Gildan Activewear Inc (GIL) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2011 Gildan Activewear Inc. earnings conference call. My name is Lacy, and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will facilitate a question and answer session towards the end of the prepared remarks.

(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 Relations. Please proceed.

Thank you, Lacy. Good morning, everyone, and thank you for joining us. This morning we issued our press release announcing our earnings results for the third quarter fiscal 2011 and our interim shareholder report containing Management's discussion and analysis of consolidated financial statements. These documents will be filed with the Canadian Securities Regulatory Authority and the US securities commission and are also available on our website at www.gildan.com. I'm joined here this morning by Glenn Chamandy, our President and Chief Executive Officer, and Laurence Sellyn, our Executive Vice President and Chief Financial and Administrative Officer. Shortly, Laurence will be providing an overview of our third quarter financial results and our business outlook, after which, we will open the call to questions. Before we begin, 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 unknown 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 filing with the US Securities and Exchange Commission and Canadian Securities Regulatory Authority that may affect the Company's future results. I will now like to turn the call over to Laurence.

Good morning. We will review our records third quarter results, which we reported today, and then discuss current market conditions and the assumptions used for our forward-looking information. Sales and earnings in the third quarter were the highest for any quarter in the history of the Company. Sales revenues were $530 million, up 34% from last year, and EPS was $0.77 per share, up 42.6% from the third quarter of fiscal 2010. Sales of activewear and underwear increased by 21% due to an approximate 26% increase in average net selling prices, which more than offset at 0.9% reduction in unit sales volumes. Over all, industry unit shipments from US distributors to US screen printers declined by 9% during the quarter according to the CREST report, compared with our assumption in our May guidance, the industry demand will grow by 3%, which would've continued the pattern of recovery in demand which we got in the second quarter of fiscal 2010.

The cadence of industry demand appeared to deteriorate in successive of months during the third quarter, with demand in June being down by 12%. However, it should be noted that June of 2010 was a very strong month which benefited from pre-buying in advance of a selling price increase which was announced two months in advance, and which was not the applicable to back orders so that the true magnitude of the decline in June is overstated. We believe that the decline in screen print market demand in the third quarter is due to a combination of factor, including overall uncertainty about macroeconomic conditions, the possible impacts and demand elasticity of successive selling price increases, and delay in the timing of shipments from distributors to screen printers as screen printers seek to benefit from declining cotton costs. In addition, Gildan shipments in the third quarter were constrained by lack of capacity and low inventory availability, which limited our ability to fully servicing distributor demand and resulted in a slight decline in market share from 62% to 61%. Sales revenues in international and other screen print markets in the quarter increased by approximately 45% due to higher selling prices and currency fluctuations, combined with an approximate 12.5% increase in unit sales volumes, which was achieved in spite of capacity constraints.

Shipments of activewear and underwear to retailers grew by in excess of 80%. Sales of socks increased by 139%. Although the increase in sock sales was primarily due to the impact of the Gold Toe acquisition, organic sock sales also increased. Excluding the acquisition impact, unit sales volumes of socks increased by approximately 15% over the third quarter last year, and we are also continuing to successfully implement increases in selling prices in socks and other retail products. The organic growth in unit sales volumes in socks was primarily attributable to earlier timing or back-to-school shipments and to the more efficient operations in our new retail distribution center in Charleston, South Carolina. Consolidated gross margins in the quarter were 28.3%, versus 27.1% in the third quarter last year and our guidance the 26% to 26.5% provided in May. The improvement in margins compared to the third quarter of fiscal 2010 was due to manufacturing efficiencies and the impact of Gold Toe. The impact of higher net selling prices, including the absence of promotional discounting during the quarter, offset the negative impact in percentage gross margins so the higher cost of cotton.

Our cost of cotton in the third quarter was close to our May forecast of approximately $1.25 per pound, as we began to consume inventories produced with a significantly higher cost cotton. Higher cost cotton is impacting Gildan earlier than competitors and placing us at a short-term cost disadvantage in the second half of fiscal 2011 due, primarily, to our faster inventory turnover, which is, however, expected to benefit Gildan in fiscal 2012 as cotton costs decline. The increase in gross margins compared to our May guidance was due to higher than projected net selling prices in the screen print market. Turning now to our guidance for the fourth quarter and full year. We are developing our business plans and updating our financial projections based on assuming that weak economic and market conditions will continue. Specifically, we are assuming that overall industry shipments from US distributors to US screen printers will decline by 5% in the fourth quarter compared to our assumption of 3% growth in our May guidance. Actual industry demand in the month of July appears to be in line with this assumption. We are also assuming weak consumer demand and low inventory replenishment in retail. In this environment, we have now initiated promotional discounting in the US distributor channel. In order to stimulate industry demand and reinforce our market leadership position.

Substantial selling price increases are continuing to be implemented in the retail market, however, to catch up with increases during the year in the cost of cotton and other cost inputs. As a result of the downturn in screen print market conditions, we are now projecting sales revenues in the fourth quarter of close to $500 million, gross margins of approximately 22% and EPS of approximately $0.40 per share, resulting in projected full-year fiscal 2011 sales revenues slightly above $1.7 billion and full-year EPS of approximately $2 per share, at the bottom end of our guidance range provided in May of $2 to $2.10 per share. Cotton costs in the fourth quarter are still expected to be approximately $1.60 per pound and approximately $1.15 per pound for the full fiscal year as assumed in our prior guidance. We plan to continue to run all of our manufacturing facilities at full production capacity during the fourth quarter, in spite of the weak economic environment in order to rebuild inventories to optimal levels and ensure that we are positioned to take advantage of any improvement in market conditions, to fully service customer demand and pursue our growth strategies in fiscal 2012. Our intention is to initiate sales and earnings guidance for fiscal 2012 when we report our results for our fourth quarter and full fiscal year in early December.

While it is premature to provide guidance for fiscal 2012 at this time, we are in a position to communicate that we have completed the fixation of cotton to be consumed in cost of sales in the first and second quarters of fiscal 2012. We are projecting that all of our high cost cotton will be consumed at some point during the second quarter and that cotton costs in each of the first 2 quarters of fiscal 2012 will successively decline compared to the fourth quarter of 2011 and then continue to decrease further in the subsequent quarters of fiscal 2012 based on our ongoing coverage and assuming that cotton futures do not reverse significantly from current trends. Currently we do not intend to implement further selling price increases in the screen print market if future cotton costs remain at current levels or continue to decline. Although economic and market conditions at the current time are uncertain, and we will have to navigate through the transition to lower cost cotton over the next 3 fiscal quarters, we remain fully committed to the ramp up of our new capacity expansion of Rio Nance V into continuing to pursue of the growth and value drivers, which we have highlighted in our investor presentations, namely, reinforcing our market share leadership and grand leadership in US wholesale distributor market and the overall US screen print market; leveraging this market share as demand recovers over time to pre-recession levels; leveraging our North American screen print brand in screen print markets in Europe, Asia-Pacific and Latin America; further expansion of our Asian Manufacturing hub in support of our growth strategy in Europe and Asia; leveraging our large-scale strategically located vertical manufacturing to become a leading full line supplier of basic family apparel for US retailers; and continuing to reinvest in our supply chain to achieve ongoing significant manufacturing cost reductions and product quality enhancements.

Our retail operations are now in the process of being integrated as a consolidated standalone division headquarters in Charleston. In addition, the integration of the Gold Toe acquisition is proceeding well, and we continue to feel positive about the projected financial benefits from the acquisition. Our detailed integration plans include the transfer of basic high-volume products currently sourced by Gold Toe from our site suppliers to Rio Nance IV and the development of plans to combine the competitive strength in core competency of both companies to drive organic sales growth. We are actively pursuing opportunities for further development of the Gold Toe brands, including Auro, Power Socks and All Pro, as well as the iconic Gold Toe brand and brand extensions and for further development of our licensing relationships with Under Armour and New Balance. In addition, we are continuing to develop our Gildan brand in retail and continue to be committed to support high-volume retailer private label and license brand programs such as Starter, which fit with Gildan's vertically integrated manufacturing, provided they meet our criteria for profitability and return on capital.

We ended the third quarter in a strong financial position with cash and cash equivalents of $89 million, $252 million of bank indebtedness, which was incurred as result of financing the acquisition of Gold Toe for approximately $350 million during the quarter, and considerable unused debt capacity, having announced on June 30 that we had increased the amount of our revolving bank credit facilities from $400 million to $800 million. Our plans for use of our unused debt capacity continue to contemplate further possible acquisitions, which would complement our organic growth strategy and the other acquisition criteria, which we have communicated to manage acquisition risk and seek to ensure that acquisitions will enhance shareholder volume. In addition, we are pleased to announced today our regular quarterly dividend of $0.075 per share payable in September to shareholders of record on August 18, 2011.

Thank you, Laurence. This concludes our formal remarks. Before we open the call to questions, I would each caller to start with only one question. As you know we have 19 analysts covering Gildan, and we would like to give everyone the opportunity to ask a question within the allocated time of the call, which should end around 9.30. Time permitting, we will definitely circle back for a second round. Thank you. Operator, we're now ready to start the Q&A sessions.

(Operator instructions)

Nicole Shevins, Goldman Sachs.

My question was related to the gross margin increase. It was up about 120 basis points, which was above your guidance, so I just wanted to see if you could break out the different drivers to that. How much came from the Gold Toe acquisition versus higher selling prices and d/c efficiencies? Thanks.

Relative to our guidance, the higher margins were essentially due to more favorable selling prices.

Can you break out, in basis points, how much you think came from the selling prices versus some of the other drivers?

We are talking relative to our guidance, right?

Relative to your guidance, yes.

So, it was relative to our guidance, as opposed to last year, the favorable variance was essentially lower -- was essentially the fact that we benefited more fully from the last price increase in the quarter and more favorable net selling prices. That was really the reason for the more favorable margins relative to our guidance.

Okay.

Martin Landry, GPM Securities.

Your sales of activewear and underwear to the US retailers were up 80% year-over-year. Could you tell us which product is getting traction and where?

Well, all of our retail products were up. Socks we said were up about 140%, largely due to the Gold Toe acquisition, but, even excluding the impact of the acquisition, our socks were up 15% organically. We also mentioned that sales of activewear and underwear to retailers were up over 80%.

Yes, that's what I meant in terms of your activewear and underwear to retailers. Is there like the fleece program getting traction -- is it underwear? Just a bit of color would be great.

Well, it was a combination of more underwear sales as well as new activewear programs across the board and all the various customers in which we currently are doing business. Most of the gains came from, obviously, from the current product lines as well as some new wins we had in the activewear category for this quarter.

And is this growth rate sustainable going forward?

Our growth rate has always been a function of our capacity, which we've been restrained, so we've been managing through our capacity. To answer your question, obviously, we are planting the seeds as we increase our capacity into 2012 with the development of our Rio Nance facility. We're working on planting all the seeds to, obviously, increase significantly our share at retail.

Okay.

Jesse Haines, TD securities.

It seems to be to me that you're providing a bit of mixed views. First, you are providing some cautious assumptions in terms of lower volumes in the fourth quarter as some promotions needed to stimulate demand. And secondly you're alluding to continued confidence in volume growth because you're going forward with operating at full capacity going ahead with Rio Nance V. Can you just help me reconcile this and how to think about this?

I think two things is that -- one, the market today is obviously not performing. The question of price elasticity, as people refer to it -- we don't really think in the wholesale market today that it is necessarily pricing that is actually deteriorating in the market. We think it is largely due to the economic outlook when it comes to wholesale. And the reason why we think that is there is some potential lost revenues due to people converting from T-shirts into mugs, and that's a very small portion I think the overall business.

But, if you look at what's happened in industry and the trends, we're finding that customers can trade down in T-shirts. In other words -- I just want to clear this point up -- that is -- if you look at the pricing strategy up until now in the marketplace, although we've increased our prices significantly, those prices have not necessarily made a major impact today in the market. So, for example, a lot of the price increases that we've had -- let's assume that we went up x% -- a lot of what we are seeing are people trading down on shirts in buying lower-priced items. Then when you translate that into the end use consumer and what he's paying for a T-shirt, if you look at the price increases that we've passed through, the channels have absorbed a lot of these price increases. So price has not been a real driver and terms of what we think is driving the negative share in the wholesale market itself.

So what we are in the process of doing is we're taking a cautious look at wholesale but really what is going to -- obviously, if you look at our drivers as we go into next year, we think there's still lots of room for us to continue to gain market share. Now we are putting in place a plan not just to drive one part of our business but to drive all aspects of it. And for example, I am going to start with wholesale, then I'll move into some of the other categories.

In wholesale, as we go into next year, we've increased our product line significantly. We have a lot more product offering. Again, because of our lack of capacity this year, we weren't able to really fulfill what we think are the opportunities in wholesale in terms of delivering new products. Our SKU base is up significantly, and we will support a lot of our inventory build in Q4 to build up inventories to support all these future opportunities as we go forward. And a lot of these products that we are adding in our lines for the wholesale markets next year are all high-margin, value added products. And it won't just serve the North American markets, but also serve our international markets as well.

Another factor is that, obviously, we haven't been priced aggressively. We've been sold out now for 18 months. We haven't been the lowest priced product in the marketplace.

Starting in July, as we started to promote our products again, we've seen a big turn, obviously, in terms of the sell through of our products. And we've neglected all of our markets really -- our international markets, because we just haven't been -- had the capacity, and we've really tried our best to maintain and service the markets in our core business, which is are US distributor market, but all the other growth opportunities that the company has had in wholesale have been neglected. We haven't serviced them in terms of providing adequate amount of inventory so as we speak those markets will also be replenished with inventory as we go in this quarter and that's going to drive continued share as we go into next year.

So really we are taking a view that the market is down. Partly it is also and in this quarter, but all the pieces that we are putting in place as we go forward into next year and bring our inventories and our products to market, we are very comfortable that we will gain share in every single aspect of our wholesale business as we go through into 2012.

And, in the retail front, like anything else, retailers work in advance, the cycle time is anywhere between six and nine months. We are in the process now and we have been planting all the seeds, obviously, to align ourselves with our capacity expansions, which is Rio Nance V coming on line. And we are levering, obviously, the -- our core business that we have today, but we're also going to lever the Gold Toe brands and make sure that we lever not just into socks but into activewear, underwear type products, and there's lots of opportunity. We are talking to retailers as we speak. So for us, we feel very comfortable as we go into 2012, as we bring on this additional capacity, that this growth in every aspect of our business, and we are feeling very comfortable that we can mitigate through even bad economic times in 2012.

Okay, that's very helpful, thanks Glenn. Just a clarification, though -- it seems to me that the lower shipments you're seeing are less of a, as you say, sort of an issue with price increases, more of a macro environment maybe cautiousness but also your inability to service the channel. So if you didn't -- if you had the ability to service the channel, would your -- what would your unit shipments have been in the quarter? Would you have that handy?

We had back orders still left at the good order book at the end of the quarter. We still have a pretty good order book even at the end of July to be honest with you.

As we go forward, we are still tight on inventory. And really the build in our inventory, the way we see it, is going to really only come at the very end of Q4 for us.

So the one other piece I think that maybe I think is a factor in terms of where we are today is that people see the future price of cotton coming down. And, obviously, we know -- what we think -- there's 3 factors that Laurence mentioned which is one is there could be some price elasticity where we have negative sales people converting out of T-shirts and mugs, for example, but we think that's small. And the environment that we think is a driver the reason why the market is down. But also there is this stocking up we think at the printer level -- not the distributor level but the actual printers themselves. We see the future price coming down and they are saying -- hey -- they actually may be stocked up during along the way, but they are stocking down now. So that could be also contributing, we think, a little bit, to the negative growth in the channel.

One thing I think I want to try and maybe clarify in terms of pricing is that we as a company raised our prices effectively to cover cotton at $1.50. The future curve of cotton today is roughly about $1.05. If you take the cost of buying the cotton, which we refer to as basis, that's approximate $0.10, so if you were to buy cotton in the future you are looking at somewhere about $1.15 a pound versus the $1.50 that we set our pricing up and raised prices towards. That's a $0.35 a pound let's say difference. It takes roughly about 6 pounds to make a dozen t-shirts so we are looking at roughly about $2 a dozen is where we raise price relative to the future price.

But, in the industry, there's been other significant cost inputs. Energy's gone up, labor's gone up, transportation's gone up -- the dyes, chemicals -- there's a lot of other related costs of inflation that we've occurred during this course of fiscal 2011. Just to put number to it, it could be roughly in the $0.80 range, okay? So if you look at really the future cost of cotton relative to where we raised prices and other input costs, there may be $1.20 a let's say for example with lower cost cotton in the future. We've already reflected that in our guidance for Q4, so, really, when you look at where we are pricing our cotton in the wholesale market and the discounts that we are assuming and the margins we are assuming in Q4, we already reflected the future cost in prices in our margin guidance for Q4.

So as we go through Q4 into Q1 and Q2 and then into 3 and 4 of next year, subsequent quarters we will continue to have increased margin as we go through unless cotton continues to come down, and we might assume lower prices, but assuming that it remains at these levels we will have some subsequent margin increases as we go quarter-by-quarter. But the point is we reflected the future price of cotton in our margin guidance for Q4.

Okay, great. Just a very quick one before I circle back -- you mention, obviously, still being -- you have a backlog. You're still tight on capacity. You still have higher cotton costs, which will filter through. Yet you are still putting through sort of I guess promotions or maybe price decreases. Again, can you help me reconcile that?

Listen, the price promotions are, obviously, trying to stimulate the marketplace. The market is definitely down and could be various on of the 3 reasons I said. So we are trying to stimulate that market. If people are looking and saying that the future cotton costs are x, we need to be progressive and try and make a reality where -- we need to price our products based on the future cotton curve, and that's what we're in the process of doing. So we are hoping it is going to continue to stimulate business and if not we are going to generate a market share by pricing our products to continue our growth strategy.

Great.

Tal Woolley, RBC Capital Markets.

Just wondering if you can talk about again what sort of incremental volume -- if you can just reiterate what sort of incremental volume you expect to see from Rio Nance V in next year's numbers? And then where are the most likely destinations for that incremental volume?

Right now Rio Nance V is going to start production at the end of Q4. And it is going to go through a ramp up through 2012. Part of the ramp up -- if you look at where and how we sell our products -- obviously, the height of the summer selling season is in June, July. So, really the part of what Rio Nance V will contribute to capacity, let's say, for example, for 2012 is the ability for us, in the first 6 to 8 months, basically, will be really the part that will impact our sales. And as we get into the back half of the year, typically our capacity outstrips our sales volume because Q3 is our largest quarter.

But we will be able to have significant capacity for next year. We would rather refer to that in December when we provide guidance. But it is going to be a significant, obviously, over this year.

And then where do you expect to see most of that incremental volume go?

The volume is, like I said earlier, we have growth initiatives in every aspect of our business. If you look at our last investor presentation, we are really -- and that's what I think is one of the strengths of our company is that there's still lots of opportunity everywhere. Our wholesale business we think we're going to get modest market share increases through taking market share as well as do all these new products that we've introduced.

Service probably going to be a big factor for us. We just haven't serviced this year. It took end users -- had to buy for more than one distributor just to fill orders because of the fact that we were so constrained on capacity so service will be a big plus. And as we rebuild our inventories in Q4, our service percentages are going to be probably better than Gildan has ever done in service before in the past. So that's going to be a contributor to increasing market share, and that's in every single market again, because we short ship all of our markets. International growth -- we saw our international and other markets are continuing to grow.

Europe has been capacity restrained. We have new products in those markets as well. Again, the opportunities are huge. We have a large market share in the US market, but we have very small market share in every one of the other markets where Gildan is currently, actively selling. In Asia, for example, we accrue on a small basis quarter -- believe it or not our sales were up significantly and next year we will more than double our sales in the Asian business.

Everywhere we have in wholesale we have significant growth opportunities. And in retail, because of the fact that we've been capacity restrained, we've been sort of reluctant to go get new business because we just couldn't service it. We've been now kicking the tires, obviously, knowing we have Rio Nance V coming on. Our sales group is actively pursuing new business.

We are going to lever, obviously, the acquisition of Gold Toe. It was part of one of the drivers for us to actually acquire the company is to lever the brands and the opportunity we saw in Gold Toe into new product opportunities, which we are currently discussing with retailers.

We're developing our Gildan brand, getting traction every single day, and we will have some new programs for the spring season and definitely for fall. And we are working closely with our large private label companies to look at whatever opportunities that fit our skill sets in terms of large programs that are more branded type private label programs. So everywhere we are looking, there's growth opportunity, and its always been a functioning capacity, and, as bring on our capacity, we will sell it, and we are very comfortable and confident about the future.

Okay, thanks very much.

Kenric Tyghe, Raymond James.

In your revised outlook, you had commented on your low inventory in key products or key product categories. I just wanted to check back with you. How is that training or how are you positioning into 2012. Clearly against a weak macro backdrop, there pockets of strength that you weren't able to participate in or perhaps won't be able to participate in in the fourth quarter but equally with your capacity plans and with your -- continuing as you are looking into 2012 by way of your production volume. One would assume you're able to address -- perhaps you could just address where those pockets of strengths are and how well you are positioned going into 2012 on this?

Maybe just to go try and answer your a question a little bit different way is that when you look at our inventory in the marketplace even today, we have 60% plus share of the inventory and we only have a 50% plus share -- sorry a 60% plus share of the market share but we have only about a 50% share of inventory. So inventory in the marketplace at the end of the quarter is significantly lower than our market share. And, also, the quality of the inventory that's in the marketplace may not be as good as it should be. Which we refer to it even probably being even lower.

So as we go through Q4, the quality of our inventory will continue to get better, and which will continue to help us to service and drive share as we go forward into the balance of this quarter. I think that's maybe the way we need to look at that. If that answers the question.

Just a quick follow-up then on that -- perhaps I missed it -- but where is your share of channel inventory versus market share? I think previously it's been disclosed, and I may have missed it in the MD&A today.

Market share in sales is in the 61% at the end of the quarter. And our share in inventory is in the low at 51%, 52% in the channel.

Great, thank you. Just a final follow-up with respect to cotton. Laurence seems to have laid out -- where we are going trend wise, and I think we, obviously, all keep pretty close tabs on the curve. Could you perhaps provide a little more color to the extent you have actually -- at what levels you currently contracted or some sort of range of estimate there on the first and second quarter?

What we said is that we have very good visibility and covered for the Q1 and Q2 of next year. And in each of those subsequent quarters, our cotton cost will be less than it was in, obviously, Q4. And we said that if the future cotton curve remains the same, those would be sort of the prices you may see in the Q3 and Q4 of next year.

So I think you just previously have been willing to provide some indication of -- you've taken cotton -- you've covered cotton at dollar x or dollar y or you partially covered dollar x or dollar y into a given quarter. Are you still willing or able to give that degree of color?

No, I don't think we want to provide any more details than what Glenn said. We will be initiating our guidance for 2012 when we report at the beginning of December and, for the time being, I think what you can take away is one, that we've covered our cotton for the first two quarters, that we'll use up our high cost cotton at some point during the second quarter, that cotton in Q1 and Q2 will successively be lower than Q4 of this year. And that we are obviously positioned to benefit from the current low futures in the second half of the year.

Fair enough. Thank you.

Ken Stumphauzer, Stern Agee.

I just want to touch on your expectations for industry demand in the upcoming quarter. Some view -- it might be kind of a sanguine view just given the fact that declines were much more significant in the most recently completed quarter. You had alluded to the fact that you felt like maybe it was pre-buy ahead of a year ago price increase. So I'm curious to know your reads from the month of July which, obviously, has concluded. Would that confirm your supposition?

As I mentioned in our comments we don't have the CREST data for July, but based on the information that we have as we go through the month, it reinforces the assumption we have made in our guidance of the market being down to 5%. We feel we are tracking that. And also we feel that is consistent with what happened in June when you adjust for the pre-buying initiative a year ago.

Okay. Thanks, guys. Best of luck.

Susan Anderson with Citi

I guess you talked -- and I know you've already talked a lot about this, but you talked about (inaudible) to the $1.50 level of cotton. How should we think about, though, the promotions running through and eating into that and I guess heading into the fourth quarter and assuming about 500 basis points declining gross margin, how much of that would be the promotion?

You are talking about the margins for Q4 versus Q3?

Yes. I guess how much do we think about the promotions --

Our margins in Q3 were, obviously, over 28%, and we've reported and we've guided to 22% in Q4. That changes really because of the significantly higher cost of cotton that's being consumed in Q4 which negatively impacts margins in Q4 versus Q3 by about 900 basis points.

When you take price mix together, it is not really a negative because, although we have more discounting on the positive side, we have the full benefit of the last increasing gross prices where it was implemented a couple of months ago so the two go in opposite directions. Plus we have more favorable mix, plus. Also, our retail margins are continuing to improve as we implement the price increases to catch up with the increases in cotton that were incurred as we went through the year. And then the other thing that also is favorably impacting our margins, is that Gold Toe is a higher share of our sales in Q4, which is a back to school project.

Okay. Then at the $0.80 you talked about -- their cost number-- I guess maybe can you just quantify for the third and fourth quarter the impact and how we should think about this going forward?

That's a cost of sort of the reality of the inflationary environment. Let's say, for example, on I think the industry's cost of goods is pretty consistent. It is power, electricity, bunker, labor, transportation, dyes and chemicals. That was -- the breakdown of all that was roughly $0.80. That's obviously in our numbers.

Yes. Okay, thanks, guys.

Claude Proulx, BMO Capital Markets.

My question is -- in previous calls, you've talked about the fact that people were increasingly sourcing out of North America, switching from Asian suppliers because shortage of yarn in Asia. Big inflation in Asia. In terms of cost, what are you seeing these days with cotton costs coming down significantly, and I think I guess that yarn is becoming also a lot more available in Asia.

Our prices obviously in Asia are coming down fast and furious. The one thing I can tell you is that there will be a lot of opportunity because what is going to end up happening is that there's been definitely correction. And reality is that a lot of people in Asia have a long supply chain as well, have commitments that extend themselves let's say, for example, in high-cost cotton through even beginning of next year.

So what's going to happen, from what we are seeing, is that there's going to be lots of leaving I would say in terms of the manufacturing base in Asia as the future curve comes down. That's more so because, in Asia, obtusely doesn't really affect our wholesale business, but Asia is a big provider of products to the retail space. Facets of the-- retail in general, it is everywhere -- all different product categories and so forth. So as the environment continues to deteriorate, if it does, there could be, obviously, some negative climate, let's say, for example, which I think for us is one thing we're looking at because we think it is going to create sales opportunities as we go forward -- more potential new opportunities in manufacturing as we continue to invest and plan our growth initiatives.

One thing I want to reinforce what was said is this shift towards vertical manufacturing in the Western Hemisphere isn't just kind of temporary window because of what's happened with cotton. This is a structural thing. For the kind of replenishment markets that we serve, whether it is wholesale distributors or retailers, we've built facilities that make this into a large-scale capital intensive business where labor is a lower part of the cost structure. And also the speed of response to the market to quickly respond to inventory replenishment by customers is absolutely critical. And also the other thing, as well, is it is important to have the financial strength to be able to finance increases in working capital to higher input costs.

When you said opportunities in manufacturing -- does it include potentially acquisition?

We'll potentially look at it is part of our growth strategy in developing our whole Asian business -- not so much for servicing this market, but for continued growth in Asia, there potentially could be opportunities arising in the future.

Okay, thank you.

Vishal Shreedhar, National Bank Financial.

On the manufacturing efficiencies that you have articulated in the past, $140 million, can you give a sense of how much you've already captured -- maybe you're going to capture in this fiscal year and how much you anticipate incremental you can capture in fiscal 2012?

I'd say about $30 million is reflected in this year in 2011. And as far as what's in 2012, we will reflect that when we initiate our guidance in a couple of months.

But just to be reconfirm that. All of our initiatives in terms of our energy initiatives will only installed and running in the beginning of the new year of January, February. So, as we get through to next year, there will be significant cost savings as we go towards the end of 2012, to our energy initiatives, our supply chain initiatives, the building up of Rio Nance IV as we continue to migrate all the socks from Gold Toe into our facility.

Another thing this year is -- occurred at Gildan -- we had a significant ramp up in labor and sewing in anticipation of the Rio Nance V coming online, and a lot that efficiency will continue to materialize as we go forward into next year. And our distribution and transportation initiatives will also materialize as we communicated to you in our investment trip. So, we have a lot of huge opportunities and probably one of the biggest opportunities, which we actually didn't even communicate, was the fact that our Rio Nance V facility, which is going to be the largest state-of-the-art plant that Gildan owns and operates, is going to have a significant lower cost than our other facilities, due to the nature of the technology and the scope of how we built that plant.

When we always compare ourselves, let's say, for example when we were in North America and we are moving offshore, the pay back for the facilities that we built was very quick. Believe it or not, the pay back of Rio Nance V, relative to the other facilities, will have a very good IRR and the pay back in a very short period of time just in terms of its cost structure relative to the other facilities. So, as far as Gildan is concerned, we continue to not just think on one but we're always looking to continually looking at new supply initiatives -- supply chain initiatives that will continue lowering our costs and position us to gain share in the future.

And of the $140 million, how much of that is contingent on achieving full capacity or operating at full capacity?

None of it -- because the energy piece is a function of developing our energy. All of our supply chain initiatives that we mentioned will be a percentage of every pound or every dozen that we produce. Rio Nance IV is one that, obviously, the big benefit of ramping up Rio Nance IV will be somewhat because of the fact that we are utilizing our capacity but mostly because we're taking high-cost away from other areas and we're able to producing those goods and putting them into our facility. We're going to get a double whammy in Rio Nance IV. We're going to get the benefit of moving and allocating high cost production to the facility, but it is not ramped up yet and, as it continues to ramp up, to its full capacity we will have some savings there.

And in our soy facilities, there will be a benefit from the ramp up of them because that's just a training curve because we probably hired 4000 to 5000 people during 2011. And that training curve will subside as we ramp up those facilities in 2012. And transportation and other initiatives and distribution, those are really things that are in place and not necessarily tied to a capacity utilization numbers.

Obviously, if we didn't run our new capacity at full capacity utilization, that would result in inefficiency so it would detract from our cost savings. The fundamental part of the rationale and justification for building this new capacity is that we have growth strategies that make us feel confident that we will fully utilize the capacity that is required to support our growth strategies.

Thank you.

Scott Rattee, Stonecap Securities

I just have a question -- just related to the fact that you lowered your expectations for unit demand in wholesale channel. But you noted that you're continuing to run at full capacity. From that, should I be assuming that you're coming into this quarter -- I thought you were expecting about 4 million dozen in incremental inventory, should that actually -- should we be expecting that to be a little bit higher given that capacity still running at 100%, but your actual demand outlook is a little bit softer?

The number is going to be relatively what it was before because, partly -- because what happens to our capacity is always a function of mix. And based on the mix we're currently running, we see ourselves still in about the 3 million or 4 million dozens worth capacity built by the end of the year.

Okay. Great. Thanks.

Which we are seeing as required to be able to service our customer base.

Eric Tracy, Friedman Billings Ramsey. Please proceed.

If you could, clarify for me the 4Q revenue guidance. On the unit volumes, are you all assuming that you run similar to the industry demand of down 5%?

Yes.

Okay.

As far as that segment of the business.

So Gildan will run similar in line to with the industry demand is. That's basically an eight-point swing between what you were expecting previously? I think you said you were up -- expecting up three.

Yes.

Okay. Then in terms of -- can you quantify on average what the price -- the promotions what the pricing is going to be down or what you expect for four Q?

Down versus what?

What you had previously -- so are you then planning on average a 4% to 5% price decrease? Or --

I would say the main assumption that's changing in our guidance -- relative to our May guidance -- is the lower volumes because of the lower demand.

Okay, so there's no -- okay. I thought you said with the promotions, I would've assumed that would have down-ticked the actual average prices.

There are things going the other way as well. More people mix the benefit of the last price increase that was implemented --the price increases in retail.

Okay. And then, as we think about the first half of 2012, can you talk just a little bit about the pricing, your assumptions there? Does that -- are you just going to sort of test and see what happens with demand on these lower prices or is the assumption that's going to continue to down tick into the first half?

Again, we will provide our guidance when we report in a couple of months. But I think what you can take away from what we've said is that margins may possibly be slightly higher in the first half -- due to slightly lower cotton costs. And then we are, obviously, positioned for both higher margins and higher volumes in the second half of the year as we benefit from consuming lower cost cotton.

I just wanted to clarify that, Laurence, higher margins in the first half -- I'm assuming that's relative to 4Q?

Yes. I mean slightly. The improvement of margins would more likely be in the second half of the year where we're consuming low cost cotton. But we are, as we said, assuming that what we know that our cotton costs will be slightly lower in Q1 and then lower again in Q2. That gives us the opportunity for some very slight margin improvement in the first half of the year.

Just to clarify again, cotton I think was $0.78 Q1, $0.90 to 2Q, correct? So, those are the other compares you've got?

Yes --.

Okay. Just lastly on the sock business --

and I'm talking relative to Q4.

Absolutely. Yes. And then, in terms of the sock business, the retail unit volumes of 15% -- can you talk about pricing in the quarter? And then I think you mentioned there's a bit of a pull forward into this quarter. How should we think about that as we go into 4Q?

Pricing we really haven't felt effective the price increases. We had a small price increase in the beginning of the year which is the January period. We have a subsequent price increase in most cases only effective in the beginning of August. So we haven't really felt this quarter the pricing impact and that's one of the drivers that will help as we go into Q1 and Q2 of next year. We're going to have in retail much higher prices than we did this year.

As far as the demand is concerned, we don't know how well back to school is going to materialize. We definitely did have some strong promotions that we sent with the retailers and shipped in our third quarter. And the question is, and we are taking conservative approach, in terms of sell through and replenishment from retailers just on what we are seeing in the economic environment out there.

Okay, thank you, guys.

Mark Petrie, CIBC World Markets.

Given the exposure that Gold Toe gives you to a broader spectrum of retail channels, can you just talk about the relative health of those channels, be it mass versus department stores, sporting goods and the general sense that you have on volumes?

I think to answer your question, I think that the health of the other channels is actually performing quite well. From what we are reading and seeing, is that the consumer is getting squeezed the most is the consumer that's shopping at the mass level with the higher cost inflationary lifestyle and terms of fuel, food, energy. And those consumers that are still shopping in higher end stores haven't felt that pinch as badly. So, typically, I think that, where Gold Toe is positioned, that channel is still doing relatively well. And hopefully we're going to be able to continue to drive the success of the Gold Toe brands and lever them into other areas and other opportunities in activewear and underwear as we go forward in the next year which is part of our plan.

Okay, and just on the dynamic in terms of pricing versus in being capacity constrained in the distributor channel, do you think that these promotional pricing measures that you've taken positions you as the lowest price in the distributor channel?

Well, you know what, I would say maybe not the lowest price but Gildan has never been typically -- we don't think we have to be the lowest price. I think we are positioning ourselves to make sure that our brand is being sold successfully by our distributors. Our customers like to make money with Gildan so it is also a question of -- and how are you to see that price in market is a function of how are distributors are selling our products. So, because we are the number one brand in the channel, we anticipate and hopefully our customers will make better margins with Gildan than some of the other brands being sold in the channel.

So we are not a price -- low-price t-shirt for example. We are selling really a full assortment of products and brands and we are very -- we've always found a good balance between being customer centric and making sure that we make our market shares and market share objectives. We balance those two things in making sure that it is a good win-win for everybody.

Okay. Thanks.

Jim Duffy, Stifel Nicolaus.

You've had good success with retail programs business. Will you begin to report the retail operations as a separate P&L item? And then, related to that, what are you seeing with respect to pricing power and margins in this arena? Any comments you can provide on the competitive landscape would be helpful.

I will take the first part of your question. We are not in the process of structuring our retail business as a separate profit center headquartered in Charleston, South Carolina. And what drives the requirements for external segmented reporting is how you're managing and reporting the company internally. So I would say that we are moving towards segmented note disclosure between our screen print business and our retail business, which would likely start in first quarter of next year.

As far as the pricing is concerned, we've had price increases across the board in all product categories, which really only -- the major price increases are only taken effect really on the beginning of this month actually. And even though we've taken a second round of price increases, we're obviously, priced we think quite significantly below the prices that are coming out in the marketplace. So, we are comfortable with our positioning. We believe we will lever these price increases, obviously, to gain higher margins as we flow through into the next coming quarters. But also we are positioned, we think, to continue to look at growth opportunities and continue growing our retail sales.

Glenn, with your western hemisphere based supply chain, are you finding yourself very cost advantaged in negotiations with retailers as you compete against Asian-based suppliers?

You know what -- at the end of the day our supply chain and our ability to replenish in the scale in which Gildan operates -- is really the asset that we offer all of our customers, both retail and wholesale. There's nobody in the world globally that has and has been spending the capital and has the capacity currently and coming online that Gildan can achieve. And what's going to happen is that they realize this. And it is our scale, it is our quality, it is our CSR, it is our reliability, it is everything that sort of makes our supply chain so unique. And we are very confident that the investments we're making will pay off as we go forward and continue adding capacity.

That's helpful. Thank you.

David Glick, Buck. Research

Good morning, thank you. Glenn, as you look about how your position for 2012 from a capacity standpoint, how do you evaluate the risk of being able to operate at full capacity, and it sounds like you're confident that you can. But, as you evaluate the risk of potentially not running at full capacity versus gross margin risk of operating at full capacity -- maybe having to discount more. How do you look at those 2 trade-offs and evaluate those risks?

Obviously, we are going to what's in the best interest of our shareholders to maximize our returns. That's number one -- that's how we operate our business. But the way we are looking at it right now is that there is a lot of growth opportunities for Gildan. We're taking a very cautious approach in the marketplace. And we are viewing that the screen print market, which obviously is our largest market, will still be somewhat negatively affected for the first half of next year. So we are already taking some of that into account in terms of looking at how we are going to drive our future growth opportunities and allocate, obviously, and look at those other markets in which we are currently selling to make sure that we utilize all of our capacity.

So we are pretty comfortable with all -- and that's what's great about our story. It is not one-dimensional. We have huge opportunities everywhere. It is just a question of allocating the appropriate capacity and driving the business.

Now, obviously we are not going to jeopardize for the sake of driving capacity. But also, if you look at our cost structure, even in the event that we don't sell all of our capacity, there's not a material impact cost to our cost structure because -- obviously, the more we make, the lower our costs go -- but we have a very good, I think, overhead structure in terms of the way we operate. And we will always make sure we have a good balance. But managing our EPS will obviously be a driver in terms of making sure that we continue to deliver the most shareholder value we possibly can.

How would you evaluate, when you had this last drop in the van in 2008. You thought there was some opportunities to go after some of these markets. And then, in the end, the drop was too big, and you didn't' have perhaps the infrastructure and place to capitalize on the opportunities in those other markets outside of your core distributor screen print market. How do you -- how would you say the company is positioned to pivot in this scenario versus the last time demand really dropped?

First of all, last time we fell off a cliff, so that's the big difference, number 1. But we didn't anticipate the last drop, obviously. But right now we've been planning Rio Nance V for, obviously, some time now. So our planning process has been in place for a long time.

This is not something that, all of a sudden, we said -- hey -- we didn't all of a sudden put up the brand new capacity. We've already been putting the foundation and everything in motion obviously to sell this capacity as part of our growth initiatives. And part of that is looking at that -- that's one of the reasons we bought Gold Toe-- to expedite that opportunity as we go and lever their brands and build the distribution in other areas -- other retail areas that Gildan was currently obviously selling in. This is something that we've been planning and working and strategizing which is part of our plan.

And even the downturn in this market, if you look at the absolute dollars of the downturn it is not that significant. 5% even if you take the screen print market -- the distributor market down -- let's say call it 5%, it leaves a couple million dozen on an annualized basis so it is not that significant for the overall size of the capacity that Gildan is bringing online. We are looking at much bigger opportunities, obviously, as we continue to drive the plans we put in place.

Thank you very much. I appreciate it and good luck.

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

Thank you all. Once again for joining us for our conference call. We look forward to talking to again at our next earnings conference call. Which will be held in the beginning of December. Have a great day.

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