Gildan Activewear Inc (GIL) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2011 Gildan Activewear earnings conference call. My name is Carris and I will be your coordinator for today. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions)

As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to your host for today, Ms. Sophie Argiriou, Director of Investor Communications. Please proceed.

Thank you, Carris. Good afternoon, everyone, and thank you for joining us. Earlier we issued our press release announcing our earnings results for the first quarter of fiscal 2011 and our interim shareholder report containing management's discussion and analysis and consolidated financial statement. These documents will be filed with the Canadian Securities Regulatory Authorities and the US Securities Commission and are also available on our website at www.gildan.com.

I'm joined here this evening by 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 a brief overview of our first-quarter financial results and our business outlook, after which we will open the call to questions.

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

I would now like to turn the call over to Laurence Sellyn.

Good afternoon. We are pleased to announce today a fourth successive quarter of record results. Sales and earnings were both records for the first quarter of the fiscal year.

These results reflected very strong sales for activewear, partially offset by higher costs of cotton and start-up inefficiencies in distribution and manufacturing, which negatively impacted results for socks and underwear. Net sales revenues for the first quarter were $331 million, up 50% from the first quarter of fiscal 2010, and we achieved EPS growth of 25% over the first quarter of last year. EPS in the quarter was $0.30 per share. Unit sales volumes of activewear and underwear increased by approximately 66.5% from the first quarter of last year and net selling prices for activewear increased by approximately 12%.

The increase in unit sales was due to inventory replenishment by US wholesale distributors, who had reduced inventories in the first quarter of last year; continuing strong recovery in sales demand from screenprinters, which increased by approximately 8% in the first quarter; continuing strong growth in international and other screenprint markets; and strong growth in activewear and underwear for mass market retailers from a small base in fiscal 2010.

The strong growth in unit sales for activewear and underwear was achieved in spite of production capacity constraints and low finished goods inventories throughout the quarter. The Company was unable to fully service demand for its brand in the US distributor channel, resulting in a decline in its market share during the quarter to 60.2%, compared with 61.3% in the first quarter of last year and 64% in the fourth quarter of last year. Gildan's share of inventories in the US distributor channel was 52.4% at December 31st, compared to our market share in the first quarter of 60.2%, and we are comfortable with our level of inventories in the distributor channel at the present time. We continue to have a very high level of open orders from distributors in the second quarter.

The significant increase in activewear net selling prices was due to the implementation of previously announced selling price increases, as well as lower promotional activity due to the favorable market conditions. A further selling price increase, averaging approximately 7%, was announced in the US screenprint market in January. In line with previous selling price announcements this increase will not be applicable to back orders.

We indicated in our press release that AC Nielsen is discontinuing the S.T.A.R.S. report, which we have historically utilized to track unit volume shipments of activewear from US wholesale distributors to US screenprinters. Going forward, we will now subscribe to the CREST report produced by Capstone Research, which uses a slightly different distributor database and reflects some differences in methodology.

Sales of socks were $61.2 million, down 9.3% from $67.5 million in the first quarter of last year. The main reason for our failure to achieve the sales growth which we had projected for the quarter was our difficulty in servicing retail demand from our new US distribution center. Continuing ramp-up issues at this facility significantly impacted our sock deliveries and sales during the peak Christmas holiday selling season.

Gross margins in the first quarter were 24.7%, compared with 29.8% in the first quarter last year. The decline in gross margins compared to last year was due to an increase in cotton costs to $0.78 per pound from $0.60 per pound in the first quarter last year, which negatively impacted gross margins by 450-basis points, and higher costs for energy and other purchased cost inputs, together with ramp-up manufacturing inefficiency, which resulted in very low gross margins for socks and underwear, as well as additional sewing overtime cost to maximize production of activewear and a lower-valued activewear product mix due to higher proportion of basic T-shirts. These factors more than offset the positive gross margin impact of the significantly-higher net selling prices for activewear.

Although selling, general and administrative expenses were 12.6% of sales, compared to 15.4% in the first quarter a year ago, SG&A expenses increased in dollar terms to $41.6 million compared to $34 million last year. This increase was largely due to the start-up inefficiencies of the new Charleston retail distribution center, which negatively impacted SG&A expenses by approximately $3 million, and by higher volume-driven distribution expenses at our Eden, North Carolina screenprint distribution center, which, however, were partially offset by efficiency improvements at this facility, largely as a result of our ongoing capital expenditure projects to expand and automate the facility.

The results for the sock business are obviously a disappointment and a number of action items are being implemented to address these issues. We expect to achieve significantly improved results for socks during the course of the balance of fiscal 2011, as a result of the following. Number one, achieving our efficiency goals for the Charleston distribution center as a result of training programs and technology enhancements, which are currently being implemented. Two, completion of the ramp-up of the new Rio Nance IV sock facility. Thirdly, the closure of the remaining US sock manufacturing facilities, which was announced last week, and which will result in more than ten million dozens of high-cost production be consolidated into Rio Nance IV.

Four, selling price increases averaging in the range of 5% to 6% were implemented with retail customers in January, and further significant price increases have been agreed, which will take effect in the second half of the year. In addition, retail customers have accepted product modifications, which will reduce manufacturing costs. And fifthly, the Company is in the process of negotiating selective new sales opportunities in socks, which are expected to be significant to our retail growth strategy. In addition, we are currently consolidating our underwear, sewing and packaging at one of our Honduran sewing factories.

Our operator training programs are progressing well and we are implementing substantial selling price increases for our underwear program, which have been communicated to our retail customers. Our transition to the MBS yarn spinning technology will result in significant savings in underwear manufacturing costs, as well as eliminate import duties on products made from imported yarn, which do not qualify for duty-free access to the US market under CAFTA.

We have updated the assumptions in our full-year outlook in our release today, although we recognize that it is obviously more difficult to provide forecasts in the current environment of unprecedented volatility in cotton prices and to be able to predict the impact of higher selling prices and industry demand. Sales are now projected to be slightly in excess of $1.6 billion. The Company has reflected the impact of the recent 7% selling price increase in the screenprint market and the price increases, which we are implementing for our retail customers, but the forecast does not at this time anticipate any further price increases, which have not yet been announced. We will, however, seek further selling price increases in the second half of the fiscal year if cotton prices do not correct significantly from current levels.

We are currently forecasting overall industry demand growth of approximately 3% in the US screenprint market for the balance of the year, which will still translate into industry demand levels that are well below the level of demand before the economic downturn. Nevertheless, we have slightly reduced projected sales volumes in the second half of the year compared to our prior forecast in order to provide for the possible negative impact of increases in selling prices and industry demand, although we currently intend to continue to run all of our manufacturing facilities for production of activewear and underwear at full capacity.

Gross margins are still forecast to be approximately 25%, as indicated when we initiated fiscal 2011 guidance in December. The positive impact to further selling price increases, which have already been implemented, is currently projected to be fully offset by higher than previously projected cotton cost increases in the second half of the fiscal year, and by lower than previously projected manufacturing and distribution cost reductions. The Company's cotton requirements for consumption in the fourth quarter of the fiscal year are approximately 55% hedged. Our revised outlook assumes that cotton costs for consumption in fiscal 2011 average slightly in excess of $1.10 per pound compared to our previous assumption of $1 per pound.

Cotton costs in the first quarter which we have just reported, were $0.78 per pound. Cotton costs in the second quarter are projected at below $0.90 per pound, which is lower than previously projected due to the timing of the flow-through of opening inventories. Cotton costs in the third quarter have been essentially covered at approximately $1.25 per pound, which is higher than projected in December, as the balance of our unfilled cotton requirements has been filled at higher prices due to -- and due to also the timing of consumption of inventories. Based on filling the balance of our open requirements for consumption in the fourth quarter at close to current cotton prices, cotton costs in the fourth quarter would be approximately $1.40 per pound.

Selling price increases implemented to date are estimated to pass through cotton cost increases up to approximately $1.25 per pound. For the second quarter of fiscal 2011, we are currently projecting net sales revenues of approximately $375 million, up approximately 15% from the second quarter of fiscal 2010 and gross margins of close to 27% compared to 27.8% in the second quarter of fiscal 2010. Selling, general and administrative expenses are expected to be slightly lower than 10.5%, as they are not expected to increase further in line with the projected increase in sales.

Finally, we ended the first quarter with cash and cash equivalents of $235 million, which was $23 million lower than the year-end position, due to cash requirements in the first quarter to finance increased inventories and our capital expenditure program. Total capital expenditures for fiscal 2011 are still projected to be in excess of $150 million, including the construction of Rio Nance V, which is now under way. We are also projecting further increases in inventory levels, including the impact in inventory unit costs of higher cotton and other purchased input costs.

Our initial quarterly dividend for the first fiscal quarter will be paid on March the 18th, 2011, to shareholders of record on February 23rd. We are confident that our strong balance sheet and cash flow generation will support an ongoing quarterly dividend while at the same time retaining significant financing capacity to pursue our organic growth strategy, as well as explore selective acquisition opportunities, which may potentially complement our organic growth.

Thank you, Laurence. This concludes our formal remarks.

We're now ready to start the Q&A session. Please limit your questions to two or three in order to give everyone the opportunity to ask their questions and, of course, time permitting, we'll circle back for more questions. Thank you. Carris, can you just take us through the logistics?

(Operator Instructions)Martin Landry with Desjardins Securities. Please proceed.

Good evening. Could you give us a little bit of more details on your inefficiencies at your distribution center? What exactly is happening? What exactly is going on for you to have inefficiencies over there?

Well, this is Glenn, good afternoon. The inefficiencies are mainly due to the consolidation of approximately four distribution centers into Charleston, which we moved during Q4, so we made a big push to consolidate four distribution centers into our new state-of-the-art facility. And the facility is configured and was configured completely different than our other facility, so there was new processes, new systems that needed to be implemented.And there was some training issues in terms of bringing the people up-to-speed, as well as probably a little bit of management oversight in terms of the readiness for us to make the move.

Since the end of the quarter, we're now currently running at full efficiency, and most of these problems are behind us. And obviously it would happen, unfortunately, in the height of the season for Christmas and holiday, so it was one of these events where you just can never catch up, and ultimately we lost revenues and we spent additional training dollars and employee hours and dollars, and as well as transportation and other costs associated with the ramp-up. But the issues are behind us right now, and the facility's running smooth as scheduled, and we feel very comfortable at this point going forward.

So you don't anticipate any impact for Q2?

Not in distribution costs, no.

Okay. And you've mentioned that you're anticipating a little bit of weakness in demand in the industry. What leads you to believe that we're going to see weakness in demand? It looks like volumes have been up quite strongly, even though we've seen some price increases. Did you see any signs yet of weakness in demand?

No, we --

No, demand, as we said, is continuing strong. We have a very large open order position, and there's nothing that we see that would indicate any weakening of demand. And as we mentioned on the call, we're planning to continue to run our facilities at full-production capacity. What caused us to reduce our forecast is simply the unknown, that we've announced further significant increase in selling prices; it's likely that there would be further selling price increases if cotton stays up at present levels. So we don't know what the demand elasticity is, and we've provided for a possible impact of lower demand because of the higher prices.

But as we speak, I would say that our business has never been stronger. We've never been in the position where we've had this level of back orders ending Q4, Q1, and now going into Q2. So we have a lot of momentum behind our brand and our business, and we're running full out. We'll continue to maximize all our production facilities, and I spend actually my full time working with the production and planning department, and making sure that we're hitting our goals, and making sure that we're maximizing production throughout all of our facilities.

Okay. And my last question, did you start hedging for fiscal 2012 yet for your cotton?

We've hedged a little bit, but not anything significant. Our objective right now is to -- in terms of all of our hedging, is to mitigate exposure. Nobody in the world today has a crystal ball, and the worst thing that could happen is like what happened in 2008 when cotton went from $1 down to $0.45 overnight. So, what we're trying to do is to mitigate exposure, and we're buying in sequence where we think we have visibility in our business, and we feel comfortable with our purchases so far.

And we think that today, cotton is somewhat probably over-valued. There's a lot of cotton being produced for next year. The first National Cotton Council report came out where the acreage they estimate is going to be increased by 14%. We're hearing it could be up to even greater than that, up to 21.5 million bales relative to the 18.5 million bales this year. There's a lot of variables that can move the cotton market. Chinese can move the market. So what we need to do is be careful with these volatile times, take it a step at a time, and just try to mitigate exposure and that's what we've done so far.And we'll increase our prices proportionately to offset the cotton as we go forward.

Okay. Thank you very much.

Eric Tracy with FBR Capital Markets. Please proceed.

Thanks, good afternoon. Maybe if I could just follow up on the cotton conversation, with respect to the gross margin assumptions holding at the 25% level. On the higher cotton cost now, plus you talked about some lower manufacturing efficiencies, is it simply just the prices? Because you'd think you'd still get further dilution on the gross margin. Can you just help me, walk me through reconciling that maintaining of that gross margin guidance?

So I'm reconciling from 25% to 25%, the factors that offset each other. That's what you're asking me to do, yes. So the price increases that we've already announced and implemented were not including any further price increases -- positively impact margins by 3%. The impact of further increases in cotton costs, since we provided guidance in December, has a 2% negative impact, and the impact of the manufacturing inefficiencies and higher purchase input costs is 1%. So 3% positive for price, 2% negative for cotton, and 1% negative for manufacturing efficiencies, round numbers.

Okay, fair enough. And then as it relates to the elasticity and the impact on unit volumes and that, are you able to quantify what's embedded within your assumptions?

No, it's not scientific. We don't have the ability to do this scientifically.

But what we've done is we've reduced what we think the expectations of growth in the market are for the balance of the year, which are significantly lower than what they were up until now. Last quarter the market grew by 8%.

The one thing I think I would add to this whole thing is that we're not just -- and what we discussed in our last call is the new paradigm because although we've increased prices in our channel roughly under 20%, let's say for example, in the four subsequent price increases, that amount is significantly lower than the increased cost of Asian imports. The price in T-shirts in Asia have gone up probably double since a year October from the $15 range to closer to the $23 range, plus duty and shipping, for example. Those shirts are significantly more expensive.

So what's driving our industry? And these are the pieces that we don't know because definitely one would think as you raise prices, demand would be reduced but the reality is that there's more and more opportunity as people migrate product production from Asia into this hemisphere.And I think that's what the big windfall is going to be for us, again, and people in our industry. So hopefully we're going to see continued demand. We don't have a crystal ball, again, for conservative reasons we're going to run full capacity. We're making every dozen we can. Our inventory levels at the end of the last fiscal year were short by probably a good three million dozens where we want them to be at the end of September.

So we're pretty confident that we can run everything we can make, and the question will be, what will happen with the demand in the market?But based on where we are today, I would say historically when you look at the beginning of the year, we've never been off to such a good start. We've never had this much momentum in the beginning of the year in all of the years we've been selling T-shirts, so things are heading in the right direction, and we just hope they continue.

And maybe if I could just follow on the sock business. Again, it sounds like efficiency's been causing you to miss out on some of the demand there. Can you speak to the pricing in terms of the quarter versus unit volume? Just first, if you could touch on that.

For socks?

For socks.

Unit volumes were down about 5%, and then we gave the total dollar decline was about 9%.

That's a mixture over your --.

Yes, which, the difference between the 5% and 9% is more a function of the change in the mix as we moved towards a more basic lower-volume manufacturing mix that fits with our manufacturing.

As far as our whole sock business in general, with the increases in prices that are effective in January, plus the modifications in product that we're making to enhance our margins in conjunction with the retailers, and subsequent price increases that are being worked on for back-to-school.And combine that with an acceleration of our relocation of our US production facilities from Pruitt and closing Pruitt, two of the plants will be closing next week and two more plants will be closing at the end of this quarter.And when everybody comes to the trip in Honduras in March, you'll see Rio Nance IV running at a pretty good clip and totally integrated.

Just to remind you that we're still making 10 million dozens in the United States, and every dozen that we produce in the states probably costs at least $1.50 dozen more then our vertically-integrated facility in Honduras. We have significant savings, as well as cost of our product, as well as our price increases, so we expect as we go forward into the back half of this year into next year that our margins will be in line with our business plans.

Okay, and then just lastly on Q2, a couple things. On the gross margin, again, I get it's a lower cotton cost that you now have embedded in 90% versus 95%. Is there anything else going on there -- again, I know pricing coming through, as well, but just thinking of the disconnect between Q1 to Q2, the significant ramp, is it all pricing and then lower cotton that gets you there?

So we have 2% improvement in gross margins between Q1 and Q2. The positive impact of the price increases should increase margins by 4%, the negative impact of higher cotton is 3%, and so that's 1% favorable.And the other 1% improvement comes from more favorable mix with the higher proportion of fleece and long-sleeve T-shirts in the second quarter compared with the first quarter.

Okay. Thanks, guys. Thanks for the detail.

Jessy Hayem with TD Securities. Please proceed.

Thank you. Still on the subject of socks, just wondering, with the inefficiencies you had in terms of the service levels throughout the quarter, what has been the reaction of retailers? Any penalties related to this? I suppose this was reflected in some of the score cards that retailers keep track of?

Yes, well, we had not necessarily penalties from retailers but we paid freight to get our goods on time to some of the retailers, so not necessarily penalties, but more costs incurred to supply the product. Definitely having shipping issues is not the greatest thing to have, but we worked through all these issues and we're back on track. One of the objectives for us right now is we're going to consolidate our US production, but we're also at the same time working today on significantly new opportunities that will continue our growth in socks as we go forward.

So we're continuing very optimistic about landing new programs, which hopefully in the next coming months we can tell you about, but at the end of the day we're very comfortable with our positioning. It's not something that we -- it's great to have, but that's part of life and we're a major supplier to these retailers and it's a two-way street. So we think our relationships are strong enough to be able to support continued growth and new opportunities, and we have quite a few in the burner right now.

Okay. And I guess it's safe to say that these orders are pretty much lost, nothing you can recoup in the quarter, right -- in the current quarter?

Those are pretty well lost because of the fact that they're skewed to holiday, so I would say they would be lost out of our forecast for this year.

Okay. And just on the ramp of the sock facilities, once Rio Nance IV is fully ramped up, you're going to be at 65 million dozen capacity, which you're ramping up to 60 million dozen this year, if I remember correctly.So essentially you're folding that 10 million dozen capacity that was still available in the US into Rio Nance IV and V, right -- III and IV, I should say?

Right, but the thing is, what we're going to do is we're obviously going to ramp the plant up based on our forward-go sales, so if our sales will support 55 million dozens, that will be the number. I think where we're seeing our sales volume in socks year-over-year today is probably more flattish, I would say, is what we're looking to do in this fiscal year because our focus right now is to continue to reduce cost, increase our prices, do product changes, and we're working on significant new programs, but they're going to be in the back half of the year that will really probably affect next year. So, once we get the plant consolidated, we'll have the capacity to go to 60 million dozens plus, but we'll be somewhere between the 55 million dozens, mid-50 million dozens range probably end year this year just to support what our sales objectives are for this year.

Okay. And then the price increases at retail, would you care to share what percentage price increase that would be, and I believe you mentioned they're effective January for both socks and underwear?

Yes. Well, we said approximately 5% for January, and I prefer not to disclose the underwear ones at this point in time because it's a little premature for us to do that, but they'll be significant.

Okay, and just a last question. Are you still on track to produce roughly 64 million dozens activewear underwear this year, of which hypothetically 4 million dozens is going into inventory?

That's right. 64 million dozens will be our end-year production, and approximately 4 million-plus dozens will go into inventory.

Great. Thank you very much.

Kenric Tyghe with Raymond James. Please proceed.

Thank you, good evening. I wanted you to provide a little more color with respect to the new programs you're referencing or other potential new programs in underwear, and specifically with regard to prior sensitivities you mentioned with your large mass-merchant retailer. I'd just like to know how those are being positioned, and what the response has been in the channels such that it has?

I think you're referring to the sock program that I mentioned -- or sock program or programs that I mentioned as we went through the comments, and clearly if we were at a point where we were comfortable giving you specific details in that, we would have done it, but hopefully we'll be in a position to do that soon.

Fair enough. Worth a try. Just a follow-up on cotton. I realize we've had quite a discussion on it. At 55% hedged on the fourth quarter, that appears to have been a fairly conservative strategy on your part. Is that just a function of the dynamics you've laid out, or is it one of you remaining opportunistic in the market or something else we're perhaps missing by way of dynamics in the broader cotton market?

What we said is that we're hedging to -- as we go through this volatility to try and mitigate exposure, because we don't know what's going to happen to the price of cotton, and it's moving relatively fast up and down. So, based on the decisions we made, this is where we landed, and the assumption that's in our guidance now is that based on what's hedged at 55%, plus the future price -- current future price, that's what's landed in our guidance. So if the future price goes up even further from here, there could be some down side.If it comes down to future price, there could be some upside, but we feel cotton is really pretty well high level now. It's peaked at $1.75 a pound for March. And we'll be further hedged as we go through in the next month or so. So that's where we are right now, and we feel comfortable where we're landed, and if cotton stays at these levels we'll introduce additional price increases, and if it subsides we'll just keep going at the level we're at now.

Thank you. Just a quick follow up. I realize we'll get better visibility when we tour the facilities in March, but you mentioned that the build is progressing. Any further commentary on the build? Progressing is obviously expected at this point, but any further color you could provide around the build?

Around what?

The facility expansion --

Rio Nance V.

Rio Nance V.

Well, we're running -- hopefully everybody will make our investor trip in March. Rio Nance V is full steam ahead. The plan for us is to start production there in August. The knitting will start in August, and the actual dying and finishing will be running in September and the plant will be ramped up through 2012. It's also going to be our biggest, most state-of-the-art facility, which will be great to see. So it's making great progress right now, the equipment's ordered, the building's up, it's moving forward.

Thanks very much. I'll leave it there.

Thank you.

Claude Proulx with BMO Capital Markets. Please proceed.

Thank you, good afternoon. Quick question. When you look at 2011, and you talk about cotton prices might be being some downside, when you look at the upside, would you say it comes more from volume or pricing?

I don't think we think there's much downside in our cotton assumption. We've assumed that we fill the balance of our uncovered requirements at the current prices. So certainly no -- it's at least as likely that cotton will come down from today's levels as go up, so I don't think we positioned that as more of a downside risk than an upside.

And what would be the biggest source of upside, would you say, pricing or volume?

I guess the first point, Claude, is that I don't want to say our guidance is entire guidance, but where the upside opportunities would be that we mentioned are further selling price increase and further sales volumes because of inventory that we're building at the end of the year. And hopefully the assumption we've made that there'll be negative impact in demand at the higher prices will be a conservative assumption that won't actually materialize.

So maybe more volume than pricing?

Right now, the market -- listen, the market was up 8% in the month of October, the quarter ending December, so if it runs at that clip and there's continued strong demand, obviously that is an upside for us because we're building 4 million dozens of additional inventory that could be sold to the market. So that's really the unknown for us. We're being conservative, but we think that we're being realistic in terms of where we're going, and I think that that's where you should position yourself today and that's the market. And again, what I said before is that even the price increases, which we obtained so far, if you look at 20% on an average price of, let's say it's about $3.60 a dozen for argument's sake on a T-shirt, where the prices in Bangladesh have gone up for duty paid probably closer to $12 a dozen.We are so far competitive that there is room to raise prices because I think people are going to continue to bring more products into this hemisphere, so that's the positive side.

I think that there's still room, but we don't want to do anything unless we have to. And all of our price increases up until now have been based on $1.25 cotton, so that's what we feel comfortable with at this time and that's where we are positioning ourselves. So if the future price comes down significantly, maybe we'll continue going at this clip. Where the future price is today, there'll definitely be a price increase sometime in the back half of the year.

Okay. Thank you.

Spencer Churchill with Paradigm Capital. Please proceed.

Thanks, good evening. Just on the Charleston impact for Q1, I was wondering if you might be able to quantify the revenue hit, as well as the extra cost that you incurred in the quarter?

Well, the extra cost was about $3 million. The impact on revenue is harder to quantify because it's an opportunity cost.

Yes, it was approximately 2 million dozens worth of product, [say] a couple cents.

Okay, great. Thanks. And in terms of the price increase on the socks that you implemented in January, just in terms of the timing, should we expect to see that get impact later in Q2, early Q3 like the activewear, or should the timing -- could it be different?

Sorry, I didn't -- are you're talking about the retail price?

Yes.

Yes, well, the retail price increase, the first one is in effect in January, so that goes into effect ASAP, January 1. And then I said we're making some selective product changes between now and let's say, for example, probably will take more effect in Q3. And then we have another price increase that will come in effect for back-to-school.

Okay. And just in terms of the -- on the competitive front, and how you're competitors are reacting to the recent round of price increases, have you seen any attempts by some of your competitors to steal share by holding back, or is everyone falling in line and doing price increases themselves?

The good news is from our competitor base is that we're all in the same boat really. We're all trying to mitigate this exposure. I think that in general it's not just in this hemisphere, but the reality is that the whole world is short on cotton. One of the things you can do is you can actually check the on-call and see that most of the cotton that's been sold has not been covered, and that's one of the reasons why it's run up to these types of levels. So, the good news is that we're all going to benefit, too, because if business is good and the business is coming from Asia and coming to our hemisphere, it's strong for everybody. I think everybody's seeing good sales, not just ourselves. I think that some of our competitors have reported their sales were up, as well, in our channel, so that's good for everybody. I think as an industry, I think the question is to mitigate through the volatility of cotton and continue to grow the business.

Great, and just one last question. Laurence, maybe if you could take us through the analysis you did last quarter in terms of the EPS adjustments for fiscal 2011 versus year-ended fiscal 2010 in terms of what the EPS impact was for the cotton increase, the volume increase, and then the negatives on the other side?

So going from last year to this year.

Yes.

For the full year? Okay. So, the impact of favorable selling prices is now a little bit more than $1.50; sales volumes are about $0.30; higher cost cotton's close to $1.70; manufacturing efficiencies will contribute positively about $0.15; and SG&A expenses are negative $0.10.

Okay. And then I think you mentioned before product mix was negative $0.10, and higher taxes was negative $0.05. Any update on those numbers?

Say that again.

Product mix was negative $0.10, and higher taxes was negative $0.05, I believe, last time we went through this?

Product mix would be negative $0.05, and higher taxes would be maybe a little less than $0.05.

Okay, great. Thanks very much, guys.

Thank you.

Omar Saad with Credit Suisse. Please proceed.

Thanks, good evening.

Good evening.

Wanted to ask you guys, you're the clear market leader. Everybody -- like you said, Glenn, everybody in the industry is experiencing the same phenomenon. Have you thought about pulling the price lever earlier or a little bit more aggressively? It sounds like the competitive response is favorable. There's not really any irrational competitors out there willing to squeeze their own margin in order to take a little bit of share. Is there something from your customer standpoint with the wholesale distributors? Are they price resistant, or the end market is price resistant? Can you just help me understand how you think about that whole chain of events?

Well, like anything else, I think we were pretty aggressive, honestly, because I'm really surprised how aggressive we were ourselves in terms of the last four price increases that we've attained. But the reality is that our customer has mix commitments, they have programs, so you have to be careful and implement these price increases in a reasonable time in order to give people a chance to adapt and make the adequate commitments. I think that's definitely one major factor.

Also, we want to make sure that we don't have a total demand destruction because we've had four price increases in a very short period of time, and the last one the ink's not dry yet because it was just a couple weeks ago, basically. So as we see, making sure that demand keeps going the way it's going, and hopefully it will because I think that we're still very globally competitive even at the prices we're selling our products for today.

And also we want to make sure that cotton is going to continue to stay at these levels because it's not for sure that cotton is not overpriced. There's definitely a lot of speculative people in the market today, and what's happening with cotton when you look at it at $1.75 a pound, I can tell you that in most cases people will have a very hard time to -- and that's a global thing, is to actually sell those products and bring them to market.So I think that that's going to force the price to continue to come down eventually. And so those factors, which we weigh in, we don't want to be in a knee-jerk position.So I think as long as we're methodical, we make sure the business is growing, we make sure our customers are rolling in the same direction as us, and we make sure we have visibility in the market, at that point in time we'll consider potential price increases if cotton stays where it is.

Okay, thanks, that's helpful. Switching gears a little bit, can you talk a little bit about some of the product modifications you're making in the socks to help on the margin side, and is that something that's coming from the customer, or is that your own innovation?

Well, some customers are having a hard time -- and this is mainly in retail. Customers are having a hard time dealing with these type of price increases because, obviously, they're significant. So in certain cases they're looking to make product changes like content in the product, maybe more polyester, for example, which is less expensive today than cotton, lighter weights, things like that, half cushion instead of full cushion. So there's things that you can do to a sock that you can reduce the cost.

And as part of that, pass on to the consumer without having to hit them with a price increase, as well as I think that the industry -- or the retail market will continue looking at pack sizes will change as we go forward. You get eight in a pack for a certain price, maybe you can only get six in a pack for the same price, and then the retailer can make more money and the margin increase will go accordingly. And also maybe one point is that's hardly our whole strategy is that we have the best quality sock in the industry, so even in our case we can afford, relative to what's out there in market, to take a little out of it and also give -- and all this is in conjunction with our customer, obviously, and still be on par with most of the socks in the marketplace today.

Okay, and last question, just to affirm. I think I heard you say this already, but the last four price increases, based on the sales number you guys put up, and I think your comments, it doesn't seem like you're seeing demand elasticity yet?

No, we haven't seen it yet, and we're pretty optimistic.And the only thing that we don't really know, again, is how much is new business coming back to this hemisphere, and I think that that's really part of what's driving the opportunity at hand, so we have a lot of new business coming back here. Asia is a total mess. There's hyper-inflation everywhere. Labor costs have gone up. We have a [factory] in Bangladesh, which is going pretty good, but what the government states inflation is, for example, 8% or 9%, and it's going significantly higher than that. So a lot of these countries, freight's going to become more expense. The yarn -- part of what we discussed about yarn is not just the cost of fixing your yarn on the exchange, but there's the other component, which is actually buying the cotton, which is the basis.And some of the Asian suppliers are paying $0.30 a pound just to have that cotton delivered to them, so on top of the $1.75 that's there today.

So, when you take all this in account -- and let me give you a good example of that -- you could buy a kilo of yarn, like a single 30-count, and last October you were able to purchase that from India or Pakistan for $2.50 a kilo, and what they're quoting for this April is $7 a kilo. It's almost three-fold in terms of what the cost of that yarn is, and that's the reason why it reflects in their price of their cost of goods sold. That's what's driving our demand right now partly, and also the unreliability of these Asian suppliers, basically.Retailers and I think printers are looking to buy more product domestically, and even though we're in Central America, our supply chain is considered to be a domestic supply chain.

Interesting. So retailers and screenprinters, everybody's been buying T-shirts in Asia over the last decade, starting to look back closer to home.

I think that's what's happening.

Okay, great. Thanks, guys.

Candice Williams with Canaccord Genuity. Please proceed.

Thanks. I was hoping you could help me get my mind around how pricing dynamics would work on the way down in a situation where cotton prices fall quickly?

Well, typically what happens, and I think one of the reasons why we haven't stuck our neck out and gone long on cotton at these types of prices is because of the fact is that we have a pretty efficient supply chain, and we're turning our inventory every three months. So the amount of inventory we're going to have in cotton in our supply chain would be three months. Typically what happens is that if cotton does start coming down -- now, we don't anticipate cotton coming down, crashing down unless there's a global meltdown like there was in 2008 -- we believe it's going to be a soft landing. Even with the acreage of next year, we think that cotton is going to be trading in the $0.90 to $1.20 range because it's going to take a couple of years for the ending inventories to refill themselves. So the only way that cotton would come down typically fast would be if there's a global crisis, let's say for example, like there was in 2008.

We've now set our prices today to be roughly about $1.25 cotton. We estimate next year will trade between $0.90 to $1.20, that's the range that we think it's going to trade at, and based on that we would not have to modify our prices. There could be potentially, as the cotton gets flushed out of the channel, maybe a little bit more promotional activity reflecting the new price of cotton. I think that's what would happen.

But at the same token, I think that there's still either -- when cotton does start coming down to normalized level of $1, $0.88, $0.90 to $1.20, which is our projection maybe for 2011, it may come down even further in 2012 as there's continued planting to replenish the inventories, which for sure is going to happen. As that transpires, other costs are going to occur because it's not -- cotton has been a big run-up today, but other costs that are running up throughout the world; transportation and labor and other things. So, I think that even when cotton settles down next year there'll be mitigating other costs going up the other way, let's say for example, that will probably keep pricing stability where it is.

And maybe one last point is that even today, prices -- when I started in this industry in 1993, I can tell you we sold a white T-shirt for $30.68 a dozen was like the market price. Today we're still selling those shirts for $17 a dozen, so our pricing today compared to 15 years ago is still significantly lower. So, we're very competitive as an industry, and we're also very competitive relative to the rest of the world, so I'm not really concerned about that type of landing. I think it will be relatively soft.

I was just wondering if there was margin upside in a situation where even if it is overdue your --

Yes, I think there will be, because we're not going to lower prices -- that's what I'm trying to tell you -- is that if cotton trades between $0.90 to $1.20 next year, and we fix our cotton prices -- our pricing at $1.25, for argument's sake, we're not going to change those prices. I think that with our efficiencies and all the things we're doing with biomass and Rio Nance V and all the other types of cost initiatives, we're definitely going to try and improve our margins as we go forward.

Okay. Thank you.

David Glick with Buckingham Research Group. Please proceed.

Thank you. Laurence, I just wanted to clarify. Essentially your guidance if we were to translate it down to EPS is unchanged, just how you're getting there on the gross margin line is different. I just want to make sure I'm interpreting that correctly?

Yes, there will be no material change. The margins are the same, we've slightly increased the sales, and there's no change in the dollar SG&A.

Okay. And then on cotton, I think you said you're assuming $1.40 for your fiscal fourth quarter, and that you're 55% hedged. I'm looking at the July future at $1.68, so you must -- the 55% must be significantly below $1.40, or you're counting on the price coming down? I just want to try to understand what the assumptions are embedded in that number?

If we bought all our cotton today at $1.65, we'd average $1.40.

Okay.

If we bought the balance of the 45%. So some of it was already bought at lower prices --

I see.

-- so assuming the balance is at today's prices, it averages out to $1.40.

Okay. So some of it was even below or close to where you were for Q3 -- where you are for Q3?

Absolutely.

Okay, great. Thank you very much. Good luck.

Thank you.

Tal Woolley with RBC Capital Markets. Please proceed.

Hi, good afternoon. Just wanted to talk a bit about the volume weakness. It seems that you're seeing in the guidance for the back half of the year, it seems like you're primarily concerned about the screenprint business, if I'm reading correctly. At the end of the day, you'll have sold more at retail this year than you will have in the prior year, correct?

Yes, we're not concerned about the volume. We've been conservative in our estimates. Right now our business has never been stronger, so if you ask me if I'm concerned about volume today, the answer is, I'm not concerned. Business has never been stronger. We've never been off to a better start in any single year in the Company's history.

The reality is that we just don't know the unknown, so what we've done is we've projected a more modest growth in sales within the channel of just around 3%, versus the 8% it's been running at until December. The quarter ending December, the market was up 8%, and what we're saying is, we're saying -- look, potentially because of the last price increase we just put through in January, could that slow down demand?

So we're conservative in our guidance. We're producing still the same amount of dozens we anticipated from the beginning, which is 64 million, we're just putting a little bit more dozens in inventory, so potentially if the market is as strong for the balance of the year like it was in December, then we'll sell more dozens and that will be upside to our forecast. We just don't know, and that's the thing. So it's been too early for us so we're -- it's two weeks from our last price increase, so it's a little early to say -- how's it going. We just don't know. So as we go through and we'll have -- as we go through the quarter and we start seeing the CREST reports and the reports coming out in terms of the market conditions, we'll have a better visibility, and then we'll keep adjusting from there. But we're -- irrelevant of that, we'll continue producing full out, full blast, 64 million dozen.

Okay. Just in terms of shuttering the US capacity and ramping up Rio Nance IV, what are some of the typical inefficiencies you can see during that process, like have you had any stuff happen in the past that you might avoid again or -- ?

Well, part of our inefficiencies, even in Q1 in retail, were actually the fact that the factory wasn't ramped up completely and (inaudible) the start-up phase. So we have negative efficiencies in our plant as we speak, which is going to flow through our P&L in Q1. So the quicker we expedite the move, the quicker we'll get our costs under control and get it similar to our normalized operating cost at Rio Nance III. So there are going to be a couple of transitions, some extra training. A lot of that has happened already because we've been training people in anticipation of moving knitting and moving our packaging facilities there. So there's been a lot of training, and that's a big bulk of the inefficiencies that we passed through in terms of our negative efficiencies in manufacturing in retail in Q1. There'll be some still flowing into Q2, which is in our guidance, but then as we get into, obviously, Q3 and Q4, we'll flush all those inefficiencies out and our margins will start to increase, as well as combine that with the additional price increases and the product enhancements.

Okay. And I don't know if this is like a really dumb question or not, and you can certainly tell me, but is there any concern about physical availability of cotton? I read a couple articles questioning that maybe if demand's a little bit stronger towards the end of the year, that depending on exactly when crops come off or in the fall, that there might be some issues just with physically stuff being available.And I didn't know if that's something that you're concerned about, whether that's a geographical issue or not?

Well, that is the whole issue why cotton is where it is today. It's all about physical. So the theory is that there's not enough physical cotton, so people are buying their cotton early and forcing the price up because they need this physical cotton. And that's -- really the truth is that the question is that's why you need to consider your positioning because at the end of the day, is this a premature hoarding process of people hoarding cotton because they're worried about physical, and ultimately having enough cotton to bridge the gap, would bring cotton down significantly in the future days. Those are some of the issues you have to deal with when you're trying to mitigate the exposure, but the reality is that that's what it is. Now we've booked all of our physical cotton for our facilities basically, so we are covered for this fiscal year and have enough cotton to bridge until the next harvest crop ourselves.

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

Thank you.

Hugues Bourgeois with National Bank Financial. Please proceed.

Yes, good day. Can you just maybe (inaudible) us on the progress you're doing in Bangladesh in terms of capacity expansion, and also the target markets?

Well, what we're doing in capacity expansion is we're running the facility, it's running well, it's on track with our projected volumes. We're actually increasing the capacity during the course of this year. We have a project, when we took over the factory we made a list of items. We're going to be investing roughly about $12 million more capital in that plant from our original investment, so we're going to have about a $25 million investment in total. That investment is going to take the capacity of the factory up to about 5 million dozens of production, which will mainly be up and running by the end of -- let's say by first quarter of next year. And those dozens are being used to support these international markets that we're focusing on.

Our international sales are growing strong, once again. That's what -- that's, again, what's driving our overall demand is -- our strategy is we have four growth objectives. We're continuing to grow our US distributor business and capitalize on the recovery of the market. We're looking at international growth, as well as we're pursuing retail opportunities. All these things together, we believe, are a formula to continue our success as a Company but also not only continue the build-up of Bangladesh but as well as to bring on additional capacity in our Rio Nance V facility, which is going to be the largest state-of-the-art facility in which Gildan operates.

Okay. And the investment you're doing in the new vortex fiber, is that being implemented currently, or will it be done over the course of the year?

Well, that project was geared to be during the course of the year, so that's a project that was back ended. We have enough vortex right now with the first initial investment we made to support all of this year's sales, and that second investment was really geared to support next year.

Thank you.

Scott Rattee with Stonecap Securities. Please proceed.

Hi, good afternoon. Just a question within the retail channel. Are you seeing any evidence of the fact that as we have the higher apparel prices coming through, that it's really serving as a catalyst for consumers to consider and/or purchase private label brands more so than previously?

No, I would not say so. I think at the end of the day, consumers in the mass market in the United States have typically bought on price, that's really the driving factor. I think the big question is going to be, can a consumer absorb these new price increases. The elasticity piece there I think at retail is much more sensitive I think in certain cases. Now, what will happen in my opinion is that the retail units will probably end up coming down because people will trade smaller pack sizes, so the only way the rings will continue -- the pack rings. In other words, instead of having an eight pack you have a six pack, it has the same ring, but ultimately unit volume will shrink. And that's just a function of the amount of disposable income that people probably have to shop at these retailers.

So, I don't think it's going to make a big difference between being branded or versus private label. I think it's going to be the shell shock of the price increases because I think everything is going to go up relatively. Everybody's faced with the same type of cost pressure, so if a brand was selling for X and private was X, just X moved up or it'll be reduced in terms of the offering to the consumer.

Okay. And you mentioned a little bit earlier that you're in very good position that the backlog is one of the highest you've seen. I know you made a comment, something similar to that when we finished the fourth quarter. Could you comment on whether or not the backlog is actually increased quarter-over-quarter, or give some color on how that is progressing?

I'd rather not say, to be honest with you, but I can tell you that we feel very comfortable, and I can tell you that we've never been off to a better start either in Q1 or Q2 historically in the Company; I think that's the point of reference. And we're very optimistic, we hope things continue as they are today. And we'll report in May and we'll hopefully come back and say, yes, the market achieved our expectations and we still have these back orders and that's hopefully our objective.

Okay, and just one final quick one, just as a confirmation. You'd mentioned -- or in the quarter, that SG&A was 12.6%. I thought for the full year we were looking for it to be running at about 10.5%. Is that still what you're targeting?

We're targeting a little below 10.5%. The reason why it's higher in the first quarter is purely a function of seasonality. The first quarter is seasonally the lowest quarter of the year for T-shirts, so the SG&A as a percentage of sales is always higher in Q1.

Okay, great. Thanks much for that clarification. I appreciate it.

Thank you.

Thank you.

Jim Duffy with Stifel Nicolaus. Please proceed.

Thank you, and thanks for taking the time to answer my questions. I'm interested in your view on the extent to which you think distributors are buying in advance of the anticipated price increases, what that means for inventory build in the channel and how you foresee that influencing the flow of business across the year?

Well, the reality is that the inventories in the channel at the end of December, our inventory was about 52% of the share of the inventory and our share of -- our demand is about 60%, so we're very comfortable with our balance. So up until now, even the fact that we shipped as many dozens as we did in Q1, we're very comfortable with that inventory position. So business is strong. There was 8% growth in the quarter, and we feel very comfortable where the inventories are today in the market.

I don't think that the distributors are buying necessarily more than they need, because their inventories would reflect that in the marketplace.But I think the distributors are buying and getting visibility, making sure that they do get delivery, and I think that's a little bit more of the case, let's say for example, than buying in anticipation of the price going up.So I think that the balance is good, and I think we're anticipating to be in line even at the end of this quarter.

And although -- I'll add one thing. Although we identified distributor replenishment as a factor in our analysis that was impacting the year-over-year growth in sales, a lot of that was the non-recurrence of the destocking that took place in the first quarter of last year, so inventories in the channel are still in good balance.

Okay. And then when you look at your back orders, understanding that back orders are on the books prior to the price increase, is the volume such that it carries you deep enough into your inventory that your cost of goods are going to be higher than the associated price on those sales?

What we do is -- yes and no. But what we do is if we -- rather than putting a price increase that's going to be out in the future, which is very difficult to say what order came in at what time, and just because you're changing the price effective a (inaudible) date, and the way you get orders, basically, you ship -- if you're shipping them and you don't ship it completely do you increase the price or don't increase price; it's very complicated. So what we do is we basically increase the price right away, so any order that was in the system we honor that back order, let's say for example, and gets shipped under the old price, and only the new orders from that day of the price increase will then reflect that new price. So therefore, the margin on those back orders is obviously lower than it would be on the new orders reflectively.

Okay, that's helpful. Thanks very much.

Mark Petrie with CIBC World Markets. Please proceed.

Hi, good afternoon. Sorry, just to clarify quickly, with your growth lagging the industry growth in the wholesale distributor channel in the US, is that strictly a function of the inventory and you see that trend reversing, or is that a matter partly of you guys allocating product to different channels or geographies?

Well, we increase our shipment to distributors significantly in the quarter, and it's a function of the demand and the 8% growth in the market, and the amount of inventory that we had to support it. And also, it's a little bit -- also the quality of inventory. Because we're trying to catch up coming off of Q4, we could be out on certain SKUs that could affect our market share as we -- in this quarter. But I would say that as we get into February, in the March period, we should see our market share go back to more of a normalized level as we go forward. So it's more a function of not having the right SKUs, and sometimes in certain cases we had the right amount of inventory but not the right SKUs, or vice versa. So it's just a question of us being so tight on inventory, basically, that it's a reflection of the loss of share.

Okay, thanks, that's helpful. You've spoken in the past about anticipating consolidation on some of the smaller manufacturers, and obviously they're under a lot of pressure in the current environment. Have you seen much of that so far or -- and what kind of role do you guys think that you could be playing in that, if any?

I can't really comment on that, but I can tell you one thing is that the price of cotton is going to make a significant impact on the global supply chain, because if you look at what the cost -- if you take a trailer of yarn was selling for $35,000 six months ago, is selling for over $100,000 today.So smaller, under-capitalized companies are going to have significant problems having to deal with the amount of working capital that's required to support their business on a going-forward basis. Even ourselves, we're projecting a significant use of working capital just reflective of taking cotton last year in our books at $0.70 plus, and if we end up this year at $1.40, you just do the math and basically it takes seven pounds per dozen, take the amount of dozens and take the difference in the price, it's hundreds of millions of dollars, and we're in a good financial position because we use our own cash, but the reality, that's a major strain.

And the second part of it is that the credit lines from the people that supply them are probably going to be tightened in the sense where how much credit do you want to give somebody, so that's also another issue. I think overall it's going to create -- for the smaller, under-capitalized producers, it's going to be very difficult times for them and that may be part of also what we can capitalize on, as well as which will be part of our opportunity to create demand, and that's even within the US market. There's a lot of smaller manufacturers in the West Coast United States, there's a lot of small manufacturers in Central America that just can't afford to buy yarn at these prices, or don't have the credit lines, and that demand theoretically should come hopefully our way.

Okay, thanks a lot.

Thank you.

Anthony Zicha with Scotia Capital. Please proceed.

Hi, good evening. A follow-up question relating to inventory levels. Glenn, do you believe that -- on the retailer front that some of the retailers have been pulling forward their purchases, and building up some inventory, and do you think that the levels are in line where they should be?

Well, I can't tell in general, but I can say with our inventory levels in retail, they actually came down a little, to be honest with you, in January, so I would say that they're pretty well in balance. Like anything else, retailers -- the increases that we've taken in January is not worthwhile for a major retailer like Wal-Mart. They don't adjust their systems like that basically. They work on so many weeks of supply, and they keep the machine going, and so I would say that the inventory levels are normalized where we see them today.

And do you think that there's some product shortages out there at some retailers in different items because of the cotton situation?

I don't think today there's necessarily shortages. I think that there's going to be disruptions to the supply chain in back-to-school in the fall with these type of prices because -- and not so much from -- I would say from North American producers, but more from Asian producers because a lot of companies in Asia aren't vertical. They buy yarn and they produce their goods, and all of a sudden they go and buy their yarn and the guy commits them to a price and doesn't honor the price, and therefore, that vendor can't honor the contract to the retailer, and all that is working on LCs out there, for example. So there's going to be some broken hearts for sure, but it's hard for me to say.

My last question, relating to your European operations, and particular in the UK, can you give us an idea of your progress like year-over-year in terms of market share and what the competitive landscape is like?

Well, our business is very strong in Europe, like it is everywhere else. We grew I think the number was --

It was about 20%.

20%. And again, in Europe we've been probably more capacity restrained than we are in North America because it's further away, but we're working hard to make sure that as we allocate it appropriately that we're -- it's definitely been more so capacity restrained than even in the US, believe it or not. So, even based on that, we'll still be able to grow it over 20%.

Okay. And some of the production that will come from Bangladesh will be servicing the European market?

Yes. Some of the production from Bangladesh is servicing basically our Asian hub, as well as our European -- partially our European business, specific SKUs.

Okay, thank you.

Thank you.

And ladies and gentlemen, this concludes all the time we have for questions today. I will now turn the call back to Sophie Argiriou for closing remarks.

Thank you. Just before ending the conference call, I would like to remind you that Gildan will be holding its annual shareholders meeting tomorrow at 11 AM Eastern Time in Montreal at the Centre Mont-Royal.We'll therefore be available this evening for the next little while to take any follow-up questions. With that, I'd like to thank everyone for joining us, and we look forward to talking to you again at our next earnings conference call. Thanks, and have a good night.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect. Have a wonderful day.