Gildan Activewear Inc (GIL) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the second quarter 2011 Gildan Activewear Inc. 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. We will facilitate a question and answer session towards the end of the conference. (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 Relations. Please proceed.

Thank you, Lacey. Good morning, everyone, and thank you for joining us. This morning we issued our press release announcing our earnings results for the second quarter of fiscal 2011 and our interim shareholder report containing management's discussions and analysis and consolidated financial statements. These documents will be filed with the Canadian securities regulatory authorities and the US Securities Commission, and are also available on our website at www.gildan.com. Joining me here this morning are Glenn Chamandy, our President and Chief Executive Officer, and Laurence Sellyn, our Executive Vice President and Chief Financial and Administrative officer. Laurence will provide a brief overview of our second quarter financial results and our business outlook, after which we will open the call to questions.

Before we begin, let me 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. This morning, we reported our fifth successive quarter of record quarterly results. In addition, we substantially increased our earnings guidance for the full fiscal year, in spite of significantly higher cotton costs for the second half of the fiscal year compared to the first six months. Sales for the second quarter were $383 million, up 17.3% from $327 million in the second quarter last year. EPS before restructuring charges was $0.53, a record for the second quarter of our fiscal year and up 29% from $0.41 per share in the second quarter of fiscal 2010.

The growth in sales revenues was primarily due to the impact of higher net selling prices for activewear which increased by close to 20% as a result of successive selling price increases and lower promotional activity. In addition, unit sales volumes for activewear and underwear increased by 6%, in spite of continuing low finished goods inventories and capacity constraints which prevented the Company from maximizing its market share and fully servicing distributor demand to replenish inventory. Although we were able to sequentially increase our market share to approximately 63% compared to approximately 58% in the first quarter, according to the CREST report, replenishment of Gildan inventories in the distributor channel was lower than in the second quarter of fiscal 2010. At the end of the quarter, our share of distributor inventory was 52% compared to our market share of 63%. And we currently continue to have a significant open order position.

We continue to achieve good growth in international and other screen print markets in spite of our low inventory levels and capacity constraints. Sales of socks were down by 24% due to lower retailer inventory replenishment, the discontinuation of a large uneconomic sock program in the third quarter of fiscal 2010, and a lower valued, more basic product mix. In the third quarter last year, we completed the rationalization of unprofitable sock programs we had acquired from Kentucky, Derby, and Prewett, and are now positioned to build from our base of private label and branded Gildan sock programs. Our new Gildan branded sock programs are selling through strongly to consumers. We expect to have a strong back-to-school season this year and to be able to service demand from our retail customers.

Sales of activewear and underwear to retailers increased by over 50% compared to the second quarter of fiscal 2010. Selling price increases averaging approximately 5% were implemented in the quarter in the retail market, and further increases are being implemented in the second half of the fiscal year. Gross margins were slightly higher than the second quarter of last year at 28.1% versus 27.8% a year ago. The increase in activewear selling prices offset the impact of higher cotton, energy, and other purchased input costs, startup manufacturing efficiencies which impacted margins for socks and underwear, and more favorable activewear product mix due to a higher proportion of basic T-shirts and a higher proportion of sales of irregulars.

SG&A expenses in the second quarter included a $3.7 million loss on the sale of our former corporate aircraft which was recently replaced by an operating lease for a new aircraft. Excluding this item, SG&A expenses increased by 13.7% from the second quarter last year and were 11.5% of sales compared to 11.8% of sales a year ago. The increase in dollar SG&A expenses over fiscal 2010 was primarily due to the ramp up of the new retail distribution center, expenses for retail advertising, a year-to-date adjustment to performance driven variable compensation, and the impact of the higher valued Canadian dollar on corporate administrative expenses.

Results for the second quarter reflected income tax recoveries of $5 million, of which approximately half related to the first quarter. The tax recoveries are due to recognition of the tax benefit of year-to-date losses in US legal entities which are being recognized as a result of our projected future earnings in these entities which are expected to enable us to fully utilize the losses. We've increased our guidance for sales revenues for the full fiscal year from approximately $1.6 billion to $1.8 billion. Gross margins for the full year are now projected to be in the range of 25.5% compared to our previous forecast of approximately 25%. The increase in projected sales revenues and gross margins is due to the acquisition of Gold Toe Moretz which was April 15th 2011. And a further increase in activewear selling prices in the US screen print market averaging approximately 7.5%, which was announced in March. The end year impact of the March selling price increase, combined with the further selling price increases for retail products, more than offset the additional negative impact to further increases in cotton costs compared to our previous guidance. The balance of our cotton costs for consumption in the second half of the fiscal year have now been fixed and full year cotton costs are now projected to be approximately $1.15 per pound. Our updated guidance does not include any possible further increase in selling prices in the screen print market. Selling price increases implemented to date in the screen print channel are estimated to pass through cotton cost increases up to approximately $1.50 per pound which was lower than our projected cotton cost of approximately $1.60 per pound in the fourth quarter of the fiscal year.

Based on these assumptions and projected SG&A of approximately 11.5% of sales, we're now projecting EPS before restructuring charges of $2 to $2.10 for fiscal 2011. Full year EPS includes approximately $0.07 accretion due to the acquisition of Gold Toe Moretz. EPS in the third fiscal quarter are projected to be approximately $0.70 per share, up approximately 30% from the third quarter of fiscal 2010 on projected net sales revenues of close to $550 million.

Results for the third quarter will be negatively impacted by a significant increase in cotton costs to approximately $1.25 per pound versus approximately $0.85 per pound in the second quarter. However, EPS is projected to increase sequentially from the second quarter due to higher seasonal sales volumes, the full benefit of previously announced selling price increases, more favorable activewear product mix, more favorable manufacturing efficiency, and the non-recurrence on the loss on the sale of the aircraft. Percentage gross margins are projected to decline slightly from fiscal 2010 due to the impact of higher cotton costs. We are projecting a small income tax recovery in both the third and fourth quarters. Our EPS guidance assumes the continuation of current overall economic conditions. And the current volatility in cotton prices does not significantly change our current outlook for industry selling prices and demand.

We used $62 million of cash in the second quarter due to seasonal increases in receivables compared to the first quarter, rebuilding of activewear inventory, increased inventories of socks and underwear for back-to-school programs, approximately $35 million to finance the higher cost of inventories due to inflation in the cost of cotton and other purchased cost inputs, approximately $40 million for Capital Expenditures including the ramp up of Rio Nance 4, the construction of the building for Rio Nance 5 and the expansion and automation of the Eden, North Carolina screenprint distribution center. And for the payment of our first quarterly dividend in March. We ended the second quarter with cash and cash equivalents of approximately $175 million. Subsequent to the quarter end, we utilized approximately $100 million of our surplus cash to partially fund the acquisition of Gold Toe Moretz, with the $250 million balance of the $350 million purchase price of the acquisition being financed by drawing down on our $400 million revolving bank credit facility. We're currently considering the option of increasing our bank revolver in order to continue to have flexibility to finance further acquisition opportunities.

The management teams of both Gold Toe Moretz and Gildan are very excited about the potential growth opportunities that we see from combining the different and complementary strengths of the two companies. We view the acquisition as an important step in the strategic development of our Company. The economics of the acquisition, which were discussed in our recent conference call to announce the acquisition, both the IRRs and EPS accretion, are based on Gold Toe Moretz's standalone EBITDA and the cost synergies from the consolidation of certain activity. However, the real upside from the acquisition is the opportunity to drive significant top line organic sales growth which was not included in our base case assumptions used to economically justify the acquisition. The combined company is well-positioned for strong growth due to our multi-brand positioning which is well diversified in all US retail channels for apparel, mass market, national chains, dollar stores, department stores, wholesale clubs and sporting goods retailers. Opportunities to capitalize on the combined strengths of the two companies include, firstly, development of some of Gold Toe Moretz's company-owned brand and brand extensions in the mass market based on leveraging Gildan's global low cost manufacturing. Secondly, further development of Gold Toe Moretz's licensing relationship with Under Armour and New Balance. And, thirdly, leveraging Gold Toe Moretz's core competencies and brand management to further enhance the development of the Gildan brand for retail which is already beginning to gain traction.

We continue to have a strong balance sheet and unused debt capacity which will enable us to continue to pursue complementary acquisitions as one of the elements of our ongoing growth strategy. We intend to be disciplined about focusing on acquisitions which meet our criteria to manage acquisition risk and achieve attractive returns on capital. Acquisition targets should complement our organic growth strategy, be easily integrated into Gildan, not be turnaround situations, and meet our financial criteria for risk-adjusted return on capital, EPS accretion and conservative debt leverage. Finally, our strategy to maximize returns and capital for our shareholders also includes the quarterly dividend which we initiated in the first quarter. We're also pleased to announced today a dividend of $0.075 per share for the second quarter which will be payable on June 17 to shareholders of record on May 25, 2011.

Thank you, Laurence. This concludes our formal remarks. Before we open the call to questions, as usual, I ask that you limit your questions to two in order to give everyone the opportunity to ask their questions. If we have time we will circle back for a next round of questions. Thank you. Lacey?

(Operator Instructions) Spencer Churchill with Paradigm Capital.

Hi guys, great quarter. Just talking about some of the inefficiencies that you mentioned on the distribution side of Charleston impacting margins again in the quarter, I think if I recall we hoped that was solved last quarter, so it looks like perhaps it spilled into the second quarter. Maybe if you can just give an update on what's going on there and if we expect that, that should continue.

That was on a year-over-year basis, not in relation to our forecast. The ramp up is proceeding as planned.

The facility is running as scheduled and is operating in a normal course of business today without issues and within cost of projections that we've set forth.

Okay, great. And then maybe just in terms of the full year guidance, if you take out the $0.07 from Gold Toe, the bottom of the range is a little bit above where we talked about implied EPS for the year last quarter. And maybe if you could just talk a little bit about how much of that improvement was related to price versus potentially the tax recovery you talked about in the second half. And then maybe if there is any improvement in terms of the volumes.

We haven't at this time reflected any increased volume in our updated guidance so that would potentially be an upside. So what is driving the increase from our guidance at the end of the first quarter is the impact of the further March selling price which is about price increase which is about $0.40 for the balance of the year. That essentially offset the further increase in cotton and higher manufacturing costs and costs of other purchased cost inputs, and higher SG&A costs. So all we're reflecting at this time is the impact of Gold Toe in the lower tax rate.

Okay, great. And just one question, final question. You did talk last quarter very bullishly in terms of the order book and the outlook, just in terms of the general macro picture. Are you still feeling as positive as you were before?

Yes, we still have quite a large order book today. The days of inventory that we have in the channel today are lower this year over last year. We have about 70 days, just over 70 days of inventory in the screen print channel. Our share of inventory is under 50% which is almost 4% lower than it was last year and our share is relatively flat on a year-over-year basis. So things are still tight. We're very bullish still, and we feel we're in a very good position from that point of view.

Claude Proulx with BMO Capital Markets.

Thank you. Good morning. Just one quick question. Inventories of finished product, it's up 30% in dollar terms. How much is it up from in terms of volume, how much more inventory do you have?

Are you talking in the channel?

No, I'm talking in your warehouse, your own.

Our increased finished goods inventory accounts for about $25 million of the increase in inventory compared to the first quarter.

No, but I'm talking year-over-year. It's up 30%. There's obviously higher costs in there, but there must be also in terms of units. Any color you can give?

I would say that the percentage of inventory that is up is inventory that's actually being used to support our growth strategy. So we have also allocated this year more inventories to our business in Europe is growing and et cetera. So the actual quantities of dozens is in the neighborhood of about 1.5 million, just slightly north of that this quarter. But a lot of that inventory is not necessarily saying it's for sale. The actual way we look at it is how much inventory do we have in our North Carolina warehouse, let's say, for example, and that is just slightly over where it was last year at this time. If that answers your question. So we're still tight on inventory and we still have a strong back order base, and we're very bullish in terms of the outlook going forward in this next quarter.

Because I'm asking because you're saying that the potential upside would come from volume, so if it's not in your inventory it will have to come from--

Not in Q3, that's for sure.

Okay, but in Q4 you could have some additional production?

Q4 we could have additional production.

Eric Tracy with FBR Capital Markets.

Thanks, good morning. If we could just speak to the price increases that have come through. In aggregate, what do those price increases look like to date, including the 7.5% in March? And then how do we think about that on a go forward basis? If we assume cotton at the current level of $1.50 as we head into FY '12, how much further in price would need to be taken to offset? I'm trying to just get a sense of where we are from a pricing standpoint, what incremental might have to look like, and then the assumptions around elasticity going forward, as well.

I think that, first of all, the price increases really worked out to about 26% from wholesale. And that's from July of last year through March this year. But to put that in retrospect, is the way we look at this also is that the actual average price of a T-shirt that we're selling -- because we have a mix, we have sleeves and there's golf shirts -- but if you just take T-shirts which is the lion's share of our sales, after the 26% price increase, the average price of a T-shirt is around $1.75. Which is what we sell to, let's say, for example, our end-users or our distributors. Which is one-third less than it was in 1993, believe it or not. So despite the fact that we've had inflation, we've over 15 years had significant deflation.

That quantifies, basically, if you take it on $1.75, you take a shirt, let's say, for example, and you say, post all these increases we're around $1.35 to $1.40. With a $0.40 increase per unit, the actual cost of the end unit, as we look at the supply chain and you look at the retail price, let's say, of a shirt that's being sold in a souvenir shop or I don't know, wherever you look by product, most items are selling anywhere between $10 and $30. So if you take $20, that $0.40 along the way is being absorbed. So the end-user is not necessarily spending or paying much more money for the shirts just because of the fact that the supply chain, the whole value chain is quite large. So the way we look at it is that I think we're still, as an industry, very competitively priced, and that, realistically, I would say prior to these price increases, we probably globally were at the bottom of the market.

The other factor is it's not just the cotton prices. We've raised prices up until now to handle $1.50 cotton and the price of go forward is not just the price of cotton. It's the price of cotton plus, obviously, the cost of basis, so you have to look at those two together. So even next December, cotton is trading at $1.25 a pound as of today plus the basis cost, it's pretty close to where we raised prices until now. So we feel very comfortable with the level of prices we are at. But there's also other inflationary factors that are affecting costs. Labor is going up everywhere, transportation, power. So inflation is here. So we're feeling comfortable with the prices where we are today. Cotton may come down a little bit in the future but there's other inflationary factors. And where we're priced, I don't think that we have really taken a lot out of the pricing power or at least elasticity of pricing, let's say, for example, in the future. I don't know if that answers your question but we're very comfortable where we are today on a go forward basis.

So just to clarify, though, on the elasticity side, so embedded within the guidance, is there an expectation of impact on unit volumes in the back half of the year? Negative impact on unit volumes based on these price increases or is it essentially you feel good about--

We're thinking that we're going for a 2% market growth in the back half, is where we're looking at, which is similar to what we've seen in the first 4 months of this year.

Okay. And then if I could, I have to touch on the sock business, the core sock business, down 24%. I believe that the business has been negative for going on 2 years now and it seems to be there's timing and replenishment issues that seem to be recurring. Again, if we could just maybe speak to the visibility you have to turning that, and understanding now with the Gold Toe acquisition that is going to potentially mask a lot of the core issues. But I'm just trying to get at the visibility that you have and maybe what some of the issues and how you reconcile those going forward?

To start with, we've consciously brought the volume down ourselves as we discontinued product lines that didn't meet our criteria. And that's what we've been doing over the last couple of years. The reduction in unit volume is a couple million dozen in the quarter, which represented about 800,000 dozen of the last of the discontinued product. Because either we're discontinuing product on a year-over-year basis because we're closing it out, or we have to complete the programs with the retailers. So we basically are completely finished with the discontinued side. And we had about $1.2 million of destocking from one of our largest customers due to some of the late shipping that we had last quarter. So the shipping issues we had in Q1, we shipped goods later in the season, later in the quarter, that reflected the replenishment of this quarter.

What we're projecting for the balance of the year is flat sales in terms of socks, so we feel that we're at a plateau right now. But all the volume in which we're selling on a go forward basis is what we considered our criteria. It's more the branded type products. So we've gotten rid of and shed ourselves of a lot of the no name type brands. So we're focusing on where we think we can add value in the long run. And our whole focus is going to be to supply retailers' branded private labels as well as develop our own brands, Gildan and as well as those brands that we purchased through the (inaudible) acquisition. So we feel very comfortable with our positioning and we're very bullish on our whole opportunity. And we've had some major initiatives even in our own Gildan branding sock program which is selling very well at retail today. So overall, we're very excited and we're going to continue to ramp up our Rio Nance 4 facility. The plant is going to continue to be ramped, as we discussed in our investor trip, and partly through the remaining Gildan volume but also with the implementation of the products that we're going to move from Gold Toe into our facility, which is going to significantly, obviously, increase their margins because we'll be able to produce those goods at a much lower price than they've been outsourcing them in the past.

Just to add to what Glenn said, I think the way we would position the impact of Gold Toe is to enhance our core business, not to mask the performance of the business.

Right, okay. And then just lastly, Laurence, if you could just quantify for us the incremental tax recovery component for Q3 and Q4, what that contribution is?

That's about $0.05 relative to our previous forecast.

$0.05 for the entire back half?

Yes.

Kenric Tyghe with Raymond James.

I just want to confirm, you mentioned you've covered cotton for the fourth quarter at $1.60, if I heard you correctly, Laurence. Could you also speak to the extent to which, if any, you've looked at the first quarter of '12, particularly given the sharp reset lower in the near dated cotton future?

We're constantly purchasing cotton. We're obviously taking advantage of some of the downside in the quarter, the reduction in pricing and the recent reduction. The one thing to remember when you're looking at cotton, though, which I think is an important fact, is that the cotton that we're currently purchasing now is the July period. So May is now off the Board and we're purchasing what they call the July period. And the way that cotton is being sold to the industry is basically you have to buy the cotton period is for June, July, August, September, and October. And this period is coming off the board in the middle of June. So by the middle of June, everybody who's consuming cotton and their requirements through October will be fixed and purchased by the middle of June, which is roughly about, just over 30 working days from today. And at that point in time, that cotton will, obviously, be flushed through people's cost of goods sold into the next 6 to 9 months depending on inventory levels into '12. And so even though the price has come down from its highs, people will have cotton at the high level, the lower level but essentially I think that cotton prices will still be fairly high relatively into 2012 as an industry. Not necessarily our prices.

Thank you. And just to follow-up on that, has the basis point spread, I think as you referred to it before, relative to actual futures prices, has that started to narrow with the futures trading lower, as well? Is there less risk on the cost to carry from producers? I know you've previously highlighted that as an issue against the contracts as we see them publicly.

It's actually gotten a little worse, to be honest with you. Because what the merchants want in terms of the risk/reward is because of the inversion of cotton today between, let's say, December and March, when people are buying cotton they have a choice between buying in December and covering yourself all the way through March on December futures, or taking the risk on the inversion which is, let's say, $0.10 a pound today. So the fact is, that the merchants last year got caught off guard with this inversion and they're not taking the same risk on a go forward basis. And that's one of the reasons why, even though cotton futures look lower, the cost potentially could be still quite high. So that's a fact that we still have to look at. So I think at the end of the day, the reality is that based on where we are today, the world ending stocks in cotton, and I would say that the cotton will remain to be bullish, let's say, for example, into next year. It's going to take not just 2012 but it will take until 2013 before we start seeing it come down to more normalized levels. And the new normal may not be the old normal. Normal could be $1, we don't know. I think that's the deal we have.

Thank you. And just a quick final question. Your guidance and discussion around your European business, particularly given continued strong volume growth, continued market share gains and demand pull, it's just looking increasingly too conservative, perhaps increasingly conservative, perhaps even too conservative. Could you just walk us through what your thinking is currently on the European business given what appears to be traction ahead of your own expectations and prior commentary?

I will just say one point, our European business right now, which we're very bullish on, still has the reins on it because, the thing is, that we're very tight on capacity. So as good as it is, it could be a lot better, to be honest with you, because we're very tight today and we're allocating, we set a plan in Europe to do so much and we're not going to exceed that plan because we don't want to allocate anymore inventory to that market. We made a plan originally to begin the year and the rest of that capacity is being allocated to the North American markets to maintain our service levels here. But I think that the real opportunity for us is we're building Rio Nance 5 as fast as we possibly can. The plant will start operations in September and be ramped up as quick as we can in our fiscal '12. And as we ramp up that facility, we'll have ample capacity to support the replenishment of our inventories here in North America as well as all of the growth opportunities that we have in other markets in which we're selling.

Jessy Hayem with TD Securities.

Thank you. Most of my questions have been answered. I just wanted to follow-up again on the sock business. When you mentioned, Glenn, you expect flat sock sales, you were referring to unit volumes for the rest of the year, right?

Yes, that's correct.

So obviously no opportunity to recoup some of the lost business with the retailers?

The thing is, in the back half of the year, first of all we're raising price in the back half of the year. What we haven't mentioned on the call yet is that we have quite a large price increase going through in August, which obviously is needed to require to support the higher raw material costs, et cetera. So our view in retail is that we're planning unit volume flat just because of the unknown in terms of the price increases. And in retail, it's a little different because in unit volume we're flat, but a lot of the pricing that is in the market could be, let's say for example, change of pack sizes. So instead of selling 10, you sell 1 less in a pack, let's say for example. So that maintains, let's say for example, volume will be maintained and that's how you pass on the selling prices to the consumer. So we're projecting somewhat flat volume sales but we will have price increases that will support the growth in volume, in revenue.

And the other thing to emphasize, Jessy, that we mentioned in the formal comments is that the management teams of Gildan and Gold Toe have already been working very closely together to identify and start to drive significant organic growth opportunities in both business, which we see as very significant upside for our organic sales growth as we go forward.

Even in the second half?

Not in the second half. But one thing, Jessy, is that the thing is, for us, even though we consider ourselves to be flat, what we've also done is we've taken the time to reduce our capacity in the States. So as you saw in the investor trip, we're building up Rio Nance 4 right now. So we shed capacity we had available to us in the State which obviously is going to lower our cost. And that's one of the things why we're bullish on our margins in retail. As we get to the end of this year, our margins are going to increase significantly, just as we get all those cost savings from Rio Nance 4. So we reduced capacity in the States, we're ramping up Rio Nance 4. That ramp up coincides with our ability to supply a flattish type market. And as we continue to ramp it, we're also going to migrate production out from the Gold Toe operations and achieve our synergies from Gold Toe. And as we go forward to next year we're going to have significantly higher margins because Rio Nance 4 will be fully ramped up. And just reminding you that the cost difference in Rio Nance 4 relative to US production is in excess of $1.50 a dozen, and we closed down over 10 million dozens of production.

And just a clarification. The price increases that are coming through at retail, is this socks and underwear and any other business you have at retail?

Yes, and the price increases are going to be a combination of socks, underwear, and also product changes. So there's certain cases we changed products which reduce costs to that product. So not necessarily all are reflected in the selling price. Some will become just cost reduction. But if you quantify it, it's probably going to be in about the 15% range for the August period. And then we'll evaluate as we go forward depending on what happens with the price of cotton over the next d4 weeks. There could even be potential further increases even in the holiday for October.

Mark Petrie with CIBC World Markets.

Good morning. You touched on this, Glenn, but wonder if you can just give us a broad update in terms of the status of Rio Nance 5, as well as the transition of capacity from the US to Rio Nance 4?

The transition from Rio Nance 4 is complete because we closed the remaining factories we had in the United States down at the end of Q2. And we're in the process of ramping up Rio Nance 4 which will be completely ramped up, the bulk of it will be done by September. There will be a balance that's going to happen into Q1 only because of some equipment that's only arriving in October, until it gets installed and running. So we'll be 98% ramped probably by September and the balance will happen in our Q1 of '12. And Rio Nance 5 is basically full speed ahead. We're going to start the operations in that plant, the knitting facilities will start some time at the end of August, and the dye houses will start in September. And the equipment will continue to be installed and the plant will be ramped up over the course of '12. And it will be ramped up based on, obviously, the opportunities at hand, but the plant capacity is roughly about 30 million dozen worth of mix of T-shirts.

That's the target, by end of 2012?

It depends on, obviously, volume so it depends obviously on the opportunities, but that's definitely a good goal. And really, to support a big chunk of what we're going to have available to us for 2012, because one thing you have to understand is when we start the factory, we are really starting in the beginning of October, for all intents and purposes, and then we'll have a ramp up period. So the portion of what we ramp between the beginning of the year until July, let's say, is really going to affect and give us the ability to support sales in the period of '12. And then after that, really, is going to be whatever the capacity is we'll be supporting 2013. And that's the way you have to look at, is over a 2-year process.

Okay, thanks. And just capacity in Bangladesh right now?

Capacity in Bangladesh, we're building that up to the 4.5 million to 5 million dozen level. And that will be built up probably by the end of this fiscal year we said. But probably be realistically, I would say, Q1 of next year is when it's going to happen. But it's growing every day right now, as we speak.

And the delays there are just?

Delays there are just took a little longer. We're actually expanding one of the knitting facilities. It's not a big operation. We're producing there close to 3 million dozen, as we speak, so the incremental production is not that large relative to the overall mix. It's just a question of logistics and we need to get a little bit of land. That took a little longer than we anticipated but overall, we're pretty well on track with what we want to do, just maybe 2 months later that expected.

Susan Sansbury with Miller Tabak.

Hi, yes. Thanks very much. Glenn, the subject came up earlier, not on this call but on other conference calls. The question is, on a go forward basis, as cotton prices come down to whatever level, in the past the industry used to pass through the cost savings. What do you expect to happen on a go forward basis this time around? Is it going to be different? That's my first question.

I think it's going to be different, Susan, for a couple of reasons. I think that the other cost inflation that we're going to be incurring are going to be quite substantial, we believe, in the future. So a lot of the cotton reductions, as they do happen, we don't expect cotton to make a material impact in reductions before, even the earliest will be towards the end of next year if it does happen. And, at that same time, if you look at, what you read they're saying in China wages are going to go up 17% and double over the next 3 to 5 years. And power costs are going up, transportation. Financial costs we think are going to be substantially higher. So all of the other inflationary factors, a lot of what we see will be offset, cotton will be offset by some of these other inflationary factors.

The other thing I think you have to remember is that if net of those two is slightly lower, the reality for Gildan, I think, and the way we looked at our business is that our objective is not necessarily to margin up the increase, obviously. There's some timing issue going back and forth. But at the end of the day, we're going to make the same amount of dollars on a T-shirt in terms of margin dollars. So as we see cotton going up, our margins actually shrank.

On a percentage basis.

On a percentage basis. And as we see cotton coming down slightly, we'll basically have higher margins and potentially lower selling prices. So it won't have a big effect on our earnings on a go forward basis but that's the way to look at it. I don't know if that answers your question.

Yes, that's very helpful. Second question goes back to Gold Toe. Laurence, when you talked about the margins there, you said that interest expense was whatever it was, a huge amount, and it reflected the LBO debt. What should we assume from this point forward?

We're currently financing the portion of the purchase price that we didn't finance out of our surplus cash on our bank revolver where we pay 1% interest. So that's what I would be assuming for the balance of this year.

Yes, but the debt, you didn't assume Gold Toe's debt?

We paid $350 million, Susan, of which $100 million was financed through our surplus cash and $250 million has been financed out of drawing down on our bank debt and we're paying 1% all-in interest cost on our bank debt.

So there's going to be no effective decline in Gold Toe's interest expense?

Pre-acquisition, the Company was paying 10% on much higher debt. So one of the reasons, if you looked at the reconciliation we provided from their earnings to our pro forma earnings is because we're no longer carrying that huge high cost debt burden that they had before the acquisition.

All right, so you made that adjustment, in other words, when you came up with the--

That's reflected in EPS accretion of $0.07.

Ken Stumphauzer with Sterne, Agee.

Good morning, guys. Just a couple of quick questions . First, I was wondering if you could comment on unit volumes for the industry in April. There was some commentary out there from Broder Brothers that there might have been a

I would say, you can't look at one month. I would say that the 4-month combined represented about a plus 2% for the industry, which is what we've forecasted on a go forward basis. The preliminary numbers from April show a slight decline. They show a decline but that's basically factoring less days than there was last year. So if you factor in the less days, it becomes a slighter decline. But overall we think it's just the timing, and you have to really look, not take 1 month, you have to look at the 4 months of this fiscal year really to get a good understanding. And from what we're talking to distributors, business is very good so far in May, so if you do your channel checks, ask how May is going. So far it's going very well.

So do you think that was representative of pre-buy in front of the most recent price increase?

It could have been a little bit of people, printers, saying the price is going up next week, taking a little bit more inventory. That could happen. And that's why you can't take in one month. You have to look at the period of time because that's more representative of the market itself.

That's why we don't provide monthly Stars or CREST data. We only do it on a quarterly basis because you cannot extrapolate a trend from 1 month, and we've seen that throughout our history year after year. You have to look at a longer period of time.

But just to summarize, you guys think that's an aberration, it's not a trend?

Yes.

Okay. And then, secondly, I was wondering, I wanted to touch on your commentary on acquisitions, Laurence. One, I was wondering if you could talk about prospective deal sizes, what you'd feel comfortable with after swallowing a pretty sizeable deal recently. And then, secondly, just given the nature of the Gold Toe acquisition, being part of it is essentially an outsourced model, whether you would consider buying a fully outsourced brand.

If you look at our growth drivers basically, we have 4 growth drivers for the Company. One is the continue generating more market share in our screen print, develop our mass market, lower our cost, look for new geographical opportunities for other categories in which Gildan is currently not doing business. And Gold Toe fit into the retail opportunity. But we're looking still as a Company to grow in all of the areas of opportunity for us. And as part of our acquisition criteria, as long as we could do a tuck-in acquisition that meets our capital requirements and return on capital that will help facilitate the growth in any one of our divisions, those are opportunities that we believe will continue to enhance shareholder value. We're looking to grow our business internationally. We're looking to definitely drive our brand strategies so there could be potentially other brands in the future that could be acquired. And we're also looking to look for new channels of distribution that we can lever, the same way we went from wholesale, selling the same T-shirt to wholesalers to retailers and international, to find other ways we can continue to grow.

And we're also looking to expand geographically into other manufacturing areas, like we did in Bangladesh. That was just a stepping stone for us in terms of developing our new geographical hub. And there potentially could be more expansion opportunities there, as well. So it could be a combination of different events but I think the important thing is that we're looking for mitigated risk, as well as things that can create shareholder value, and find ways to increase our organic growth.

But as far as deal size what would you guys feel comfortable with? And then, secondly, what I was trying to ask is, just given the nature of the Gold Toe acquisition, would you consider buying something that wouldn't necessarily be plugged into your global supply chain? Or is that off the table?

A lot of the Gold Toe production won't be plugged into our supply chain but what will happen is that we're going to lever the brand that they have in categories that could be plugged into our supply chain like, potentially, underwear and activewear type products. So that's the value of driving brands because there may not be -- and in the brand business, you can't expect to actually manufacture all the products. We know what our key sweet spot is in terms of what we want to produce, and the key thing for us is to buy brands that we can actually -- like Gold Toe is a good example -- we don't make dress stocks. That's something that is not a Gildan skill set. We make white athletic socks. And, of course, their production will be migrated into our low-cost model but we'll continue to build on their sourcing relationship to supply these other products but where it will benefit is, as we go through brand extension and product extension into potentially underwear or activewear in some of the brands they have, and that's really what we'll lever into Rio Nance 5 or some of our low-cost capacity.

And I don't think we would want to be too specific about lumping ourself into the criteria for acquisition opportunity. This was definitely a size that was significant enough to make the synergy impact but was easily digestible from an operating and financial point of view. We're comfortable with that size in the $250 million, $350 million is a good size for us. But we will be responsive to opportunities that meet all of our criteria and are complementary with our organic growth strategy.

David Glick with Buckingham Research.

Yes, good morning and congrats on the quarter and the outlook. Laurence, just looking through your implied guidance for the fourth quarter, it suggests gross margins in the 23% to 23.5% range which, if we're correct in our calculations. And obviously that's the peak of negative comparison on cotton year-over-year. And you touched on some advantages you're going to have in moving sock production from the US to Honduras. But if you could give us some sense on how we think about the go forward run rate for gross margins, and how that relates to operating margins. Obviously the acquisition of Gold Toe and the mix there impacts that. But obviously there's a lot of volatility in gross margins this year. And maybe help us think about, given the prevailing price of cotton, how we should be thinking about that line on the income statement.

The fourth quarter is the quarter where the cost of cotton that's flowing through our cost of sales is higher than the impact to the selling price increases that we've implemented so far. And if cotton were to continue to stay at that level then we would evaluate further selling price increases. We have a wide range for Q4, and hopefully we'll be able to also take advantage of further volume opportunity and be at the high end of the range. Gold Toe is definitely going to be accretive to our margins. It's a high margin business that's going to significantly impact our margins. And, obviously, we're going to manage the different variables to achieve our ongoing goals in terms of returning capital and EPS goals as we go forward.

Maybe just one more point. As you look on a go forward basis, we've been able to increase our pricing, let's say, for example, to compensate for cotton up to $1.50. At the same time, the Company is rigorously looking at ways to reduce cost. As we went through in our investor trip, that we have significant cost savings that haven't materialized yet in our cost of goods sold. Like, for example, our biomass production that's going in Honduras is going to be a significant savings. And that's only going to be a next year phenomenon. We have a year-over-year, starting in the beginning of next year, we're going to have a significant reduction in socks costs because of the closure of our US capacity. So that's, again, our strength and our success as a Company, is to continue looking.

What we said is that we have over $140 million of synergy or cost savings that will occur over the next 24 plus months. And some of those are in play right now and will make a big factor in '12. Laurence's point is that we have raised our prices to cover $1.50. If we see cotton trading in excess of this as we go forward, there's definitely room for further price increases. And we're not alone in this. This is a global phenomenon. That's really the beauty -- not the beauty but that's the reality that we're living in, is that the cost of cotton or raw materials or inflation is infecting every single, everybody in our industry anyway, globally. So, what we also said is that we're more competitive as an industry with this new paradigm. The cost of Asia has soared over the last 18 months and is continuing to rise. So our industry, not just ourselves, again, but all our competitors are doing very well in terms of selling their capacity. Business is pretty strong and it's been pretty conducive with the price increases so far, and hopefully we'll continue on a go forward future.

As Glenn says, compared with other global competitors, we have not only a low cost manufacturing position but significant opportunities to continue to widen our cost advantage and generate further significant cost reductions.

So Laurence, is it fair to say that given all those variables that you can manage, you aren't looking to move backwards on what's implied about a 14% operating margin this year?

We're obviously committed to our growth strategy which means not just top line growth but achieving our EPS growth objectives as we go forward, and driving our goals for profit to returning capital. I guess what we're trying to say is we have a lot of different levers that we can use to achieve our profit goals that we've always achieved in the past and we continue to be committed to.

Tal Woolley with RBC Capital Markets.

Hi, good morning. I was just wondering if you could speak to me a little bit about, you talked a little bit about the wholesale channel but maybe you could talk a little bit, too, about the retailers now versus, say, 6 months ago, what their outlook, has there been much change in their outlook for your categories? Any change in inventory or stocking strategies going into next year? I'm just trying to get a sense of how confident they feel about the market going forward given the rise in the cost of goods.

I would say in retail, the retailers themselves were obviously nervous because a big part of the consumer spending is affected by gas prices and food prices and all of the other commodities that affect people's disposable income. So power is basically, obviously, an area that could feel some pressure, let's say for example, because of these other inflationary areas. I think in our area what we focus on is core products. We're less worried about them, to be honest with you. And also, we have ways to maneuver by reducing the offering and keeping the pricing, let's say for example, relatively stable. So if you go and buy a pack of socks, today you buy the same pack of socks, in the future and the prices is the same per pack but just one pair less. From a consumer point of view, when I go to the gas station, I put $80 of gas and now only get three-quarters of a tank instead of a full tank, but I still put $80 in, you what I mean? That's the same philosophy.

So there definitely could be less units being sold, we think, and that's why we're planning our business flat. But at the end of the day, it's something that definitely you have to be concerned of. I think it's more so in our retail business than our wholesale business because our wholesale business is finding itself much more competitive globally. And that's really where a lot of brand companies and a lot of companies that purchase T-shirts are moving back to the hemisphere on the activewear side on the wholesale market. And that's what's really driving the success, we think, in wholesale today. So we're still optimistic but cautiously optimistic on the retail side but more bullish on wholesale.

Okay. You've mentioned some of the factors that you think might balance out any rollover in the cotton price over the next 12 months. I'm just wondering, though, is there a point at which you would see cotton prices decline where you thought, okay, yes, there might have to be something done here? I'm just trying to get a sense, is there a point at which you really you think these price increases might not stay?

At the end of the day, what I said before is that we have other inflationary factors. Cotton is not going to make a big effect even if it does come down before the end of next year. So we have quite a ways before that materializes just because of the fact that in 30 days people have bought enough cotton, probably, to handle next May. And if you look at the future price for December, that's going to cover people all the way through the third quarter of next year, and we don't see that materially changing very fast. So that's the first thing.

The second thing is, at the same time we have all these inflationary factors continuing to grow. Power has gone up, wages are continuing to grow. And they will offset these higher costs, cotton. And again, in our case, we may find that our T-shirts can bear more money than we've received in the past just because of the fact that we're so competitively priced globally today, and there might even be room for margin expansion. But I would say the worst case is, even if prices do over time come down, what our point is, is that our margin dollars will stay constant. Our percentage in the future at today's point might have a lower percentage margin, but the actual margin dollars will still be there. And as we do lower prices, those percentages will increase as a percentage of our sales, and we continue to get good returns. So we're not really concerned. In fact, that's (inaudible), if I can put it that way, but hopefully it will be a good balance, and there could be some upside in terms of us actually being able to keep a little of this in our pocket hopefully.

So another way of saying that might be to say that if there's going to be a problem, it will probably be on the demand side, not so much on the pricing? That if there's a problem, it'll be because consumers just slow down?

Yes, and in our case in wholesale, I don't think it's a demand issue because I think what's happening is that the demand is so strong in our industry today, is the fact that people are buying more product in this hemisphere. And like what I said in the past with the new paradigm and the shift from Asia and back into this hemisphere, retailers want to be closer and brand companies want to be closer to this hemisphere. And because of the fact that we're globally competitive, we can respond quickly. Our CSR standards and everything else goes with our industry. And that's not just Gildan, that's everybody who participates in this hemisphere. So we think from that perspective we're bullish on demand in the wholesale area on a go forward basis.

Okay. And that actually leads into my last question. You're seeing that China share of a lot of the items you participate in has, in terms of imports into the US, are down for the first time in a long time. I'm just trying to get a sense of, with the cotton prices, I know we talked about how the cotton price is rising it was really causing some capacity issues, production challenges in Asia. With it subsiding, do those issues get better or do they get worse? It's hard for me to assess.

In Asia it's not just the cotton prices. In Asia, for example, you're hearing in places like China, for example, that there's not enough workers even to come to work to run the factories. I don't know if you follow Foxconn, for example, they had to double their wages because of the fact they had social unrest. So I think, in general, there's an inflation factor that's happening in Asia, partly driven by local consumption. People can sell in China today and make more money than they were exporting before. So that's driven a lot of the phenomenon in terms of the cost advantage, let's say for example, that I think has occurred. And the toughness of doing business there and the lead times. So that's what's driving, I think, our success. And the other thing is that we're very competitive. We spent as an industry, since Gildan has been in business in the wholesale market since '93, we've had the years, we've deflated our product almost 100%. So we're still competitive. Even after this 26% increase in price, we're still selling at one-third less than we did when we entered the market back in 1993. So we're well-positioned and we feel very comfortable in how we're positioned not just domestically but as well on a global basis.

Susan Anderson with Citi.

Hi, guys, congrats on a great quarter. I think most of my questions have been answered but maybe if you could just touch on if you've had any reaction from the retailers in terms of price increases in the back half. Basically are you seeing any pushback at all?

We haven't, these prices that we're talking about evolved (inaudible) with the retailers and are effective, our second round of price increases will be effective in the beginning of August as they set their stores. And obviously, it's never a happy time when you talk about price increases.

Although I think the retailers understand the reality.

The retailers understand exactly the global environment because they all buy products all around the world. So it's not just ourselves, it's the whole industry who's had significant price increases. So we're somewhat following the industry at the same time.

Okay. And then are you guys raising prices in the Gold Toe business also or is that already set in stone for this year?

They had some price increases early on in the year. There may be some potential price increases like ours in the back half of the year but not substantially as high because, first of all, cotton is a very small percentage, a smaller percentage of their sales, let's say for example, than it is ours. And they're selling a different type of product. So there will be a small price increase, I would say, from a Gold Toe perspective, but not to the same level as Gildan.

Okay. And then you talked about earlier the spread between the price increases in cotton as the highest in the fourth quarter. Is that mainly in the wholesale business or the retail business?

That's our cost that's going through both segments.

Okay. And then just one last question. Maybe if you could just give some color on your market share in the screen print business. It was great to see it wasn't down in the quarter but how should we think about that going forward? What would be your expectations, for it to start going again?

There's one area we didn't grow, was in the sporstwear category this quarter. That's one of the areas we're underdeveloped. As far as the overall share is concerned, we're planning really for flattish type share and modest growth in the market around 2%, only because of our restraints in capacity.

For the back half of the year.

For the back half of the year. And just to be conservative I think that's where we landed.

And note, Susan, that although our share was flattish compared with the second quarter of last year, despite our low inventories and our capacity constraints, it was significantly up from the first quarter of this year. And long term, we continue to be seeking to continue to gain share.

(Operator Instructions) Jim Duffy with Stifel Nicolaus.

Good morning and thanks. A couple of questions. Question on your retail program pipeline. What's the outlook for incremental retail program wins as you look to spring 2012? What are the channels and product categories where you see the best opportunity for shelf space gains?

We have opportunities in every category. We're looking at socks, activewear products, underwear products. That's partly what we're in process right now of working with retailers to look at new opportunities for spring. And, as well as we're going to lever the opportunities from the Gold Toe acquisition. So in both those cases, we're focusing on new growth initiatives for spring and for fall 2012.

Glenn, is that more on the private label side or under the Gildan brand?

Our focus is going to be looking at the Gildan brand. There could be still some opportunities to enhance the existing private label programs we do have today, and also to lever the brands that are available to us now at Gold Toe.

Okay, great. And then Laurence, a question for you. Numerous times during the call you've mentioned improving relative cost advantage in the shift to Western Hemisphere manufacturing. In light of this, what do you see as the upward structural bound or resistance point on the operating margins for the business?

What we've typically done is we've generated significant cost savings, is retained some margins, but given the customers the benefit of the cost savings, as well, and used competitively lower prices to drive market share. And we would continue with that strategy.

As long as we use our competitive advantage to enhance our quality features, as well, and providing superior products to consumers or customers relative to that of our competitors.

So it's most appropriate to think of the financial model as being revenue driven earnings growth rather than one of operating margin expansion?

Historically, that's what we've done. We've used lower costs to drive volume and used volume to drive our top line growth, to drive our EPS growth.

Candice Williams with Canaccord Genuity.

Hi. Thanks. I was wondering if you could tell me which Gold Toe brands lend themselves best to product expansion? And what percentage of the sales roughly they would represent of the total Gold Toe Moretz?

The Gold Toe brand represents around 70% of the overall sales of Gold Toe Moretz. And all their brands basically are conducive to product expansion because the way Gold Toe is structured today they have Gold Toe, they have GP, RO, and then different power socks. They have different brands that they levered under the Gold Toe brand. Like some brands of Gold Toe, they maximize every channel of distribution. So the beauty and the reason why we like the acquisition was it gives us chance now to have brands in every single channel of distribution. So we're in the sporting goods, mass, department, specialty, club. So we really have relationships and product being sold in every single channel of distribution now. And that's really what we believe is not only going to be the brand extension but it's also the relationships that we have in each one of these channels of distribution that's going to allow us to generate more revenues and add new products and get more sales. We also have significant upside on the licenses which Gold Toe has which is the Under Armour and New Balance licenses which are very fast growing licenses in the sporting goods channel, that have a lot of growth potential. So overall we're very well positioned now with a full distribution and relationships across the whole retail sector.

Okay, I can understand the Under Armour, New Balance, Gold Toe. Sounds like a sock thing to me so that's where my question was coming from. That's helpful, thank you.

Candice, they also have All Pro is one of their brands. So they have different brands that can be levered.

And that falls in that 70%? That All Pro would be part of the Gold Toe 70%?

Yes, it is. Gold Toe already sells underwear. It's in the department stores, as we speak. It was something that was launched last year. So that, again, seeing the consumer to buy socks, also buys underwear. So we think there's an opportunity to lever, even though it says Gold Toe, but its got a big huge following. Anywhere you look and you talk to anybody, they wear Gold Toe socks.

And this concludes our question and answer portion of today's call. I would now like to turn the call back over to Sophie Argiriou for any closing remarks.

Thank you, everyone, for joining us. We look forward to our next earnings, talking to you again at our next earnings call which will be held in August. So thank you, once again, and have a great day.

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