold.

Great. Thank you very much.

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

Hi, good morning. With reference to your CapEx, you're going from $155 million to $130 million, will the incremental $25 million in reduction be picked up in 2011?

Yes. And most of the reductions in CapEx are timing from equipment purchases. A lot of our machinery people, because of the downturn, actually, in 2009 has been very tough for us to get the equipment in on time to support our aggressive build up mode. So it's just more a carry over into next year basically.

I would say there is about $5 million worth of small projects that have been eliminated that won't impact 2011.

Okay. My next question, can you give us some commentary, Glenn, on the activewear programs in the retail channel. Like are you still focused on the big retailers and are you, is restocking still ongoing in the wholesale and retail channels?

Sorry, do you want to just restate your questions. You are talking about both wholesale and retail not one question.

Sorry. So can you give us some commentary on the activewear programs in the retail channel and are you still primarily focused on the big retailers?

Well, our plan hasn't changed. We are focused on the whole retail market in general. What we are doing is we are providing private label to big box retailers and we are driving our branch strategy with this more small regional accounts. And in both cases, we have been very successful in developing and getting incremental business as we speak going forward into 2011. So, our activewear business is going to grow significantly in both areas and that's in both T-shirts and then sweatshirts. And we are projecting to more than double our underwear business on a year-over-year basis going forward into next year as well.

Okay. And it leads me to the same question as before, is restocking or are you seeing any evidence of restocking going in the retail channels?

I think the retail inventories, as far as we are concerned at our level, are in good balance. In fact, we have been tight on -- part of the miss for us in socks in the third quarter was that we didn't have enough inventory to support the opportunity. So, I would say inventories are in very good balance and we are projecting significant increases in Q4 and going into next year.

Okay. Well, thank you very much.

And our next question will come from the line of Eric Tracy with FBR Capital Markets. Please proceed.

Good morning. Thanks for taking my questions. If maybe we just focus on the capacity, I just want to make sure I'm clear, Laurence, in terms of the commentary on next year, sort of the opportunities for expansion relative to the various facilities being ramped. Could you maybe just sort of clarify in total what the expansion should look like from sort of end of FY 2010 through FY 2011.

This is Glenn. What we had said is that we are currently ramping up our existing Caribbean textile facilities that will exit 2010 at just north of 60 million dozens worth of activewear and underwear. In our Bangladesh facility, which primarily makes activewear type products, end year next year we will produce roughly about 2.5 million dozens. That is a ramp up and we will exit next year roughly about 3.5 million dozens in Bangladesh. But end year it will be roughly about 2.5 million dozen. And our sock capacity end year next year with the ramp up of Rio Nance IV will be roughly about 65 million dozens end year.

Okay. So the year-over-year kind of growth in capacity, you are obviously going to fully utilize but just --

So year-over-year, what we said this year we produce an activewear type products and underwear roughly about 52 million dozens end year and in socks roughly about 52 million dozens as well.

Okay. And then just turning to gross margin, I guess, kind of beyond, obviously, the price increases and sort of incremental inefficiencies you get next year to offset the higher input costs, just at the core how should we think about, relative to mix and as you continue to sort of penetrate the mass retail channel, sort of the private label margins, just how we should think about the puts and takes there?

What we have always said is that our objective is to achieve comparable profitability with our retail products as we do with our products for the screenprint channel and one of our -- we believe that all the inefficiencies that are impacting this year with the introduction of the new products will be eliminated in 2011 and then focus will be to achieve our profit targets for our retail products.

And not only the inefficiencies really for -- that we [incurred] that Laurence had mentioned earlier, but also the ramp up of Rio Nance IV will give us significant cost advantages going into next year as well, so the combination is too will enhance our margins significantly in retail.

Okay. And I don't know if I will get this, but I was just going to -- in terms of the specificity of one of the retail programs, just the starter business, any sort of color around beyond the sock business, sort of traction you may be getting in some of the other categories.

Well, we are continuing to grow all the categories. So like we said, we are looking for -- we are going to get significant increases in all categories next year. A lot of that business has already been placed with us. So we are pretty confident in terms of our growth opportunity. As far as Starter's concerned, it's doing very well. We had a major roll out in back to school. If you go to a Walmart store you can see the amount of merchandise today that is on the floor both in underwear and socks and we are looking to expand within the product category and also develop new products within their stores.

Do you guys have all of the socks and underwear business for the Starter program.

We have all the underwear business, but part of the sock business is provided by another supplier as well.

Oaky. All right, great. Thank you, guys, best of luck.

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

Thank you. Good morning. On the -- do you hear me.

Yes, we hear you.

Okay. The insurance recovery and the earthquake in Haiti, that's what I want to talk about. Is all the insurance recovery going to be book-in gross margin and then when you look at it from a quarterly standpoint, the impact of the earthquake, is there any way to split between Q3 and Q4. Was there any impact on Q2 and do you include also -- I think you've spent to support the families over there and help the people over there because, obviously, of all the suffering that has been going on there, that's included in your costs.

Yes. So, we said that the total impact, Claude, was about $0.16 per share. So I'm talking (inaudible) per share That breaks down about $0.10 from the lost sales opportunity through not having the production we lost through the earthquake to sell into this strong market and about $0.06 of inefficiencies. And I would say the breakdown of that is probably $0.03 in Q2, $0.01 in Q3 or $0.015 in Q3 and $0.015 in Q4 but equally divided. As far as the lost sales opportunities are concerned, this is product that would have been sold by distributors in the fourth quarter. Under normal circumstances, it might have been purchased by distributors in Q4 so we fill in [for the] Q4. In the current circumstances of a very tight supply environment, we believe that this product would have been purchased in Q3 and held in the inventories by the distributors at the end of Q3 and this is evidenced by the very high open order position that we had at the end of the quarter and also by the proportionally low Gildan inventories that were in the channel. So in that situation we would have -- in spite of the very strong Q3 we had -- we would have sold that additional product into the distributor inventories at the end of the quarter.

And the insurance recovery, is that all included; it is going to be all included in gross margin?

Yes.

Okay. Just a quick one, if you could give us some guidance on tax rate SG&A as a percentage of sale and depreciation and amortization for the year?

Well, SG&A was about 11.5% of sales. Tax rate for the full year about 2% and depreciation, no change from -- it [would actually] be a little lower than what we've said before, but not a lot. We are probably looking for the full year depreciation a bit less than $70 million.

Okay. Thank you very much.

And our next question will come from the line of Hugues Bourgeois with National Bank Financial. Please proceed.

Good morning. Thank you for taking my questions. Good quarter. Your market share in the wholesale distributor channel is obviously significantly up from last year, but sequentially a little under pressure. From what you saw in July and what you are seeing currently so far in August, are you on your way to recuperating what you may have lost a little, percentage points you may have lost sequentially?

I don't think we would describe a 64% market share, Hugues, as being under pressure.

No, but I mean from 64.4% to 63.9%.

Well, that's moving the needle a little bit. But look, I think that we are pretty happy with our results. There is definitely a tightness of inventory in the market as we go into Q4. So, I think that maintaining the level of market share we have now in a growing market is -- and I think that is a point you also have to take into account is that the market grew 10% basically, which -- . So keeping the market share growth in a growing market, we won two ways. We won by additional market share, but we also were able to capture the growth in the market on a year-over-year basis. And the thing to remember is that as we go into forward, if we have continued come back in terms of the over all market, the market is down almost 20% since its height over '08, '09 the market declined almost 20%. So as the market continues to come back and our share keeps remaining at the 64, 65, it's a positive impact to top line sales force as we

And, Hugues, I think if you look at the whole history of the Company you will see that while the annual trend of our market share has been to reflect significant increases every year, there have been minor variations from, sequentially from one quarter to another.

I appreciate that. I do think your market share is impressive. Don't get me wrong on that one. In terms of socks, you seem to be in terms of products where you want to be right now. Obviously on the activewear side we are talking about price increases. Do we have the same dynamic in the socks business?

Yes. We believe that there is -- we contain price increases in all of our categories in which we are selling both in retail and in wholesale.

Great. Thank you.

And our next question will come from the line of Candice Williams with Canaccord, please proceed.

Hi, there. I was wondering if you could help me with something. When you talk about price increases and the manufacturing efficiencies being able to offset higher costs and other input costs are you referring to gross margin percent, gross margin dollar or are we looking at this in a EBITDA percent or EBITDA dollar. I'm just not sure what to benchmark it to.

We are talking in terms of EPS or margins.

Okay. So dollar values. And with -- and while it seems like the duty side at Bangladesh is working very well for you, does the -- and there hasn't been any problems for you, does the increase in the overall minimum wage change your views on Bangladesh at all and the ability for them to be more competitive than other areas you'd originally looked at in Asia.

Well, first of all, the increase in Bangladesh wages, after the increase, which -- the way we operate our facilities from a CSR perspective, we pay significantly more than the minimum wage. So the impact to us is not great in terms of the increase in wages. But even after the increase in wages, Bangladesh's wages are only one-third of what the wages are in China. And the reason why we looked at Bangladesh, let's say, versus other places and taking China for example, is that the wages are more favorable, but also the energy cost in Bangladesh is also one-third of the cost of what it is in China, because Bangladesh operates with natural gas versus in China, which they use coal to generate both electricity and steam, which is not environmentally friendly.

And also if you look at the opportunity in Bangladesh, because we can buy cotton from anywhere in the world and make our raw material there, it gives us a little bit more of a opportunity to be more favorable in terms of our raw material costs. And in China, if you are trying to supply the domestic market, you have to use Chinese cotton because there is restrictions on imported cottons coming into China. So the actual cotton cost in China is significantly more expensive than the world costs, let's say for example, because it's somewhat controlled by the Chinese government. And with Bangladesh we can ship all of our Asian markets where we think there is big opportunity. Japan is duty free from Bangladesh. Australia is duty free from Bangladesh. Europe is duty free from Bangladesh and most recently in July, now we can ship China. So you know our whole concept is that we can ship really all of our markets very competitively from Bangladesh. So, it's definitely one of the more attractive places to be located.

There is actually a lot of movement from even Chinese manufacturers who are moving to Bangladesh. Today if you go to the hotel, you will see a lot of factory owners are actually looking to put their facilities up there because of the higher raise in cost in places like China. So we believe that we've picked the right spot and we are very excited about our whole development in the region. And we are also looking at other areas where we can continue developing and lowering our cost structure to support the growth in developing the hub in Bangladesh.

And as well, just that in our acquisition rational and economics, we did reflect higher labor rates and the cost of compliance with all of our social responsibility criteria and these are more than offset by efficiency gains resulting from -- applied in our operating disciplines into the factory.

Okay. And then one sort of -- one final question and it relates to Walmart's push towards RFID and one of the products included or up for discussion is underwear. Is there any expected impact if that goes through?

All of our -- RFID is basically going to be implemented through the whole men's department. So all the products that we are supplying to them in the men's, which is men's socks, underwear, we are providing the RFID. But Walmart has compensated us for the additional cost of applying the RFID to all the products.

Great, thanks for your help.

Thank you.

And our next question will come from the line of Jim Duffy with Stifel Nicolaus. Please proceed.

Thank you and good morning. Glenn, given the disconnect between demand and industry capacity, can you comment on the competitive dynamics you are seeing in the landscape for retail programs?

Well, I think that overall I would say that, and not just in retail, I would say also in wholesale, I think inventories are still very tight and supply is very tight in all categories and last conference call in May we discussed somewhat the yarn shortages in the marketplace and not just in the North America market but as well as the global market. And the price inflation associated with buying raw materials has created, I think, a tight balance in all marketplaces. So, I think that the service levels, both in retail and in wholesale, are relatively tight, not amongst our -- as an industry wide phenomenon, I would say. There is still very little yarn on the marketplace today.

We have been able to secure our yarn requirements to support our capacity build up, but there is definitely a void of raw materials in the market, which is going to be helpful, I think, in continuing the momentum going into 2011 in terms of the supply and demand balance. I think things will remain tight going into next year. And, also, create opportunity for us at retail because we had a short-term blip in socks. As we continue to work closely with our retailers and present ourselves with our effective supply chain that is so efficient and close in central America, we believe that is going to create opportunity for us into 2011 and beyond.

Okay. And then you have long-term contracts on yarn spinning capacity, correct? And what is the relative capacity you have versus your expected ramp in finishing capacity into fiscal 2011 on the yarn spinning side.

We plan in advance all of our capacity. So as we anticipated the build up to -- from our 52 million to our 60 plus million, we work together with our suppliers in advance so that we can -- as they invest in equipment, we work together with them to bring that capacity on. So we've secured our capacity based on previous commitments made to them and so we feel -- we are getting and building our capacity accordingly. A lot of the yarn that is being sold in the market sold on the spot basis. So if somebody didn't have a commitment, let's say for example, or didn't have a long-term contractual agreement, then that particular person could be short in not getting the fulfillment that they required to support their needs.

Typically there is always been an overcapacity of raw materials, not just in North America, but even in Asia. You never had an issue where you couldn't find raw materials. And that was for years. So this is really the first time, I would say, in many years that there's been this type of phenomena where raw materials are this tight and I think it caught a lot of people off guard.

Okay. That's helpful. Thanks. And then shifting gears a bit, on the sock business, can you comment on the margins you are seeing in the sock business and how this compares to your plan or objectives for that?

We don't provide margins by product. Our sock margins are below the overall average of 27%, but moving in the right direction. Underwear margins as we go through the initial ramp up are very low in Q3, but as we said earlier, our objective is to achieve our margin targets for all our retail products in 2011 and justify the ROI in our new capacity expansions.

And if you look at really this year, in our end year production, let's say for example, of socks of roughly 52 million dozens, 53 million dozens, 20 million dozens of those products were not produced in our state of the art Rio Nance facility. They were produced either in the US or using high cost contractors. And there is a significant difference in cost between our Rio Nance facility and US or high cost contractors. So, as we increase Rio Nance IV, those 20 plus million dozens will bring us significant incremental margin to overall sock business as we go forward into next year.

Great. Thanks very much.

And our next question will come from the line of Omar Saad with Credit Suisse. Please proceed.

Thanks, Good morning. Nice quarter. A couple questions. First I wanted to ask about the pricing environment. I know it sounds like it's pretty favorable with costs coming up. You have had a lot of success, I think, raising prices and it sounds like next year that will help offset the higher cost as well. But I wanted to ask on a demand side, are you seeing the higher prices or do you expect to see the higher prices affect demand at all, how it flows through the channel and the end users and the screenprinters, do you think there is a risk that higher pricing could change the demand profile?

I think that on the contrary. I think that even after the price increase, which was insignificant, 3% overall is not a huge price increase relative to the end price of a product in the marketplace. We sell T-shirts for $1.50 and they retail. By the time they get to the retail store they are $22 to $30 a piece. It's not a huge amount of money that was passed on to the end users. But what has happened is that there's with the global inflationary pressures, the pricing in, for example, in Asia has gone up 25% to 30% on basic T-shirts, for example, over the course of this year, which is much more significant than the 3% that we projected. So, we today are -- we were globally competitive. We are even more so globally competitive today. And therefore, what is going to end up happening is that's creating a lot of demand opportunities.

People that were buying products in, let's say, Asia, for example, are now looking to buy products at home, because even after our price increase, the price cost is less expensive to buy it from this hemisphere than to bring it in from Asia. And that is not necessarily, let's say for example, in our market, which is our wholesale market because there is really no imports in our market, but that is more related to retail type branded products, let's say for example, so we think that the market conditions are still conducive. And I think if cotton stays where it is today, at the $0.80 a pound level, there could be room for even additional increases as we go forward. But we are going to monitor it. The price increase that just came effect in July 5th is a little premature for us to evaluate how demand will be affected or not, but we don't think it will be affected at all.

Very interesting. Very interesting. Thanks. Another question, just shifting gears little bit, the new channel, Development International, the other screenprint channel's up 60% in the quarter. Could you add a little bit more color there. How big is that business now? The growth rate obviously is quite impressive. And kind of what is your medium to long-term outlook for those channels?

Well, that's the growth opportunity for the Company. We are continuing to grow market share in our core business, our distributor market, but international growth for us in places like Europe, Mexico, Japan, China, for example, which inputs the, with the ability for us to service these markets more effectively, we really focused on -- I'm really focusing on these markets as part of our overall growth strategy. What we've communicated to investors in our -- in the past is that we have projected roughly about 50 million dozens in overall production over the -- in our five-year planning process, let's say for example. We do believe that there is significant upside to those numbers, but that is sort of, I think, what our projections are at the current level.

Okay. Great. And then last question, at Walmart, with some of the management changes that have happened there, have you had discussions with them and do you have any insight in terms of whether there will be any changes to how they approach the apparel side of the business that you are involved in.

Well, we've had discussions with them since the changes have occurred. We don't believe there will be any impact to ourselves. They just renewed their Danskin license. And the fact is that we believe that their focus is going to be go back to basics and we're a basic provider. So, as far as we are concerned, we think that there's going -- that it will create new opportunity with them and our positioning, we believe here is we're aligned with where they are going.

Okay. Thanks.

Your next question will come from the line of Mark Petrie with CIBC. Please proceed.

Hi, good morning. You actually just touched on both of these, but I am wondering if I could just get a little bit more color. Given that you are near fully utilizing capacity for next year already or expect to, can you just talk a little bit more about your expected growth in the non-retail direct channel and if that sort of gets pushed off to fiscal 2012 or if you still see some near-term growth there just from a supply perspective as opposed to demand?

You are talking wholesale.

No, talking retail.

You're talking retail?

Yes, in the non-retail direct screenprint.

Yes. Well look, based on our projected volume increase next year, we projected a significant increase in our overall wholesale business, which will be primarily that segment as well as our international segment and as well as some additional market share gains in the wholesale market. So, we have the allocation of our overall dozens from where we are this year to next year is including a good growth opportunity in our overall wholesale business combined.

Okay, thanks. And you talked about the mix shift in socks. Just wondering how that sort of carries over to other categories. Obviously, Walmart is focusing on basics. Wondering if you can just sort of speak more broadly?

Most of our other products are basic. Underwear is underwear and the products that we are selling in activewear are really the same products that we sell into the distributor channel, just a little bit different packaging, let's say for example, to bring it to retail, but it's all in the basic category.

Okay, thanks.

Thank you.

And our next question will come from the line of Kenric Tyghe with Raymond James. Please proceed.

Thank you, good morning. A quick -- just with respect to the revisions to your 2010 gross margin for the balance of the year, obviously a positive. Is the fairly modest change to 27.5%, is that fair to assume that your backlog orders, in other words the orders you will not be applying the price increase to, were fairly material and is that the biggest driver of the steady modest improvement given that the improvement, obviously, is still a positive? I just want to sort of better understand the dynamic on the fairly modest increase in gross margin.

Well, 0.5% on a full-year basis is a pretty big number. The whole 0.5% comes from higher selling prices in the second half of the year. You have offsetting favorable mix and unfavorable efficiencies that we discussed in the call, but the higher selling prices, the lower promotional discount is what's driving the annual increase in the gross margin end rate.

So -- and Laurence, just one further one. Just with respect to 2011, the reference to the selling price environment, is that just including the full year impact of the price increases already taken and excluding any potential further price increases given the current supply shortages and/or demand dynamics in the channel?

You've got a lot of moving pieces, Kenric. Obviously what happens in pricing will depend on where cotton ends up. But if cotton stays at the level that it's at now, around $0.80, that would translate into about a $0.50 per share negative impact in 2011 versus 2010 for Gildan. And the impact of the 3% selling price that's been implemented in the screenprint channel for the full year 2011 will be about $0.30. Then you have the nonrecurrence of the inefficiencies and the benefits of the capital expenditures that was undertaken, which should bridge the gap. Then you have -- cotton may move, you have other costs inputs and we have the potential for other selling price increases.

Okay, thanks a lot. Just want to confirm that the other selling price increases were still a factor there, it wasn't just the baking in of the current one. Thanks very much. I'll leave it there.

And our next question will come from the line of Tal Woolley with RBC Capital Markets. Please proceed.

Hi, good morning.

Morning.

I wanted to -- Laurence, you quoted us $0.78 per pound number for cotton. That was for Q4, correct?

Q1 of next year.

Oh, for Q1 of next year. Okay. And then Q4 the number will be?

About $0.73.

Okay. And you had also just on a housekeeping, you said that the inventory build you expected for next year was about 2.5 million dozens?

We said about 2 million dozens.

Okay. Finally, I wondered, Glenn, if you assume that sort of the retail demand and screenprint demand stays relatively stable, it doesn't deteriorate or accelerate dramatically, how does the tight supply situation with respect to raw materials, how do you see it resolving itself over the longer term? Because it sounds really like a lot of your competitors are sort of saying that you expect to see a sort of period of inflation in this business and seems to be running counter intuitive to what a lot of people are saying with the broader economy as a whole. I'm just wondering how you see it resolving itself.

Well, I think that the short-term -- the yarn situation I think is going to continue through next year. During the downturn there was a significant amount of production that was taken out of the marketplace. And in order for the market to reinstall capacity, it takes investment and it takes time. So, there is some capacity coming on, but I think it's partly being absorbed by ourselves and other manufacturers. But it is limited and so it could take -- if somebody wants to build a new facility, for example, it could take 12 to 18 months before I can say to bring on additional capacity. So, that is part of it. And then I think that the overall reality is that the T-shirt -- well, let's say the knit business, let's say in general, has been on a deflationary mode for many years. In fact in the past you heard people going from one country to another country, but the reality is that the cost of actually producing a basic T-shirt globally has relatively hit its bottom, let's say for example.

So all these costs that are associated with producing products in Asia, as well as I think here in North America, I think that the cost inflationary factors will continue despite what your -- the overall global inflationary, deflationary environment that we are hearing about is not going to mean -- I think in our segment we are going to have continued inflation in the pile for sure as we go forward into next year.

Okay that's great. Thank you very much.

Thanks.

And our final question will come from the line of Scott Rattee with Stonecap Securities. Please proceed.

Hi, great. Thanks very much. You'd mentioned just in the commentary that, again, you'd added some new programs on the retail side. I was wondering are these just sort of extensions and stuff like that with retailers that you are currently doing business with or have you been sort of continually adding new retailers into your mix?

Well, most of the products are with the existing customers in general. We have added new programs and as well as we've extended the existing programs we have in all instances, let's say for example. So we are developing and attaining more shelf space, which is ultimately driving our volumes.

Okay, great. Just kind of along those lines, then, when you are -- I guess I'm just sort of wondering about the dynamic between how those things are sort of negotiated. Is that -- is it more along the lines of you going to the retailer, sort of suggesting some sort of expansion and stuff like that and having them evaluate it or are you actually finding that they are coming to you saying, look, this is our business plan. What can you provide that may help us out?

Well, the value we provide with our retailers is that we are providing not just the low cost manufacturing and value quality relationship of the product, but we are also providing the merchandising side as well. So we are working together with retailers and looking at ways that we can enhance their own floor space, basically, by adding and extending into new product categories that would ultimately drive their overall business. So, that's how we are able to obtain product expansion. And that's more so in the private label area, as well as we are looking at innovative products that will allow the retailers to enhance what is currently on their floor. So they could be and have something that they were offering last year and going to them and offering them new features or new products or new ideas also allows us to gain additional shelf space. And in our exiting Gildan smaller regional retailers, we are continuing to be very successful there with the additional add-ons of both activewear and underwear and obtaining more shelf space.

If you walk into a Boscos, which is a small regional retailer, you will see that we have a very good presentation of all of our product categories and we are doing the same thing with a lot of the small regional retailers. It's all these areas, which the accumulation of all of this is allowing us to grow. We have also been able to obtain significant wins into craft stores. Craft stores basically are -- [I don't know if you've] been to a craft store before, but we have a significant win with where we provide blank products with a retail fold, basically, in a craft store that allowed us to -- that people buy and they redecorate from those outlets. So there's just not one area. There's a lot of areas of opportunity for us. And we are pretty excited about the overall potential. We still have a long way to go and as we bring on our capacity over the coming 2011 to support our 2012 initiatives, we are going to continue to look for new ways to drive our business.

Okay, Glenn, thanks. Thanks for the color.

Thank you.

Ladies and gentlemen, this concludes our question and answer portion for today's call. I would now like to turn the call back over to Ms Sophie Argiriou for closing remarks.

Once again, I would like to thank you all for joining us and we look forward to talking to you again at our next earnings conference call in December. Thanks and have a great day.

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