Gildan Activewear Inc (GIL) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2010 Gildan Activewear earnings conference call. My name is Lacey and I'll be your coordinator for today. At this time all participants are in listen-only mode. Later we will facilitate a question and answer session towards the end of the presentation. (Operator Instructions) As a reminder this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Ms. Sophie Argiriou, Director of Investor Communications. Please proceed.

Thank you, Lacey. Good morning, everyone, and thank you for joining us. Earlier this morning we issued two press releases, one announcing the initiation of our quarterly dividend and normal course issuer bid and the second announcing our earnings results for the fourth quarter and for the 2010 fiscal year. We expect to file with the Canadian Securities regulatory authorities and the US Securities Commissions our report to shareholders containing management's discussion and analysis and consolidated financial statements for the fiscal year ended 2010 on December 6. These documents will also be made 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.

Before Laurence takes you through the results, I'd like to remind everyone that certain statements included in this conference call may constitute forward-looking statements within the meaning of the US Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve unknown and known risks, uncertainties, and other factors which could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. We refer you to the Company's filings with the US Securities and Exchange Commission and Canadian Securities regulatory authorities that may affect the Company's future results. I would now like to turn the call over to Laurence.

Good morning. Today we announced another strong quarter with record sales and earnings for the fourth quarter of the fiscal year. Net sales revenues were $369 million, up 22.3% from the fourth quarter of last year, and diluted EPS before $0.01 restructuring charge were $0.48 per share, up 37% from last year. The growth in EPS was primarily due to strong growth in sales revenues and increased gross margins compared with last year, partially offset by increased selling, general and administrative expenses. Our growth in sales was due to overall demand recovery and higher market share in the US screenprint market, as well as increased penetration in international screenprint markets. Industry shipments from US wholesale distributors to US screenprinters increased by 2.7% in the fourth quarter and Gildan's market share in the US wholesale distributor channel was 64% compared with 57% in the fourth quarter of last year.

Therefore, we maintained the further significant market share increases which we have achieved during fiscal 2010 in spite of having low activewear finished goods inventories, which resulted in a continuing large backorder position. In addition, we increased our unit sales volumes in international and other screenprint markets by approximately 50% in the quarter and achieved significant sales growth in underwear and activewear in the US retail channel from a small base in fiscal 2009. Unit sales volumes of socks were up by 9% compared with the fourth quarter of last year, including the negative impact of discontinued sock programs. Sell-through of men's and boys' sock programs manufactured by Gildan from retailers to consumers was very strong in the quarter, both for retailer, private label and retailer license brands, as well as for Gildan branded sock programs, although certain other categories were lower than planned. Dollar sales revenues of socks increased by 1% compared to a year ago.

The growth in dollar sales revenues was lower than the growth in unit volumes due to the execution of a planned shift to a more basic product mix, which fits with Gildan's large scale manufacturing, which was completed in the first half of the fiscal year and to significantly increase participation in retailer back-to-school promotions. Gross margins in the fourth quarter were 27.3% compared to 25.7% in the fourth quarter of last year. Gross margins in the fourth quarter last year included the negative impact to the special discount applicable to distributor inventories, which reduced margins last year by 290 basis points. The increase in gross margins was due to the non-recurrence of the special discount, the $8 million proceeds from the Haiti insurance claim, which added 240 basis points to gross margins, and the impact of a cotton subsidy in the company's US yarn spinning joint venture, which increased gross margins by 170 basis points.

The full amount of the cotton subsidy is reflected as a reduction of cost of goods sold and the 50% benefit attributable to our joint venture partner, Frontier Spinning, is reflected in non-controlling interest in the earnings statement for a net after-tax benefit to the Corporation of $1.9 million or $0.015 per share. These positive factors were partially offset by higher year-over-year cotton costs, which negatively impacted gross margins by approximately 380 basis points in the fourth quarter. Although the Company has announced three successive selling price increases in the wholesale channel to offset the increase in cotton costs and other purchase cost inputs, these price increases were not applicable to back orders and only benefited fourth quarter gross margins by approximately 150 basis points.

Gross margins in the fourth quarter were also negatively impacted by start up inefficiencies primarily related to new underwear programs and additional costs incurred due to the Haiti earthquake, which were included in inventories consumed in cost of goods sold during the fourth quarter. The insurance proceeds of $8 million represented the maximum amount of the coverage for the impact of the Haiti earthquake under the Company's insurance policies. The total earnings impact for the Company, which primarily impacted results in the third and fourth fiscal quarters, is estimated at $19 million comprised of estimated lost sales margin of $12 million due to lost production which would have allowed the Company to take fuller advantage of the strong recovery in market conditions and generate additional sales and approximately $7 million of additional production, transportation and other costs which were incurred due to the temporary disruption of the Company's supply chain.

The Company estimates that excluding the impact of non-recurring items, its normalized gross margins in the fourth quarter would have been approximately 25.6% instead of 27.3% as reported and normalized EPS would have been $0.46, plus the additional sales margin from lost Haiti production, which would have been generated in the fourth quarter. It is not possible for the Company to quantify this impact, as it is difficult to estimate to what degree the additional production would have been sold in the fourth quarter versus the third quarter. The Company has continued to have a significant backlog of open orders throughout the second half of the fiscal year. SG&A expenses in the fourth quarter amounted to $42 million or 11.4% of sales compared with $34 million or 11.3% of sales in the fourth quarter of last year.

The increase in SG&A was primarily due to the increased sales, distribution and administrative infrastructure to support the Company's retail strategy, higher volume driven distribution expenses, and increased performance driven compensation expenses compared with last year. Selling, general and administrative expenses in the fourth quarter included a charge of $1.9 million for provisions for doubtful accounts receivable. The income tax recovery in the fourth quarter primarily relates to the tax benefit of the restructuring costs and inefficiencies incurred in the fourth quarter in the Company's US retail operations, including the ramp up of the new South Carolina retail distribution center. Full year net sales revenues were slightly over $1.3 billion, up 26.3% from fiscal 2009. Gross margins were 27.8% compared with 22.2% last year. EBITDA was $278.5 million and diluted EPS before restructuring charges was $1.67, which was slightly more than double our EPS in fiscal 2009 when our results in the first half of the year were significantly impacted by the economic downturn.

Market conditions are continuing to be strong in the first quarter of fiscal 2011. The STARS report for the month of October shows growth of 5.5% in unit volume shipments from US screenprinters to US distributors and in addition, distributors are building inventories in anticipation of industry supply chain shortages and selling price increases. We are projecting net sales revenues in the first quarter in excess of $300 million, up approximately 40% from the first quarter of fiscal 2010. Gross margins in the first quarter are currently projected to be approximately 25% compared to 29.8% in the first quarter of fiscal 2010. The projected reduction in gross margins compared to last year is due to the impact of significantly higher cotton costs, manufacturing start up inefficiencies and more favorable product mix, more unfavorable product mix. These unfavorable variances will only be partially offset by the benefit of the recent price increase, which have not been applied to back orders.

A main focus of the Company in fiscal 2011 is to manage a major capital investment program for capacity expansion and further cost reduction, which is expected to total in excess of $150 million, not including a major capacity expansion and cost reduction project also being undertaken in the Company's yarn spinning joint venture. The global environment in our industry is one of supply shortages and hyperinflation in raw material and other cost inputs, which is significantly impacting manufacturing and sourcing in Asia. Gildan's investments over the past 10 years in building large scale vertical manufacturing facilities in central America and the Caribbean Basin have uniquely positioned us to take advantage of this paradigm shift and reinforce our positioning as a reliable supplier of quality products to service large, continuous replenishment programs in North America for both wholesale screenprint distributors and mass retailers.

In addition our strong balance sheet and financial strength insure that we are in a strong capital position to finance our working capital requirements resulting from higher raw material costs. In order to rebuild activewear finished goods inventories and add production capacity to continue to drive our strategic growth initiatives, we are completing the incremental expansion of production capacity at existing facilities and proceeding as expeditiously as possible with the construction of our Rio Nancy 5 facility in Honduras. This facility is now planned to have production capacity in excess of 30 million dozens when it is fully ramped up. We are also expanding our new manufacturing facility in Bangladesh. Our total production capacity for activewear and underwear from our existing manufacturing footprint in Central America, the Caribbean Basin and Bangladesh is expected to amount to approximately 90 million dozens when these capacity expansions are complete.

With the ramp up of our second sock manufacturing facility in Honduras, Rio Nancy 4, our production capacity for socks in Honduras will eventually amount to approximately 65 million dozens and the Company will have total manufacturing capacity to support consolidated sales growth to over $2.25 billion. Sock capacity in fiscal 2011 will be ramped up to 60 million dozens versus our previous plan of 65 million dozens this year. This is an opportune moment to remind you that we've set March the 22nd and 23rd, 2011, as the dates for our next analyst and investor trip to Honduras, which is an opportunity for you to personally see the continuing development and expansion of our operations there and meet our management team. In addition, the Company is undertaking major cost reduction projects during fiscal 2011.

In addition to the consolidation of sock manufacturing in Honduras, our cost reduction investments include -- the biomass alternative energy projects, which are being implemented in all of our textile and sock manufacturing operations; the replacement of high costs imported yarns with new technologies, which we are purchasing from third party yarn spinners and which we will also begin to manufacture in our joint venture yarn spinning facilities; and the automation and expansion of our distribution center in Eden, North Carolina. Manufacturing efficiencies are also expected to be further improved as a result of the ramp up of new sewing facilities, the improved efficiency of our underwear sewing and packaging operations, and the non-recurrence of other manufacturing efficiencies, including the additional costs incurred in fiscal 2010 as a result of the Haiti earthquake.

Our other main assumptions for fiscal 2011 at this time are. Firstly, we're assuming that we will operate our textile manufacturing facilities, which produce activewear and underwear, at full capacity utilization throughout the year and that all of our production capacity will be required to support our projected sales in both the screenprint and retail channels and to rebuild activewear finished goods inventories. Secondly, sock production in fiscal 2011 is estimated at approximately 60 million dozens from the Company's Honduran and US sock manufacturing facilities. Three, our forecast for fiscal 2011 reflects the implementation of previously announced selling price increases, which cumulatively total close to 13% in the US distributor channel. The end-year impact of these selling price increases is approximately 10%, as they have not been applied to back orders. Possible further selling price increases in the US distributor channel have not been included in the forecast.

Initial selling price increases averaging approximately 5% are being implemented in early 2011 in the retail channel. Fourthly, the Company has made forward commitments for all of the cotton, which will be consumed in cost of sales in the first half of the fiscal year, and a significant proportion of its projected requirements for the second half of the fiscal year. Our cost of cotton is projected to be approximately $0.78 per pound in the first fiscal quarter and approximately $0.95 per pound in the second quarter, which is higher than previously projected due to our faster consumption of our opening inventories during the first quarter. We have now purchased the majority of our cotton requirements for the third fiscal quarter at a cost of approximately $1.05 per pound and our currently projected full year cotton costs in fiscal 2011 is approximately $1 per pound. Based on these and other assumptions we are currently projecting sales revenues of approximately $1.6 billion for fiscal 2011, gross margins of approximately 25%, and SG&A expenses of approximately 10.5% of sales. Our projected income tax rate is approximately 4%.

The Company has also announced this morning that we are introducing our first quarterly dividend of $0.075 per share, which will be paid after our first fiscal quarter on March 18, 2011, to shareholders of record on February 23, 2011. The Company intends to pay the same dividend quarterly throughout fiscal 2011 and our dividend policy will be reviewed annually thereafter by a Board of Directors. The annualized dividend of $0.30 per share represents a payout of approximately 18% of our fiscal 2010 net earnings and provides approximately a 1% yield on our current share price. As discussed we are continuing to undertake major capital expenditures for capacity expansion and continue to be committed to pursue our growth strategy in all of our target markets. Also, although we are currently focused on our organic growth opportunities and not engaged in any acquisition discussions, we will consider selective complementary acquisitions which will provide an attractive return on capital.

However, we have historically generated free cash flow after financing significant capital expenditures for capacity expansion, our two sock acquisitions, and our working capital requirements to support our growth. We have utilized our cash flow in the past to deleverage the Company and as such our fiscal 2010 year-end we have a very strong balance sheet with approximately $260 million of cash and cash equivalents and significant unused debt capacity, even with conservative debt leverage parameters. Therefore, we have concluded that as a result of our strong balance sheet and free cash flow generation, we are in a position today to maintain significant financing capacity and flexibility to support our ongoing growth strategy and, at the same time, introduce the dividend to begin to provide yield to our shareholders and enhance our total returns to shareholders.

In addition, we have reinstated a normal course issuer bid, which will authorize the Company to repurchase up to 1 million shares in the open market, which we will do from time to time during the year if and when management believes that our share price is significantly undervalued. Even though we're currently in a period of global economic uncertainty and unprecedented volatility and commodity prices, the introduction of a dividend indicates the confidence that management and our Board have in our continuing strong free cash flow generation and reinforces our positive outlook towards the future prospects for Gildan as we bring on new capacity and continue to implement the next phase of our growth strategy.

Thank you, Laurence. This concludes our formal remarks. Before moving to the Q&A, as always, I would ask that everyone limit their questions to two or three as there are a number of you that would like to ask questions and we would like to give that opportunity to everyone. Time permitting, of course, we'll circle back for a second round. Thank you. I'll now turn it over to the Operator.

(Operator Instructions) Our first question will come from the line of Spencer Churchill with Paradigm Capital. Please proceed.

Hi, good morning, guys. Wanted to touch on the fiscal 2011 top-line guidance a bit. Obviously the Q1 guidance is for pretty robust growth year-over-year, 40% and you didn't have the full impact of the price increases, $1.6 billion for the full year is at 22% for year-over-year growth and I'm just wondering is there any reason that you see growth year-over-year slowing down as the year progresses or are you just being conservative or is this maybe related to the activewear capacity reduction that you talked about?

Well this reflects running our facilities at full capacity utilization and selling all of our production, so that reflects -- what we will also be doing though is building inventory, which will be available at the end of the year in the fourth quarter and so we may have some upside to sales in the fourth quarter as we rebuild, once we've rebuilt our inventories.

Okay, great. And then maybe if you could just touch on the activewear reduction in capacity, the 5 million that you talked about?

Pardon me?

Sorry, maybe I should confirm, did you say that the activewear total capacity for the year is at 60 million from 65 before?

No, what I was referring to there was the reduction of the end-year, of the capacity for socks coming in Honduras from Rio Nancy 3 and Rio Nancy 4. We still have ultimate capacity in Honduras of 65 million dozens, as we said before, but during this year we're going to ramp it up as a first stage to 60 million dozens, which would allow approximately 15% organic growth in sales of socks during the year.

Okay, great, thanks for the clarification on that And then in terms of the cotton subsidy and the yarn spinning JV, can we expect to see similar gains in terms of the number that was reported on the income statement for Q4 or was Q4 just an abnormally high number?

I'd say that's an abnormally high number.

Okay, great. And maybe I'll just take a chance at the last one, last question. In terms of the hedging strategy on cotton, is it an active strategy or is it a passive strategy? Do you try and gain the price a little bit or do you just basically hedge as you get orders further out?

It's an active strategy and we are trying to -- this market, which is quite volatile, is just to try and mitigate our exposure and try and purchase our COG at a price in which we think we could bring our product to market and keep our momentum going so that's sort of what triggered our purchasing requirements for this year.

Great. Thanks, guys.

And our next question will come from the line of Martin Landry with Desjardins Securities. Please proceed.

Good morning. In Q3 you had mentioned that you were expecting manufacturing efficiencies and higher selling prices to offset all of the or most of the rise in your input cost in fiscal '11. Has that changed or do you still expect that to happen?

We expect to have a positive impact from manufacturing efficiencies in 2011 from all of these projects I mentioned, which is partially offset by increase in other purchased cost inputs, the non-recurrence of the insurance claim and the CanAm benefit that we had this year. The net after offsetting these things is that the manufacturing efficiencies from our new investments will add about CAD0.15 to our EPS in fiscal 2011 compared with 2010.

Okay, because I'm having difficulties reconciling. You're now expecting your gross margin to decrease by more than 200 basis points in fiscal '11 versus fiscal '10 and I was just having difficulties understanding how that can happen if you're expecting most of your input costs to be offset by better efficiencies and higher selling prices.

Well, I'll walk you through a whole bridge, but this is because we're not marking up the increase in cotton costs, we're just passing it through in dollars and then also we're not getting the full benefit of the price increases end-year because we haven't applied them to back orders. But if you take all of these assumptions we've given for sales growth and margins and SG&A, it would add up to close to a CAD0.20 increase in EPS and to walk through how that 's built up, the increase in sales volume will contribute about a CAD0.40 positive impact to EPS next year. The impact to selling price increases that have been announced are not including any further possible increase contributes CAD1 per share. The higher cost of cotton negatively impacts yer-over-year EPS by CAD1.10. The manufacturing efficiencies net of the offset contribute CAD0.15, as I just outlined, and then unfavorable product mix is negative about CAD0.10 that we've assumed, increases in SG&A another CAD0.10 and higher tax negative CAD0.05. So that, these are raw numbers and add up to roughly a CAD0.20 increase in EPS.

And finally, your timeline for Rio Nancy 4, or sorry, Rio Nancy 5, is it still at the beginning of Q4 or that's been advanced?

The plant will begin production in our fourth quarter between August and September, around that time frame.

Okay. Okay, thank you very much.

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

Thanks, good morning and thanks for taking my questions. Lawrence, maybe just on the outlook there you walk through on an EPS basis. I guess I'm struggling a little bit to reconcile to that math just based upon the parameters, the top-line and gross margin and G&A you provided to kind of get there. I guess one, just on the G&A front, the 10.5% that you talked about I think that implies roughly 9% year-over-year growth. Is that the assumption that some of these cost saving initiatives sort of kick in early in the year, because it seems like that's a relative pretty big deceleration from years past.

In terms of sales. Well that's because we've already put in place the infrastructure to support a lot of our growth initiatives that we would now be leveraging in 2011.

Okay, so it's just we've sort of hit that inflection point in terms of fully leveraging the costs, so even though you're sort of adding, continuing to add to the retail program, most of that infrastructure has already been put in place?

The fixed infrastructure would be in place, yes.

Okay, okay.

Plus we would not expect to have a recurrence of the ramp up inefficiencies that we had in fiscal 2010 as we started up the new distribution center in Charleston.

Okay, okay. And then I guess on the gross margin line, it seems like, so the Q1 guidance of 25 is similar to the year and I get that the pricing, you're going to get the pricing kick in sort of after Q1, but it seems like that given the higher cotton costs, some of the other costs that come through in the back half that that should actually decel and again I understand the pricing comes through, but maybe if you could just sort of walk me through the math of the cadence of how that plays out on the gross margin line.

Well, I don't really want to start going through quarter by quarter, Eric, but big picture, the reduction in overall margins is due to the factors that I mentioned, that the selling price increase end-year is not fully offsetting the increase in cotton. We're not passing, we're not marking up the increase in cotton and we have, these are really the reasons.

Okay and if just to clarify again, the buying of sort of cotton at $1.05 for 3Q, that is for full 3Q and then what's the level of exposure in 4Q? Have you bought any into 4Q or is that still kind of fully lay out there?

We bought some of our cotton for Q4 and without giving you a number, I'd say that we're at a point where we're reasonably comfortable that further exposure that we have in cotton is offset by elasticity in pricing we have in the current supply demand environment to pass through any further increases into selling prices.

Okay. And then just lastly, maybe Glenn for you. In terms of the dividend and sort of the timing around that, sort of what was it at this point that sort of where you are in your life cycle that this made sense relative to maybe just further investments and continuing to grow the business? It certainly seems like there's opportunities for growth out there, kind of why now around the decision for the dividend?

Well, we're still focusing and we're a growth oriented Company, but the reality is that we're growing organically. We're spending lots of money in our infrastructure and capital expenditures, but we're still generating significant cash flow. So we feel that we can be both a growth oriented Company as well as provide our shareholders with additional yield with the dividend. We still have financing flexibility and cash available to do strategic tuck-in acquisitions, but we're putting in the capacity in place to support in excess of $2 billion in sales and we're very upbeat about our forecast, our business, and our future cash flows.

And in addition, Eric, to the point that Glenn's making that we're maintaining significant financing capacity and flexibility, as far as the timing, we have historically generated significant free cash flow after financing our CapEx for capacity expansion and working capital for our growth, but up to this point we use the cash to delever the balance sheet. And as far as the timing we're now debt free and building up cash in the balance sheet. So that, even though we are going to continue to pursue a growth strategy, we expect to continue to generate positive free cash flow and since we're not going to, we have no leverage to continue to eliminate, we'll be, we see an opportunity to enhance our total returns from our growth strategy by providing yield to the shareholders.

Okay, great. Fair enough. Thank you guys, I appreciate it.

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

Thank you, good morning.

Good morning.

First question is you talk about a 5% price increase in retail while at the same time in wholesale prices are going up 13%. I mean, I know that in the past you've always said you wanted to target the same kind of profitability across all of your businesses. Does it mean that we may not, you may not be able to achieve that considering that it seems like pricing is easier to raise in wholesale than retail?

I would think that I would say that the answer is longer term that's our objective and we continue to go down that path. I would say that based on the future price of COGS and if it remains at today's levels potentially there will be another price increase in the second half of the year and but it's premature for us to say that at this point in time and we haven't factored that into our forecast.

Okay, good. Second one is when you look at your socks business, I mean it came in below the guidance you had given for the fourth quarter and if I look at fiscal '11, you're cutting your production plan, is there some issues there that we should be concerned of?

Well not really issues. We've really turned the business around and we've, what we think is as we Gildanize the business, the area where we had a little bit of, I'd say, disappointment in our sell-through at retail was in the infants category. We're the largest infant sock provider probably in North America today and that we have a huge amount of business in that category, particularly at one of our largest customers, and we had made some assortment changes recently that, our sales were down in that category more than we would like to see, but during the fourth quarter we've made some assortment changes and so far in Q1 we've seen double digit increases again. So we're pretty happy we got it fixed.

Sometimes these things happen, but we're working very closely with our customer and we're back on track where we need to be. As far as the overall dozens are concerned, I think we still at 15% growth year-over-year organically is still pretty good and partly also as we're focusing on cost reductions as we mitigate our manufacturing in the US and ramp up our Rio Nancy 4 facility. So we're also still going through a transition and when you come to Honduras, you'll see the type of build that we have and the capacity that we put in place. So all these moving pieces, this is where we feel comfortable today and we're focusing on the bottom-line as well as the top-line.

And we have strong sell-through from retailers in the men's and boys' socks categories in the quarter.

All other categories were up significantly, but the infant category was actually down significantly in Q4 and is now back in double digit growth mode after we reassorted. So a lot of the sales we would have had was because we had to redo packaging and so forth with the customer, but we're back on track now in Q1 so far in terms of sell-through.

And Claud, the difference from our projection was 9% unit volume growth versus 15%, so we're still good growth even with the issues (inaudible).

So the 15 relates to--

Volume.

Is that what you expect next year or fiscal '11?

No, we have capacity in place that would support 15% volume sales, so we will be (inaudible).

And the pricing, should we expect the pricing to be stable, go down, up, considering the mix and then cotton and everything?

Well pricing will go up, obviously, because we're raising our prices. I mean, that's, that will happen in Q2. We'll see some price movement and like I said before, if cotton stays where it is today, we'll have to take another -- there's most likely be another price increase some time in the back half of the year.

Okay, thank you. Thank you.

And our next question will come from the line of Jessy Hayem, TD Securities. Please proceed.

Thank you. Just staying on the socks side, are you still using third party contractors for socks and if so when will you be kind of done with this?

We did use third party contractors during the third quarter, but we are now no longer using third party contractors and we're in the process of ramping up Rio Nancy 4 quite aggressively as we speak and the factory should be totally ramped up to our forecasted run rate in the third quarter of this year.

Okay, sorry, Glenn, you said you did use contractors in the fourth quarter or only in the third?

No, we did them in the third and less in the fourth, but it was the third and fourth quarter we did use contractors.

Small impact.

Yes.

Okay. And then I guess with that in mind just getting back to a question that was asked before, so when will we see your gross margins trending or you being able to close the differential in margin versus, I guess, what you do in the wholesaler activewear, seeing again that starting in coming quarters you are not going to be using third party contractors?

Well right now I think some time towards the end of this year, our margins will improve during the year. During the first quarter we're still running through some higher costs because of the contractors and related costs. We're ramping up Rio Nancy 4 now. We're still producing some goods in the US We've actually shuttered some facilities earlier in the year that as we make this change our wet processing has been closed and we've reconsolidated all of the packaging into our Rio Nancy 4 facility. And as that continues to flow through our cost of goods sold we'll start seeing, each quarter we'll see margin increasing and we'll continue going up during the year and we'll see the full impact probably in Q4.

And also it will depend upon the passthrough of cotton costs or cotton costs and prices being in equilibrium, but we do, we are investing capital in capacity expansion on the basis that we're going to achieve our return on investment criteria on the capital that we're adding.

Right. And then while we're still on production, Rio Nancy 5 has it started production? I'm sorry if you already mentioned that, but I didn't catch it.

We're in construction mode at the facility and it's going to start production in August - September period. The knitting is going to start some time in August and the dye house will start in September and then be ramped up during the year of 2012.

Okay. And then I guess just a general question on what -- you've mentioned, Glenn, that if cotton stays where it is there's potentially another price increase opportunity for you. What's your thinking of, I guess, what are you hearing as far as demand is concerned and obviously you're in a sort of supply shortage mode and your ability to pass through yet additional price increases, just any thoughts on that or what you're seeing out there?

Well, look, I think that the demand has been strong and the month of October, as Lawrence mentioned in the script, is that the market was up over 5%. And what's happening is that there's been this huge inflation and what we believe is a new paradigm going on in terms of the global manufacturing, particularly as it relates to Asia. The cost in Asia has skyrocketed. T-shirt prices in Asia have gone up over $9 a dozen since last year this time. They just aren't competitive. The pricing out of China in all categories, not just our basic T-shirt categories, but across-the-board everywhere, are up anywhere between 15% and 25%.

So what's happening is that retailers are scrambling in general to find product and I think it's going to play well for people that are producing in this hemisphere, ourselves and the industry at large, to capitalize on what we think is going to be a big shift in terms of where people are looking to manufacture and source of products. We have a lot of inquiries from people that are calling us now looking for product. And the second thing, I think, that's going to take place is that because of the fundamentals, there's going to be a lot of manufactures actually going out of business. Most people can't afford and don't have the capital credit lines to support the cost of raw material even today. And those that are buying raw materials and all of a sudden if it goes up or down and they have all the [triations] and fluctuations are taking significant risk in terms of margin losses, let's say for example, so that's going to create a lot of, we think, delivery issues this year. We think retailers are going to have problems getting delivered.

To give you an example, if somebody was buying yarn, let's say, or fiber, let's say for example, and they are buying it at a ex-price, the prices are moving up so fast that people are not honoring the prices, so the whole supply chain is going to be affected because of that. So what we've, how we positioned ourselves is our only variable really to be honest with you is our cotton price. In fact we are actually reducing our cost of manufacturing next year. If you take all of the pluses and minuses we're going to be positive CD0.15 of EPS. So we have significant manufacturing reductions, so the only variable we have is our cotton where I think when you look at the global paradigm, they're faced with transportation cost, labor cost, everywhere there's a huge amount of hyperinflation which is going to create instability in the market and we think is going to allow for this hemisphere to be very good in terms of going forward into the next, at least the next 12 to 24 months.

Okay, thank you. Final question, I guess before I circle back, is your guidance for top- line of about $1.6 billion for fiscal '11, I believe you said assumes you pretty much selling your full capacity and building some inventory in the fourth quarter. Does that then assume that you've, I guess, gaining traction with adding some more categories at retail beyond the socks and underwear within that assumption and, I guess, maybe you can tell us, give us some comments on how that traction is going. Are you working on spring programs at retail and so on.

Well, first of all our capacity this year is going to be roughly about 64 million dozens is what we're going to produce in year, of which about 4 million dozens we are going to put back into inventory, of which the large percentage of that will come into Q4 and that's where really we're going to have additional, like Lawrence said, additional upside in terms of sales depending on how the market goes. We've placed all of our orders for spring, which we've taken some new programs for retail, but our focus right now as we go forward is going to make sure that we service our existing programs, we bring our inventories back in line to service our customers in the wholesale market, particularly our distributors, and we're selectively looking at new programs for the fall.

We have a lot of inquiries and a lot of people are calling us looking for new programs, but we don't want to be in a position that we take more than we can chew and so we're working through this right now and we're seeing how we can maximize our capacity and the opportunities that are out there, but I think at the same token we're very excited about our capacity expansion plans. We've increased the size. Originally we had in Rio Nancy 5 the capacity of that factory was going to be just north of 20 million dozens and we've expanded the footprint of that plant to be close to 30 million dozen, actually north of 30 million dozens, just because we think that there's so much opportunity and we're working as hard as possible to bring that capacity online to support the opportunities we have.

Great. Thank you very much.

Thank you.

And our next question will come from the line of Mark Petrie with CIBC World Markets. Please proceed.

Good morning. Wholesale market shares, particularly in tees and activewear, stayed relatively flat in the last couple quarters. I know you've mentioned that the backlog has been in sort of a key driver there, but do you think that's sort of a level that you're generally satisfied with and are capacity constraints going to sort of hold you back from growing that or do you sort of still see some upside there?

Well, look, two things I think might happen. We might see actually a small reduction in our share as we go forward into Q1 just because we are so short of inventory in the market and but yet the market is very strong at the same time, so we look at this still as a great opportunity. Our sales are going to be up in unit volume over 40% year-over-year. We've never had more momentum than we have today, so we just don't know what potentially our real opportunity is, but based on the demand we have for our product, we believe we'll continue to still gain market share as we go forward once we bring our inventories back in line in the channel, which will happen by the end of December.

Okay, thanks. And can you just talk a little bit about the new technologies that you're talking about, which essentially, I'm assuming, lower your input costs by essentially lowering the cotton requirements and what product categories are those most applicable to or is it sort of just across-the-board?

Well, we made a major investment to develop our underwear business, which is primarily using finer yarns. And typically, in Asia you get a much better yarn than what's being sold here from the major underwear manufactures and Asia what they do is they sell it like a Ringspun, which is softer and feels better. We've worked closely with our yarn providers and there's a technology that we've invested in last year, which is really supporting the success and growth of our starter underwear programs at Wal-Mart and this particular yarn is a substitute for Ringspun.

It's got the same feel in hand and characteristics and quality, but it comes at a much lower cost of manufacturing. And that's what is going to give us, we think, a big advantage in our underwear business and its been so successful that we've made a decision to increase the amount of capacity to support our future retail underwear, as well as we've introduced shirts in our wholesale market that can use this application as well, which is more of a, it's the type of shirts that we sell and are lighter and more fitted and a little bit more, let's say, not fashion but a little bit more trendy, let's say for example, and that's an area which is growing fast in the marketplace. So in the case of this investment, this is going to be creating new opportunities which will tie into our projected sales forecast as we go forward.

And in addition to the manufacturing cost efficiencies, there will also be savings in duty because imported yarns don't qualify for duty-free access into the US under CAFTA.

Okay, thank you.

Thank you.

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

Hi, good morning.

Good morning.

Just wondering, I just want to verify again the end-year capacity for 2011. So for activewear and underwear you're saying $64 million with $4 million going to inventory and $60 million targeted for sales?

Yes, [$64 million] and $4 million.

And then for socks it's going to be $60 million?

Yes.

Okay. And then just in your MD&A you had made reference to, I'm trying to understand a little bit of the dynamics at retail. You made reference to the impact of back-to-school promotions impacting the realized revenues on the sock programs. Is that more of a mix issue or that you had to sort of reduce pricing to get that volume?

It's not reducing price but normally what you do is you either offer a better value by putting an extra sock in the bag, but at the end of the day, it's a combination of pricing or a better offering is typically what happens at back-to-school. Partly for us it was a small portion of price, but also the fact is that we also have realigned all of our product offerings and we've eliminated any products that are more fashion driven, so all of our product lines going forward are real basic products that meet the requirement of our Rio Nancy type facility and that's why in the past we kept saying we keep moving our product mix around and now we finally got the mix to that all of our products we're selling are conducive to the type of manufacturing that we're going to put in Rio Nancy and those socks are more basic promotional white socks, let's say for example, versus stripes and stretches and other things let's say.

Okay. I just wanted someone to talk a bit about the inventory situation at screenprint. I'm just wondering if you can discuss a little bit how you thought about allocating your capacity. You've made big gains internationally this year and then now it turns out you're a little bit short at US screenprint. I'm wondering if you can sort of talk to those two things, did you trade one for the other or how did that sort of come about?

Well, no, I think we've been tight in all of our markets as a bottom-line, but right now our focus is to rebuild our screenprint inventories and based on our forecast next year, we think we have sufficient inventory to rebuild our screenprint inventories and as well as maintain the service that was acquired in all of our markets. We're going to have a significant capacity increase. Last year we produced 52 million dozens. Next year we're planning to produce 64 million dozens. So we're making a lot more product on a year-over-year basis and so we're just right now need another month to really put ourselves back in a better position and then as our capacity is continuing to grow, we feel comfortable that our focus right now is to make sure we bring our wholesalers in the states back into a good inventory position.

And you've sensed no frustration from them on their part, like as a result of being short-stocked right now or they are still willing to wait, so to speak?

Well, look, we are certain of our market share in Q4, we didn't lose any market share. So we're working through this. It's not the best to be tight at the end of the day, but it's creating a good demand dynamics in the market at the same time. And we think that as we turn the corner here, we'll be in a much better shape, but we haven't had any major significant disappointments at this point, to answer your question.

Okay, that's great. Thank you very much guys.

Operator, before we take the next question, I just want to remind everyone that we're already past the hour and there still remains people that would like to ask a question, so I would ask if you can just keep it to one. Of course, we'll be here after the call to support you with any further questions you have, but just to let everybody ask a question I would ask that you just ask one question. Thank you.

And our next question will come from the line of David Glick with Buckingham Research. Please proceed.

Good morning. My question is about the capacity that you discussed at 90 million dozens in activewear and underwear and 65 million in socks. Is that a number that will be fully available for fiscal 2012 or what percentage do you think might be available for fiscal 2012 based on the plans that you currently have. And is there any reason why you couldn't maintain a similar operating margin that you're projecting in '11 in 2012?

Well, what we're going to do is in March when we meet you in Honduras, we'll give you a full update on the plants capacity and ramp up, but put things in perspective, the plant if it starts in September and starts to get ramped up, there's a significant portion of opportunity for us in 2012, but it will also support 2013 as well because we can only ramp it up so fast and as you know is that in our industry the height of the summer selling season is June, July type period, you know what I mean? So the major impact of the ramp up of that facility will be in the, will take us to a certain level and then we'll have to plateau and then rebuild for the following year. The reason, one of the good news is that because of the fact that it's in our Rio Nancy complex, we're already training operators, so the ramp up will happen quicker and we'll have a better steeper curve, but we'll bring you up to speed with all of those questions when we meet you in March and we'll have a little bit more clarity in our whole forecast and build up as we go forward into the future.

Okay, thanks and good luck.

Thank you.

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

Thanks a lot. Just on the increase in the provision in the receivables, can you talk about that, particularly given the growth in the wholesale market?

I don't want to focus on any particular customer. We had one customer not in the, with provisions against two accounts, neither of which were the US wholesale distributor accounts.

So they were not in the US?

One was international and one was in another (inaudible) division.

Okay. I know we're tight for time so I'll just ask one more question. On the sensitivities given the significant run up in cotton and other commodities, do the pricing sensitivities that you gave to us apply and furthermore can you tell us what percentage of your COGS will be cotton at the end of the year if you could?

Well, the sensitivities, obviously as the volume increases the sensitivities increase in line with the higher volume. So every one pound change in cotton would be about $0.0325 (inaudible) cents and every 1% selling price increase in the distributer channel is about $0.10.

Okay, thank you.

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

Thanks, good morning. Just with respect to your share of channel versus channel inventory versus market share, I may have missed it in the announcement if you could clarify where we are on that and in Europe, if you wouldn't mind, is your increased penetration there a function of sort of increased share of business with the existing distributors or have you managed to add either new distributors or new relationships in new geographies, if you could possibly clarify in those two, please?

The first part of the question, Kenric, is that our share of inventory at the end of the quarter was about 50% compared with our market share of 64%. And then as far as Europe, I'll make one comment and you can add anything you want, Glenn, is that obviously with our inventory situation we're focused in servicing existing customers, but we already cover pretty well the universe of all the major distributors in Europe.

And we had a significant increase in share in Europe this year and we have huge momentum in that marketplace and as we continue to bring on capacity there's lots of room for us to grow with all of our customers there on a go forward basis.

I'll leave it there. Thanks very much.

Thank you, Kenric.

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

Thanks. Nice quarter, guys.

Thank you.

Not a bad time to be a large scale deficient manufacturer when demand is pretty solid and capacity is constrained. And on that note I wanted to ask you guys about demand elasticity. Have you thought about it? Have you done any studies looking back at your kind of historical data and all the data you have, how elastic is demand to changes in price and when you were kind of thinking about how to deal with price increases next year, I know you didn't really raise prices on the margin, just to flow through the costs. Was there a reason for that? Could you raise prices kind of in line with the same percentages as costs go up? Any discussion in terms of how the whole entire vertical channel thinks about price increases and what the impact is from your retail partners or your wholesale distributors? How do they feel about price increases and how the end market will take it? Thanks.

I think two things. One is that we've seen pricing in the last 15 years since we've been in the industry decline every year and then we seen pricing eventually plateau and if you look at the price and cost of producing goods globally, it's relatively on the rise everywhere, so that's one phenomenon. As far as the ability for us to look at pricing and how that affects our channel, today you can buy, even after all of our price increases so far, you look at what the price of a shirt is, it's $2.10 out of our distributors doors. It's still pretty attractive relative to the end use price. If you go to a rock concert you pay $30 for a shirt. So although the pricing has gone up, it's still, we are still very competitive, I think, as an industry and we think that there's still potentially room for pricing to go up a little more without really affecting the demand, but we don't know. So our strategy obviously is going to be to be cautious and that's the way we approach the market.

We've seen, we've taken subsequent price increases pretty quick, obviously, because of July and September and October. I think what we're going to do is we'll wait and see how demand plays out and if there's definitely room to take additional price increasing that may occur, because you have got to understand is that is that the, depends on what happens also with cotton at the end of the fiscal season, because a lot of people are going to be working through their less expensive cotton, but people that are buying cotton in Q1 and potentially into Q2 of this year, between the price of cotton and basis, their costs are going to be significantly impacted as they go through and maybe not in Q3 or Q4, by Q3, but by Q4, these costs are going to be significantly increasing their cost of goods sold. So there's definitely room for price increasing if cotton remains at the type of level it is now and I think that the market personally can absorb it, but we need to be cautious and make sure that we don't knee jerk and raise pricing too fast to scare people away from buying our products.

Thanks and the channels you're selling into they're open to it? The wholesale distributors, the retailers, they are fine with the price increases?

Well, I think in wholesale it's a little bit different business than retail. People want to mark product up, our wholesalers mark product up on, so a higher prices, higher markup and it's good for our industry. In retail, it's a little bit more price sensitive because you got consumer price points and I think consumers, especially at the mass market, are a little more sensitive to price elasticity and price moving, but there's definitely room. If I look at the way the pricing has gone in the past, you can buy in certain cases nine pairs of underwear in a bag. Do you need nine pairs for the week or do you need seven pairs for the week. So there's ways to keep price points down at retail by reducing the assortments and other things, let's say for example, that could mitigate price increases and that's to be worked through with the retailers. But I think that there's still room and we're very competitive as an industry. So not just Gildan. I think that the whole industry is very competitive, the ones that produce in this hemisphere, anyway.

Thanks for the information.

All right, thank you.

Thank you.

Ladies and gentlemen, this concludes the question and answer portion of our call. I will now turn the call back over to Sophie Argiriou for any closing comments. Please proceed.

Thank you. I'd like to thank everyone for joining us. I would also like to take the opportunity to wish everyone Happy Holidays and we look forward to speaking to you in the New Year at our next earnings conference call. Goodbye.

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