Gildan Activewear Inc (GIL) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q1 2012 Gildan Activewear earnings conference call. My name is Pamela and I will be the lead operator 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. As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to your host for today, Ms. Sophie Argiriou, Director of Investor Communications. Please go ahead.

Thank you, Pamela. Good afternoon, everyone, and thank you for joining us. Earlier we issued our press release announcing our earnings results for the first quarter of fiscal 2012, and our interim shareholder report containing Management's Discussion and Analysis and consolidated financial statements. These documents will be filed with the Canadian Securities Regulatory authorities and the US Securities Commission, and are also available on our website at www.gildan.com. Joining me on the call are Glenn Chamandy, our President and Chief Executive Officer; and Laurence Sellyn, our Executive Vice President and Chief Financial and Administrative Officer. Laurence will be providing you with a brief overview of our first quarter financial results and our business outlook, after which we will open the call to question.

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 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 afternoon. This afternoon we reported our results for our first fiscal quarter, which were in line with our guidance provided in December. We also reconfirmed our sales and EPS guidance for the full 2012 fiscal year and initiated guidance for the upcoming second quarter of the fiscal year. This was our first quarter for which we've provided segmented business unit reporting. We are now managing our screenprint and retail divisions as separate operating divisions with decentralized accountability for operating income and return on capital. The two segments will be reported as Printwear and Branded Apparel instead of screenprint and retail.

In addition, this is our first quarter of financial reporting under International Financial Reporting Standards instead of Canadian GAAP. This evening's press release includes quarterly and annual sales and operating income for fiscal 2011 by operating segment. Also, we have made available on our website our fiscal [2001] quarterly and full-year results under IFRS. There are no material adjustments to our fiscal 2011 financial statements due to the change over to IFRS. The only adjustment to highlight is that the transaction costs for the acquisition of Gold Toe Moretz, which were incurred in fiscal 2011, are reported as a charge against earnings under IFRS and not capitalized as goodwill, which was the accounting treatment last year under Canadian GAAP.

Our net loss for the first quarter was $0.38 per share compared with our December forecast of approximately $0.40 per share. Net selling prices for Printwear were slightly higher than projected in December, due to lower than projected promotional discounting in the month of December. The loss from the first quarter compared to adjusted net earnings of $0.30 per share in the first quarter of fiscal 2011. The first quarter loss was due to the following factors. Number one, we continued to consume inventories during the first quarter, which had been previously manufactured with peak cost cotton. Our average cotton cost during the first quarter was slightly more than double our cost of cotton in the first quarter of last year. The higher cotton costs in the quarter compared to the first quarter of fiscal 2011, negatively impacted EPS by close to $0.45 per share.

The second factor was that selling prices in Printwear were reduced during the first quarter to align with current cotton futures, initially through short-term promotions and eventually through a formal reduction in gross selling prices, which was announced in early December. Selling prices in the Branded Apparel division, which have remained largely unchanged during the course of fiscal 2011, were increased at the end of the fiscal year in order to reflect current cotton future costs. In anticipation of the above selling price reductions in Printwear, US wholesale distributors delayed replenishment of their inventory and supply demand from screen printers by depleting inventory levels. Distributors were able to operate with lower inventories in the first quarter as the first quarter is the lowest seasonal quarter for Printwear sales. This destocking of distributor inventories resulted in close to a 40% reduction in Gildan's unit sales in the first quarter and was significantly more impactful than the 3.9% decline in screen printer demand compared to the first quarter of last year.

The decline in Gildan's unit sales volumes due to distributor destocking and lower industry demand was partially offset by our higher market share compared to the first quarter of last year and our higher shipments to Europe and other international markets. Lower Printwear sales volumes compared to last year reduced EPS in the first quarter by close to $0.25 per share. In addition, the inventory destocking by US distributors negatively impacted percentage gross margins in the first quarter, as promotional discounts in the quarter were largely based on shipments of Gildan products from distributors to screen printers, which significantly exceeded shipments into the channel. Due to the distributor destocking in the quarter, inventories of Gildan products in the channel represented only 45% of total distributor inventories compared with our market share in the quarter of over 60%. Next, the benefit of the Printwear selling price reduction announced in December was applied to distributor inventories resulting in a special distributor inventory devaluation discount in the first quarter of approximately $0.16 per share. And finally, an extended manufacturing shutdown was taken in December to manage Printwear inventory levels. The impact of the shutdown on EPS in the first quarter was approximately $0.07 per share.

These factors resulted in a segmented operating loss of $31 million in the first quarter for the Printwear business, which has historically been highly profitable. However, the Branded Apparel business generated operating income of $2.4 million in the first quarter compared with an operating loss of $6.7 million in the first quarter of fiscal 2011, in spite of the impact of consuming inventories manufactured with higher cost cotton. The improved results for Branded Apparel were due to the benefit of selling price increases implemented in the fourth quarter of fiscal 2011, improved stock manufacturing efficiencies, and the accretion from the acquisition of Gold Toe Moretz.

Results for Branded Apparel are expected to continue to improve due to the benefit of projected lower cost cotton after the second quarter of the fiscal year, combined with continuing manufacturing efficiencies as we complete the ramp-up of our Honduran soft manufacturing and the integration plan for Gold Toe. In addition, SG&A expenses for the Branded Apparel division reflect the sales, distribution, and administrative infrastructure which has been put in place to support the long-term development of the business and to pursue the Company's retail branding strategy, as well as duplication of certain SG&A expenses due to the acquisition of Gold Toe Moretz. Over time, we expect SG&A expenses for Branded Apparel to be more in line with sales revenues, in spite of the increased expenses to develop the Gildan and Gold Toe brands for retail.

We have provided EPS guidance of approximately $0.20 a share for Q2 on projected sales revenues for the quarter of close to $500 million. Higher year-over-year cotton costs are projected to negatively impact Q2 EPS by close to $0.70 a share compared to the second quarter of last year. The impact of higher cotton costs is projected to be largely offset by higher Printwear unit sales volumes in spite of an assumed 5% decline in industry demand in the US distributor channel compared to the second quarter of last year, and also due to increased US market share and increased penetration of international markets, higher retail selling prices, increased manufacturing efficiencies, and the EPS accretion from the Gold Toe Moretz acquisition.

Projected EPS for the full year is unchanged from our December guidance at approximately $1.30 per share on projected sales revenues of approximately $1.9 billion. Projected results for the second half of the year reflect the benefit of assumed significantly lower cotton costs, as high cost inventories are assumed to be fully consumed by early in the third fiscal quarter, and we are assuming that we cover the balance of our open cotton requirements for cost of sales in the fourth quarter at current cotton future costs.

The other main assumptions in our guidance for the second half of the fiscal year are, one, no recovery in overall industry shipments in the US distributor channel. Our guidance reflects the assumption of a 5% year-over-year decline in industry shipments in the second quarter, and industry shipments in the second half of the year are assumed to be flat compared with the low base in the second half of fiscal 2011 when demand declined by approximately 8% compared with the second half of 2010.

Secondly, market share in the US wholesale distributor channel is expected to be approximately 65% for the balance of the fiscal year. Three, industry pricing and Printwear in the balance of the year is assumed to be slightly lower than in the first quarter. We believe that pricing in the Printwear market is currently aligned with cotton futures. In addition, the industry has experienced inflation in labor, energy, and other input costs. However, there is no assurance that irrational pricing and further promotional discounting will not occur, which is not reflected in our guidance. As indicated in the press release, every 1% change in industry pricing impacts Gildan EPS for the balance of the fiscal year by approximately $0.09 per share. And fourthly, selling price increases for retailers, which were implemented late in 2011 are projected to be retained as price increases are in line with current cotton futures.

We are continuing to make good progress in ramping up Rio Nance 5, which will become our lowest cost facility for the manufacture of active wear and underwear. Rio Nance 5 is expected to be fully ramped up by the end of the fiscal year, resulting in additional production capacity and significant further manufacturing cost efficiencies in fiscal 2013. We are also projecting increasing cost efficiencies in our sock manufacturing as we complete the ramp-up of our new sock facilities in Honduras and realize projected synergies from the integration of Gold Toe. In addition, our investment in biomass is expected to provide further manufacturing cost efficiencies in fiscal 2013. In order to manage the pace of capacity expansion, we are temporarily retiring Rio Nance 1 at the end of the second fiscal quarter. We are evaluating plans for the modernization of certain equipment at Rio Nance 1, which would result in further manufacturing cost reductions at such time as the capacity comes back on stream.

Capital expenditures for fiscal 2012 are still planned to total approximately $100 million, and we are still projecting to generate free cash flow of $75 million to $100 million for the full fiscal year. We project to continue to utilize cash in the second fiscal quarter and generate significant free cash flow in the second half of the fiscal year. In spite of the decline in our share price in December when we initiated our earnings guidance for fiscal 2012, we have not yet used our normal course issuer bid to repurchase shares in fiscal 2012, in order to conserve cash and maintain our financing capacity and flexibility to pursue our ongoing growth strategy. We also announced today our regular quarterly dividend of $0.075 per share, which will be payable on March 19 to shareholders of record on February 23, 2012.

Thank you, Laurence. This concludes our formal remarks, and before I open the call to questions, I would ask that you limit the number of questions to two so that everyone has the opportunity to ask a question. Of course, time permitting, we will circle back for our next round of questions. Pamela, we are ready to take questions.

Thank you. (Operator Instructions) Please stand by while we assemble the queue. Martin Landry from GMP Securities.

Could you remind us of what kind of operating margin -- operating income margin you are targeting in your branded apparel segment in the long run?

Well, I think, looking obviously, our operating margins - what we said is that we anticipate getting our operating margins similar to those of wholesale in the long run. But obviously, we are investing now into the future so that will take us some years to be able to get up to the mature level of our wholesale business, but that would be our goal.

So am I correct to assume that your printwear business is currently earning a 25% operating income margin? So is that what you are targeting for your branded apparel?

That would be the goal.

Okay. And second question. Where do you stand with regards to your hedge for cotton? Are you fully hedged for fiscal '12? And if so, at what price?

I mean, obviously, information in our cotton purchases are very sensitive competitively, Martin. What we have said to you previously is that our average quarterly cost of cotton peaked at around $1.60 per pound in Q4 and that, that peak level of cotton is currently assumed to continue until early Q3; and after that, we are assuming that our cotton costs will reflect the current cotton futures although we still have a balance of cotton to cover in Q4.

But, you are still undergoing hedges.

We are still - we still have several from cotton in Q4, yes.

Nicole Shevins from Goldman Sachs.

I wanted to see if you could give us an update on the price declines that you took in 1Q. I think so far the price declines were mainly in T-shirts. Are there any other categories that you plan to take prices down on or were all the price declines taken so far? And then as a follow-up, we've heard about some new promotions going on in the last few weeks in the screen print channel. So just wanted to see if you could talk to that at all.

As far as the price declines, we've taken, obviously, price declines in T-shirts as well as fleece. And that's what has been factored into our forecast and then as part of our deval. And as far as the promotional activity in the marketplace today, it's in line really with what we projected. Even though we brought our prices down to what we -- to a lower level as a list price, we've always assumed in our forecasting that there will be promotional activity and the pricing that's currently out in the market is basically, has been -- is in our forecast. And if it deteriorates further, there could be some downside, but based on what's the current pricing environment, it's consistent with what we projected.

To get back to that, what we said on the prepared remarks that the pricing that's reflected in our guidance for Q2 does reflect some additional promotions compared to Q1.

So of the promotions in February so far, have they gotten deeper than they were in December or January, or is it pretty much consistent with how it had been tracking then?

Well, there are different types of promotions. So it's a little bit different because in the first quarter we were promoting significantly on bigger count recounts where we actually were promoting more dollars going out our customers' doors, but I would say that overall it's slightly - pricing in general would be slightly lower in this quarter, and that's what we projected in our guidance.

Okay. And then just one other follow-up. It looks like for the second quarter you're expecting sales growth around 30% year-over-year. How should we think about that printwear versus branded apparel and then any color you can give us on the year-over-year change in pricing versus change in units? Thanks.

Well, we are not providing sales guidance for the second quarter by segment, but we are expecting strong sales growth in the printwear segment due to our penetration in international markets. And some infantry destocking by distributors in the US wholesale channel and also increased market share.

Anthony Zicha from Scotia Capital.

Could you give us some color on inventory levels at the wholesale distributor level?

Well, from the crest report of December, there's a pretty good snapshot that our inventory is in the range of 45% relative to our share in the low 60s, so we really destocked the channel, and the inventory levels the way we see so far and the way the purchases and our POS is going -- has gone through in January, our inventory levels should be in similar position, and the one bright spot is, which we haven't finalized yet, obviously, because our crest is not out, is that so far in January we are seeing somewhat stronger POS than we projected. And even in February we are seeing even a stronger result. So far our POS has actually picked up. It's a little early to tell, but it's picked up more so than we projected. And hopefully, it's signs to come.

And the distributors, do you feel that they would start to restock sometime in April?

Well, I think that the distributors are going to carry inventory based on their going forward sales. That's -- we have enough inventory to support the retailer needs -- I mean the wholesaler needs, sorry. So they'll bring inventories out to support their future sales based on the summer selling season.

And is there any difference between North America and Europe?

In terms of what, inventory?

Yes. Like, I'm just trying to relate that you had a 30% increase on the international side.

Well, the thing about international is that we never had inventory, I mean, period. So for the last three years, and we keep telling everybody we haven't had the inventory to support the market. So obviously, this year we have inventory. So that's a direct reflection against the opportunity that's in Europe and Mexico. All of our international markets are doing exceptionally well. And it's a function of us redeploying our capacity.

And then just one last question. With reference to the retail channel, can you give us an idea of the internal growth rate?

Well, one thing I will add in response to the previous question. That obviously, Q2 of last year didn't include Gold Toe, which adds also significant sales to the year-over-year growth.

And then, Laurence, could you give us an idea of the internal growth rate in the retail channel during the quarter?

Well, I think -- do you want to?

Well, I think what we projected this year is -- what we've guided to was $600 million in revenue. Our retail, obviously, we have a major push on it. We have a lot of capacity to sell. We have a lot of irons in the fire. We are working hard on driving, obviously, all of our brands starting with Gildan. We've now been able to place up to over 15,000 stores and locations. We've picked up a lot of regional accounts. We are expanding within each one of the regional accounts.

We started an advertising campaign this year with the kickoff of our New Mexican Bowl, which has given us a lot of visibility and has created a lot of hype from retailers to pick up additional product, and we are working with other retailers that are looking to carry the line. And so we have a lot of opportunity, I would say, as we go forward. And in Gold Toe, we are definitely continue to driving their brand strategies. We have test in different retailers with Gold Toe underwear products. We are expanding some of their categories within the existing retailers. We have a new brand that we launched in the Gold Toe, which is called Solutions. It is a compression sock.

So we are working hard right now. Obviously, as we bring on all this capacity at Rio Nance 5, and we are pushing hard to develop new programs. We have been able to secure some new programs for fall, but they are still going to fall within our $600 million guidance number at this point. But then we are still pushing potentially for some new promotional items for the holiday and back-to-school period.

Ken Stumphauzer from Sterne Agee Capital Markets. Kenneth Stumphauzer from Sterne -

Sorry, can you hear me?

Yes, please go ahead, sir.

My apologies. As far as the 2Q guidance goes, in particular as far as the unit assumptions go, I know that you are not willing to talk with any specificity about it, but if you kind of assume that the contribution from Gold Toe is similar in 2Q, it would imply the units are going to be up somewhere in the 20% range. Is that purely a function of restocking? And is that something that you've seen already or is there something else we should be aware of?

Restockings relatively small compared with the impact of expansion in the penetration of international markets and further market share penetration within the screen print channel. So organic end-use volume growth is much more significant than the impact of restocking in Q2.

Got you. And then just finally on pricing for the duration of this year. Promotions have ticked up a little bit already in 2Q. You have very high finished goods inventory. It seems like some of your competitors right now are pricing under you. Do you still -- I mean, do you have a high degree of confidence that there won't be another pricing relapse as we get into lower cost cotton across the industry in the back half?

There's no guarantee what can happen in pricing, but I would say this is that, first of all, where the pricing is in the market today, we have anticipated the pricing, first of all. And if you look at some of the other competitors that have announced results recently, they've had to take write-downs of their inventory because they are selling the inventory under their costs. So in certain cases, I would say that there is definitely irrational pricing going on in the marketplace at even today's levels. So if the price does continue to deteriorate, it's because it's irrational, it's not something that I think is sustainable, first of all. As well as the same competitors that are pushing pricing down potentially in this channel are racing as fast as they can to raise prices at retail because they are running through all their high cost cotton. So I think as an industry, everybody is in the same boat.

We are going to be, obviously, consuming our high cost cotton by the end of our -- the beginning of our third quarter, and we feel comfortable with our positioning. And we also feel comfortable we can command a premium for our products. So if you notice over the last course of even last year, we commanded a significant premium over the market pricing because of the brand and the strength of our brand in the marketplace. So I'm not concerned, necessarily, about the actions of some of these competitors, but we are prepared. We've taken a stance, and I think one of the things maybe as being a leader in our channel, by taking the bull by the horn and devaling and bringing our price to market like we did in November, not only is that going to benefit Gildan; but based on what we see in our POS in the month of January, which is also picked up much more significantly in the month of February, we projected this quarter to be down 5%, and we are significantly so far ahead of that.

When the press comes out, hopefully, you will be able to see that. But we track our POS on a daily basis. So we are very comfortable that we position pricing in the market so that we can as an industry create more demand and get end-users buying T-shirts again. And we factored the current pricing forecasted. We knew this was going to take place and we feel very comfortable with our pricing.

Andrew Burns from DA Davidson.

I was hoping you could elaborate on the temporary closure of Rio Nance 1 at the end of the second quarter. I think last call it was -- you were just planning on reducing capacity there temporarily. First of all, are those costs with a full temporary closure incorporated in the guidance, and what would be required for you to bring that back online? And what does that do to your fixed cost structure if that would remain idled? Thanks.

Okay. Well, the cost is obviously factored into our guidance because it's part of our plan. The reason why w e are accelerating the closure of that plant is because the startup of our Rio Nance 5 plant is going ahead of schedule. It's definitely become the lowest -- it's of our flagship plant now. It's going to be our lowest cost plant, it's ramping up much quicker than we anticipated, which would ultimately result in additional savings as we move into 2013 and we lever those cost reductions into next year. So, and as far as the capacity, which I guess is another question somebody would ask is that, with our existing ramp up of Rio Nance 5, with our DR facility and Rio Nance 2, and as well as our facilities in Bangladesh, we have capacity to support between 70 million and 75 million dozen depending on mix.

So we have a lot of capacity. We are now going to take Rio Nance 1 down and we are going to -- we are in the process of re-evaluating what type of equipment we are going to put in that facility. And it will come online as soon as we need the additional capacity. The plant is almost fully depreciated basically because of the fact that it's been running, it's our oldest facility. It needs work and it needs to be modernized. So when it does come on, it's going to have a lower cost than its existing cost structure and will allow us to have additional capacity in the future.

Thanks. And with your ability to grow the international business now with capacity available, I was hoping you could remind us of how big of a piece of business you think that could be over the next several years and then the pace at which you expect that growth to come to fruition. Thanks.

Well, there is no industry stats on international markets. What we can tell you is that we can sell -- the one market that's probably, I would say, more understood in terms of understanding the landscape because we can only go by the competitors and what we think their volumes are, for example, and that's how we get our industry stats. But we have a long way to go in all of these market, and we could definitely grow our international business by over 15 million dozens, let's say, for example, over a period of time, which would be quite significant to fill up our capacity requirements. But the real thing for us is driving our retail strategy. I mean, that's really part of our growth initiative and what our focus is right now, is making sure that we drive our brands, the Gildan, Gold Toe, and position ourselves to take advantage of this new capacity to support new retail initiatives as we go forward into 2013.

Mark Petrie from CIBC World Markets.

Could you just talk a little bit about the inventory levels at your distribution centers in North and South Carolina, and if you are satisfied with those positions and how they are relative to this point last year?

Well, inventory is much higher than it was this time last year because last year we had one quarter's worth of back orders, but I can tell you where we will end the year. We will end the year in unit volume similar to -- just slightly higher than it was last year. And even last year we ended with probably just the right or maybe just under the amount of inventory that we needed because as we go into some of these geographical markets, we need inventory. And so, the inventory is definitely higher this year.

It is peaking from two aspects. It's peaking one from the price of cotton obviously, and two, from the unit perspective. And as we go through the height of summer selling season, we are going to definitely see the units come down and the price of our unit costs come down as well by the end of the year.

What I would add is that when you compare our inventories at the end of Q1 with Q1 a year ago, you have to take account of the fact that about $100 million comes from the higher cost of cotton in inventory. And also, we didn't have Gold Toe a year ago, which accounts for about $60 million inventory. So the units only represent the balance of the difference.

Thanks. And I just wanted to confirm that the guidance for Q2 and for the balance of the year, what does that actually include in terms of retail pricing?

It assumes the increases we took in retail, which -- and those price increases were based on the future price of cotton where you see it today. They weren't based on the high end of cotton because we took very few increases in retail along the way. So we only took two small increases versus the over broader market that took significant price increases in the 30% to 40% range.

Tal Woolley from RBC Capital Markets.

I just wanted to ask about the branded apparel profitability. When you had talked in December, you had mentioned that it would be marginally profitable this year. You are already starting to show some profit in Q1. I'm just wondering if there is a seasonality aspect to that number that you might see some -- you see it up, being profitable this quarter; but Q2 or Q3, it might be at a loss and then rebounding in Q4. Does that sound about right?

The things that cause the segment to be profitable are the things that we mentioned in the script that we're starting to benefit from sock manufacturing efficiencies from consolidating our production in Honduras. We are benefiting from the retail price increases that were implemented. We are benefiting from the accretion from Gold Toe. So even though retail was equally impacted by the significant increase in the cost of cotton year-over-year, it's now in the black. And as we go forward, these things are going to continue to allow us to further improve the retail profitability. Cotton cost is going to come down and we are going to continue to generate further sock manufacturing efficiencies plus benefits from the integration of Gold Toe.

Okay. So if I'm understanding you correctly, you're saying that if the year performs to guidance, that segment should be profitable for the four quarters of the year?

Yes. Well, I won't talk about individual quarters, but I would say that the full year should show very healthy profit.

Okay. And then you mentioned in the non -- I guess in the non-Gold Toe business, some destocking through the quarter at - in the retail part of the business. Can you talk to how much of that you believe is a function of market, the overall retail category performance, or is there - has there been some competitive losses that you can measure there?

Well, I'll tell you one thing for sure is that, two things have somewhat happened. One is that there's a direct relationship between unit volume and pricing in retail. So as you raise your prices, there is elasticity, you're losing volume. I think those are almost a trade-off one for one in terms of -- so POS is slightly down in our cases in the products that we sell in retail overall because we definitely took some price increases and it's affecting the sell through; but not that significantly because we didn't raise our prices that much. But what has driven down the inventories I think is the seasonal products that are being at retailers where there boots, jackets, and so forth are not selling because of weather so they're looking to bring their inventories down where they can on more replenishment type items. So if you look at our inventory reduction versus our POS reduction, it's far significantly higher on the inventory side than the POS side. So hopefully, as the big retailers just finished their year ends, they will start to restock the shelves as we go into this quarter.

Vishal Shreedhar from National Bank Financial.

I was hoping you could help me understand the capacity. I am looking for the exit capacity at the end of the fiscal year, and maybe your run rate capacity, your average capacity through the year.

Well, we're managing our capacity this year to manage our sales forecast. That's why we took time out. So what we are doing is we are running a higher level of unit volume, and we've taken time out in four weeks at Christmas time and we'll take out a little bit more in Easter, which is all factored into our forecast to manage our inventories. And then as we go through the balance of this year, we will have enough capacity between the three facilities like I said before between 70 million to 75 million dozen depending on what our requirements are going to be as we move into 2013. And we will have visibility of our 2013 probably as we get to the summer period of June and July as we focus on our opportunities at retail as well as we see the improvement in demand in the wholesale market.

Okay. So if I understand that correct, at the end of fiscal 2012, you will have activewear capacity of 70 million to 75 million dozen?

Yes, activewear, underwear. Yes.

Okay. And then through the year, how much -- in fiscal '12, how much do you intend to produce?

Well, we are going to produce what our sales volume is, and that is -- I think leave it at that.

Okay. And then fiscal '13, our prior assumption with Rio Nance 1 running was that the exit capacity out of fiscal '13 would have been 94 million dozens. Now with Rio Nance 1 down, that's no longer a valid assumption, is that correct?

Well, it's not a valid assumption today because, obviously, we are taking it down. But we can renovate Rio Nance 1 in as fast a period as we've chose to do it. And we started up Rio Nance 5 in September and it's going to be running at the same volume as Rio -- it's going to be ahead of Rio Nance 1's volume by April. So just to give you an idea. So we have the capability of expanding capacity quite quick. So that's not a really concern for us.

Okay.

That would be a great problem to have, to be honest with you.

Okay. So Rio Nance 5 will slowly ramp up through the year and by the end of the year it's going to be fully going. And just to circle back, the four weeks of shutdown, how much capacity did that take out?

Well, you figure it's -- I'd rather not say right now to be too specific, but I would just say that if you take 70 or whatever number it is and you divide it by your 50 weeks, that you can figure out when we do run at capacity, that's sort of the number on a weekly basis.

Susan Anderson from Citigroup Investment Research.

I was wondering if you could talk about the unit growth in the retail business, like what percent is broken out by price and what percent by units? And then if possible, if you could break out between Gold Toe and private label. And then lastly, just wondering if you are still planning on exiting part of the private label business.

I will start with the strategy on our branding strategy. We have exited most of our, what we call private label business that are non-branded type products. The only items which we have and are selling today are Gold Toe brands, Gildan brands, the Starter brand, and the Danskin brand as the bulk of most of our sales today. And we are managing the non-owned Gildan brands because we are actually doing all of the marketing, well, all the merchandising and development of those brands. So those are programs, which we are going to continue to focus on and hopefully expand.

So the 30 million to 40 million that you talked about last quarter is already out there?

Yes, exactly, we are in the same position.

Okay. And then have you broken out the dollar amount between Gold Toe and the other part of the business in the margins?

No. They are increasingly integrated into one business, and we don't want to break out the sales between the two. But clearly, what we can say is that the sales growth in units was from the impact of the Gold Toe acquisition. And then on top of that, we had maybe about what we said before, about $10 million impact of retail price increases in the quarter.

Okay, great. And then in terms of inventory, it looks like it was up 66%. Can you maybe breakout what part was Gold Toe, what part higher costs, and then what part units?

I thought I actually -- I gave that information in response to an earlier question. But I will give it again. About $60 million was due to Gold Toe, about $100 million was due to the higher costs in inventory, and the balance was units.

Okay, great. And then have you given the cost associate, like how much it's going to cost to shutdown Rio Nance 1?

It's insignificant, and it's in our forecast.

Susan Sansbury from Miller Tabak.

Two questions related to Gold Toe if I may. Laurence, can you actually be specific about what the level of accretion was in the quarter? And secondly, can you talk about some of the major changes going on in the mid-tier, referring to JCPenney and how that in your view will affect Gold Toe on a go-forward basis? Thanks very much.

The bridge we gave you in December for the increase in EPS from Q1 last year to Q1 this year included about $0.05 of accretion from Gold Toe, and the performance was in line with our forecast.

And then the strategy with JCPenney, we think is going to work very well for us. We are encouraged in terms of the direction where they are heading in terms of their pricing strategy. And actually, in one of their last -- actually, one of their -- we got referred to as one of the opportunities, let's say, for example, we were developing the account and pricing our products at the - at JCPenney. So overall, I think we are very happy with all of Gold Toe placement, and we are looking to expand not just into new sock categories, like ladies, for example, where it's traditionally been a man's sock, our Solutions brand, and as well as our underwear programs, which we are trying to lever through the Gold Toe brand - branded and distribution.

Any ramifications relative to what's going on at the other mid-tier and/or discount retailers with respect to JCPenney's new pricing strategy?

Well, first of all, I think it's early to tell for sure, right. But we are very confident with our placement, and we are projecting to have a continued growth with all of these customers.

David Glick from Buckingham Research Group.

Just a couple of quick follow-ups. I was wondering -- thank you for the update on the textile capacity. I was wondering if you could update us on the sock capacity as well. Also, if you could give us some color on what's happening with labor and wage inflation in the various manufacturing regions where you operate, obviously, Honduras being the biggest?

Okay. Well, as far as the sock capacity, obviously, our capacity hasn't really changed in socks. The only thing is, is that mix changes our capacity. So when we are producing Gold Toe socks, for example, they take significantly longer to knit, let's say for example, than we would a basic dumb-dumb promotional sock, let me just give you an example. But, so mix has changed; but basically, we are ramping up both of our plants and objectively by the end of this fiscal year, as we integrate Gold Toe products into our facilities, we will be using the bulk of all of our capacity. And we might have still a little bit left over, but we will be pretty well utilizing and reducing our cost of our two sock facilities based on the mix that's going in there.

That's about 65 million dozens, is that still the number?

Well, it all depends on mix, right?

So it's lower with Gold Toe?

It's lower, yes. (Indiscernible - multiple speakers.)

Okay. Got it. And anything left in the US?

No, there's nothing left in the US?

Okay. Nothing, okay, I was just double checking.

And as far as the wage increases, the government has just announced a three-year wage increase that's going to increase wages in Honduras in particularly like 7%, 8%, 8.5% roughly for the next three years. And again, which is also going to be followed up most likely by de-evaluation. So you have to look at the -- when you look at these countries from a wage inflation point of view, you also have to take currency devaluation. And also at the same time, you have to look at efficiencies and other things. So I would say that from a labor point of view for the next three years, I think we feel comfortable that any type of labor increases will be offset either through devaluation or manufacturing efficiencies.

Chris Lee from the Bank of America Merrill Lynch.

Just wondering if you think the CapEx level of $100 million that you're guiding --

Sorry, Chris, can you just talk a little louder?

Sure. Can you hear me?

Yes.

Sorry. I was just wondering if the CapEx level of $100 million that you are guiding for this year, do you think it's sustainable over the longer-term or is that a function of your sales volume?

I think we are going to spend based on our needs, but accordingly, that's -- it's actually consistently over the last three or four years we spent more than $100 million. The monies that we will spend I think on a go-forward basis would probably be similar to that because we still have a lot of projects that we are looking to invest in like our power plant, the revamping of our Rio Nance facility, distributions capacity we are putting in place. We have a lot of other investment opportunities. It's probably a good number, as you go forward, based on continuing adding capacity as well as cost-saving initiatives.

Okay. Can you share with us how much you are investing in the SG&A expense for this year to grow your branded apparel business?

Well, we are investing in dollars to spend on advertising probably about $5 million is the number between the Gold Toe and the Gildan brands.

Okay. Are there other expenses related?

Those are direct expenses, but obviously, I would say that anything in terms of promotion of the brand, that's about the number. But the SG&A in general is much higher than it needs to be today because of the infrastructure we put in place to support the growth of our retail business. I think the big thing you have to look at is that as we continue to spend more on our ad side, as our business grows, we will be able to reduce the operating side. Net-net, our SG&A probably over the next couple of years won't grow at all.

Okay. And this is my last question. In Q3 of fiscal 2011, there was one quarter where the branded apparel was generating a positive operating income, which kind of stood out to me. What went wrong - what went on there if you can give us some color on that?

I guess we were not yet being impacted by the peak costs cotton in that quarter, and it was the first quarter of the accretive impact of Gold Toe.

Tal Woolley from RBC Capital Markets.

I just wanted to talk about the Rio Nance 1 decommissioning. Is it possible like if you -- how long does it take to wind down that plant? How long would it take to refurbish? If you wanted to restart it up like as quickly as possible, what sort of timeframe is that? How long a period of time is that? Is that 6 to 9 month time frame that you could do that; is it 12 to 18 months?

Well, winding it down, basically, is happening pretty quickly. Because as we ramp up our 5 plant, obviously, we are going to wind it down. And we don't want to have a factory working at a lower volume because it would increase the cost. The quicker we get it down, the better it is for us and that's why we've been very successful in ramping up Rio Nance 5.

The infrastructure in the plant is there, so it's not like building a new facility. From the time that you order equipment, you get equipment installed in six months and then start training people. It can go very fast. I don't think that's going to be an obstacle to react to any type of opportunities in the market whatsoever.

Okay. But realistically, it seems like it could be like a year really before this is up and running again.

Yes, I wouldn't look at -- we don't, honestly, with the capacity we have now, with these other facilities, we don't need to bring this facility probably on before 2014. I mean, that would be probably the timetable. We are comfortable with our capacity today with the existing facilities. But we are going to continue to finish this project, but 2014 is -- we wouldn't need it for 2014 based on the capacity we have installed today.

Okay. And just my last question would just be then, if you are reigning in your net capacity extensions compared to where we were previously, you are mentioning that distribution inefficiencies in the branded business are sort of constraining the upside there. Are we going to be in a situation where you potentially overinvested on the distribution side?

Maybe there's a misunderstanding though in terms of -- even if you looked at what our trajectory was in our long-term projections. Even though we are building Rio Nance 5, we never committed ourselves to say, hey, we are going to go and sell every dozen from Rio Nance 5 tomorrow morning based on all these dozens. Objectively, Rio Nance 5 was to be built and then ramped up over subsequent years, a two or three year period. But what happened was that, the cost of our Rio Nance facility just in ramping it up and closing down Rio Nance 1, it's a payback in itself just on the differential between cost between 5 and 1.

The cost per dozen that we're producing in 5 versus the actual costs even when Rio Nance 1 was fully ramped up is a significant savings. It paid back and make the economics of Rio Nance 5 payback in itself. What happened was we just accelerated Rio Nance 5 really is truthfully what we've done after we've analyzed the opportunity and the cost structure of it, and then we are going to go back to Rio Nance 1 eventually and get it to be up to speed. Because, listen, Rio Nance 1, if we don't stop it now, it would be, come a certain point in time that we'd never come back to defacilitating that facility and getting it up to the same type of cost structure, which we need to have in place similar to Rio Nance 5.

Okay. Just to be clear, I just wanted to make sure that the - that you still feel that beyond the manufacturing of the distribution system and everything like that is still right sized to your capacity expansion plans over time.

Totally. We still have work to do, so we don't want to underestimate the work intended to go and grow our topline sales. But we are working very diligently now. We are going to expand our distribution in every one of our growth markets. We are going to gain more market share in our distributors. We're going to keep growing our international business. But most importantly, we're going to drive our retail strategy to continue driving and utilizing our capacity and driving our topline sales.

Thank you. There are no further questions at this time. Please continue.

Thank you. Just before ending the conference call, I'd like to remind that - remind you that Gildan will be holding its annual shareholders meeting tomorrow at 10.00 am Eastern in Montreal at the Centre Mont-Royal. We will, therefore, be available to take some questions this evening, and we can take some follow-up questions tomorrow afternoon. Thank you very much for joining us. And we look forward to talking to you at the next conference call. Good night.

Ladies and gentlemen, this concludes the conference call for today. We thank you for your participation. You may now disconnect your line, and have a great day.