Gildan Activewear Inc (GIL) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2012 Gildan Activewear earnings conference call. My name is Valerie, and I will be your 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 proceed.

Thank you, Valerie. Good morning, everyone and thank you for joining us. Early this morning we issued a press release announcing our earnings results for the second quarter of fiscal 2012. Concurrently, we also issued press release to announce the acquisition of Anvil Holdings. We also issued our interim shareholder report containing management's discussion and analysis and consolidated financial statements. These documents are available on our website at www.gildan.com and will be filed with the Canadian securities regulatory authorities and the US securities commission.

On the call with me today I'm joined by Glenn Chamandy, our President and Chief Executive Officer, and Laurence Sellyn our Executive Vice President and Chief Financial and Administrative Officer. Laurence will first be providing an overview of the second quarter financial results and business outlook, after which Glenn and Laurence will be taking your questions.

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

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

Thank you, Sophie. Good morning. This morning we announced our results for the second fiscal quarter, which were slightly ahead of our previous guidance, and reconfirmed our sales and EPS guidance for the full year.

Also we announced the acquisition of Anvil, which further solidifies our leadership position in the printwear market, creates potential new growth opportunities to build on relationships with consumer brands supplied by Anvil, and provides attractive returns on capital and EPS accretion.

We also announced plans to proceed with the modernization and refurbishment of Rio Nance I, which will begin in the third quarter of fiscal 2012 and end by the end of fiscal 2013.

Adjusted EPS of $0.23 for the quarter were down from $0.53 per share in the second quarter last year, asresults continue to be significantly impacted by the consumption of inventories previously manufactured with high cost cotton. The average cost of cotton and cost of goods sold in the second quarter was approximately $1.60 per pound, compared with approximately $0.85 per pound a year ago, which negatively impacted year-over-year EPS by close to $0.70 per share and impacted gross margins by close to 2,000 basis points.

Selling prices in printwear were reduced in the first fiscal quarter to align with current cotton futures and were close to the same level in the second quarter last year. So the higher cost of cotton resulted in significantly reduced margins and operating income for the printwear division, which has historically been highly profitable and a significant cash flow generator for Gildan.

The reduction in printwear industry selling prices in the first fiscal quarter has helped to stimulate a recovery in industry demand in the second quarter. Press data for the second quarter showed 4.9% growth in demand in the distributer channel compared to the second quarter of last year.

Also, after being capacity constrained throughout most of fiscal 2011, we have regained our market share momentum and strongly reinforced our leadership position in the printwear market. This strong trend in demand for Gildan brand in the channel has continued into the month of April.

Also, as a result of the price reduction and resulting improved visibility to plan their business, our US wholesale distributors had confidence to rebuild inventories during the second quarter. Distributors restocked inventories during the quarter to normal seasonal levels. We are also increasing our penetration in all of our international screen print markets where unit sales volumes in the second quarter were up strongly compared to the second quarter of last year.

Shipments to national accounts were flat during the second quarter compared to the second quarter of last year. We did not achieve our forecasted growth in national accounts due to weak market conditions in which our national account customers and the retailers which they service were delaying replenishment of inventories.

In spite of the high cotton cost, our branded apparel division generated a profit of $1 million during the second quarter, compared with a loss of $6 million the second quarter of fiscal 2011. The negative impact of higher cotton costs on results for branded apparel was more than offset by higher net selling prices, improved manufacturing efficiencies due to the -- due to completing the transition of sock manufacturing to Honduras and the ramp up of our new sock manufacturing capacity. The non-recurrence of ramp up in efficiencies incurred in the Charleston distribution center in the second quarter of fiscal 2011 and accretive impact of the Gold Toe Moretz acquisition.

Our EPS guidance for the full year remains unchanged at approximately $1.30 per share. The main assumptions in our updated guidance are, firstly, that the acquisition of Anvil is expected to close by the end of May. We are assuming that industry shipments from US wholesale distributors to US screen printers increase by approximately 5% in the second half of the fiscal year compared with the fiscal half of 2011.

We are assuming a market share of approximately 70% in the US distributor channel, subsequent to the acquisition of Anvil. Selling prices for the printwear business for the balance of the fiscal year are assumed to be slightly lower than in the second quarter. Selling price increases implemented in the retail channel in the fourth quarter of fiscal 2011 are projected to be maintained during fiscal 2012, as Gildan's selling price increases to retailers did not reflect the full pass through of high cost cotton.

Cotton costs in the third quarter are assumed to be comparable to the third quarter of 2011. Cotton costs in the fourth quarter of the fiscal year are expected to be significantly lower than the fourth quarter of fiscal 2011, when the cost of cotton was approximately $1.60 dollars per pound.

Results in the third quarter include a noncash charge of approximately $0.03 per share to write off obsolete manufacturing equipment at Rio Nance I, which is now you being modernized and refurbished.

EPS for the third quarter is projected to be approximately $0.65 per share, compared with $0.76 per share in the third quarter of fiscal 2011. Although cotton costs for the third quarter are projected to be comparable with the third quarter of last year, printwear selling prices in the third quarter last year reflected the full benefit of successive selling price increases implemented during 2011.

Projected EPS for the third quarter also new includes the noncash write-off for obsolete equipment at Rio Nance I, as well as impact of startup inefficiencies at Rio Nance V as a result of consuming inventories produced during the initial startup of the facility in the first half of fiscal 2012and impact of some production downtime, which has been taken in the third quarter by extending Easter holiday shutdown to manage inventory levels. This downtime had previously been scheduled for the fourth quarter.

These negative factors are projected to be partially offset by projected higher printwear unit sales volumes, higher selling prices to retailers, more favorable product mix, synergies from the integration of Gold Toe Moretz, and a slight accretion in the quarter from the acquisition of Anvil.

Results for our fourth quarter are projected to benefit significantly from the further reduction in the cost of cotton, together with increased printwear unit sales volumes and the continuing improvement in the profitability of branded apparel.

Utilization of our bank credit facility increased to approximately $330 million during the second quarter, and net indebtedness amounted to $301 million. The main uses of cash in the second quarter were a seasonal increase in accounts receivable, our continuing capital investments in capacity expansion and cost reduction projects, and dividend payments, with two quarterly dividend payments falling in the second fiscal quarter.

We are projecting that we will generate approximately $275 million of free cash flow in the second half of fiscal 2012. In spite of the use of cash in the first hall of the year, we are projecting to generate free cash flow of $100 million to $125 million for the full fiscal year. Capital expenditures for fiscal 2012 are still projected at approximately $100 million. We have announced that we will begin the refurbishment and modernization of Rio Nance I in the third quarter of 2012 and expect that this facility will start to ramp up in the second half of fiscal 2013.

The acquisition of Anvil, which we announced today for a total purchase price of approximately $88 million, is an excellent strategic fit for Gildan and is also projected to provide returns well in excess of our cost of capital due to synergies resulting from the combination with Gildan. Anvil currently has a 7% market share in the wholesale distributor channel for the printwear market and has positioned itself as is a niche player with high quality branded products such as Anvil Organic, Anvil Recycled and Anvil Sustainable.

The acquisition immediately provides Gildan with a 70% market share in the US distributor channel and also further increases our presence and product offering in the Europe and Asia Pacific regions. Based on the complimentary strengths of the two brands, we believe that we will build further on the current combined 70% market share.

Anvil also has increasingly positioned itself as a strategic supply chain for non-retailer brands such as Nike, Adidas and Reebok, which have been seeking suppliers for large-scale replenishment programs with manufacturing in the western hemisphere and which meet their criteria for product quality and social responsibility. We believe that we will have potential opportunities to build on some of these relationships to introduce further license branded product, and also that the acquisition of Anvil will enhance Gildan's capabilities to expand existing brand licenses into new product categories. As such, anthony Corsano, President and CEO of Anvil, will pursue his career as part of our senior are management team and join Gildan's branded apparel division to focus on the continuation of this strategy.

Anvil generated an EBITDA of approximately $70 million for its fiscal year ended January 28, 2012, and sales revenues in excess of $200 million, and the acquisition is expected to be immediately accretive. We will implement our integration plan during fiscal 2013, which is expected to generate synergies as a result of integrating Anvil's production for the printwear market into Gildan's low cost vertical manufacturing,the integration of Anvil's US and international distributor sales into Gildan's divisional infrastructure in Barbados,the consolidation of purchasing of raw materials and other purchase costs inputs,the elimination of certain duplicated administrative functions and savings in ongoing working capital requirements.

The projected run rate for EPS accretion is expected to be approximately $0.20 per share in 2014. Although we do not expect synergies to have a material impact in our results in year in fiscal 2013. The projected accretion is based on incremental sales growth in excess of the growth in printwear, which we have forecasted to achieve organically.

In summary, our second quarter as a results were slightly ahead of guidance, and we have reiterated our full year outlook. We expect to end fiscal 2012 with strong earnings momentum as we benefit from lower cotton costs and achieve better equilibrium between cotton costs and industry selling prices. Market demand in the printwear segment is recovering, and with the acquisition of Anvil we are positioned to lever our higher share as industry demand recovers. The Anvil acquisition is an excellent strategic and cultural fit with Gildan and is expected to be highly accretive once the acquisition synergies are realized.

In addition, we are making good progress towards achieving our objective for profitability and returning capital for branded apparel.

Thank you, Laurence. This concludes our formal remarks. We are now ready to start the Q&A session. I would ask that each caller limit the number of questions to two in order to give everyone the opportunity to ask questions, and we are circle back for a second round of questions if time permits. Thank you. Valerie?

Thank you. (Operator Instructions). Our first question comes from Martin Landry of GMP Securities. Please go ahead.

Good morning. Can you talk about the impact of your acquisition of Anvil Holdings to the dynamics of the US printwear market?This -- I mean, combined with Hanes brands exiting the market, can we expect more disciplined pricing going forward?

Well, we can't -- they are not the only competitor in the market, so we can't anticipate what will happen in pricing in the market, but I think if you look at where we are today, I think pricing over the last six months has been relatively stable. We project that slightly reduced prices in the back half of the year, but pretty consistent with our forecast. So we are pretty comfortable with our pricing assumptions. And at the end of the day -- I will give you maybe a little bit of background on the Anvil acquisition and strategy behind it.

This we think is a great brand for the Company, which will allow us not only to achieve 70% market share, but we believe there is opportunity to expand our market share to at least the 75% range with the dual brand strategy. And as we continue to drive our initiatives as we go forward, the advantages of having Anvil as a brand in Gildan's portfolio will allow us to cover more products within the market, and there will be zero duplication of the products under the Anvil brand relative to what Gildan sells today. So it is going to allows us, we think, to generate significant marketshare without having price pressures, for example, relative to your point.

Just to add, Martin, that what drives the economics of this acquisition is all the synergies that I went through in the formal remarks, and I won't go through them all again. The acquisition is highly synergistic, but we didn't include pricing as one of the synergies.

Okay. And can you help me reconcile your full year EPS guidance of $1.30. I believe you have raised your volume outlook for the US screen print industry to 5% growth for the second half from flat growth previously. You've also increased your market share assumption to 70% following the Anvil acquisition. We don't we see an upside or a positive impact on your full year guidance?

I will go through the puts and takes in our guidance with you, Martin. So on the positive side, as you say, we have increased our assumption for market growth. We have assumed 5% growth in the second half of the year in overall demand in the distributor channel compared with flat in our previous guidance, and that contributes about $0.05 of incremental EPS.

The accretion from Anvil in the balance of the year is in the order of $0.03, plus we [hit a beat] in Q2 which was let's say $0.02. But when you add these three together you have positive impacts totaling $0.10; $0.05 per the higher market growth assumption, $0.03 for Anvil and $0.02 for the first quarter -- second quarter beat.

Going the other way is that we have capped for the purposes of our projections our combined market share at 70%, although as Glenn says we are aggressively pursuing more share as we speak. So what that means is that we are now assuming for Gildan 63% share, compared with the assumption in our previous guidance of 65%. Not that we won't pursue the 65%, but we thought it was prudent to cap the combined share at 70%, and therefore our Gildan share is 63%.

So that has a negative impact going the other way of $0.03 per share. We have lower sales in our national accounts, and we have also assumed slightly lower distributor inventory rebuild in the third quarter, so the combined effect of these things is another negative $0.02 per share.

We have a miniscule increase in our cost of cotton in the balance of the year due to the timing of flow through of inventories, but every $0.01 change in the cost of cotton is $0.03 of EPS. So we have less than a $0.01 change, but impacts EPS negatively by $0.02.

And then we have also, as we mentioned, the refurbishment of Rio Nance I, which is resulting in a one-time write-off of obsolete equipment totaling $0.03.

So add up $0.03 negative for our market share being 63% versus 65%, $0.02 for lower growth in other screen print market, $0.02 for cotton and $0.03 for Rio Nance, and you offset the $0.10 of positive. In addition to that slightly lower screen print selling prices, which is in the fleece category, but that is offset by more favorable product mix.

Okay. That's quite clear. Thank you very much. That's helpful.

Thank you.

Thank you. Our next question comes from Tal Woolley of RBC Capital. Please go ahead.

Good morning, everybody.

Good morning

I'm wondering if you could talk a bit about the retail performance in the quarter? If you can offer a little more color? You cited some destocking and weaker market conditions. If you could give us a little bit more feedback about what exactly happened?

Well, , retail market conditions are weaker, but the key focus of our retail division of our branded apparel division just now is improving our profitability through all of the building blocks that we previously outlined with the market,including benefiting from the consolidation of our manufacturing in Honduras and ramp up of our new facilities, more favorable product mix, the accretive impact off Gold Toe and the Gold Toe integration.

So in spite of the high cost of cotton, we were very pleased with the profitability of our retail division, and we are on track to achieving our objectives for margins and returning capital to this division as we benefit from lower cost cotton in the second half of the

And maybe just add to that is that, as we continue to focus on our branding strategy, we have very successfully been able to increase our Gildan branded sales by over 100% this year over last year, and represents almost 50% of our retail volume today. So we are very encouraged by the penetration of our brand in retail, and we are also spending a lot of time reinvigorating the Gold Toe brand and driving it as well in retail.

So our branding strategy in both Gold Toe and Gildan is performing very well, and we are very excited about the opportunity as we go forward.

Okay. You had mentioned earlier this year I think that -- I want to say it was approximately $40 million to $50 million in programs at retail that you weren't necessarily as interested in pursuing going forward due to profitability reasons. Is that -- like when you are talking about the destocking, is that what you are talking about, that you are still unwinding those programs? Or that you are seeing more destocking related to market conditions?

There has been a little bit destocking due to market conditions, but what you are referring to is basically, look, we divested ourselves of unprofitable programs. And what we've replaced those programs with branded products, either through the Gildan -- mainly the Gildan brand as well as we are continuing to drive our Gold Toe initiative. So we basically -- in our guidance we have a projected sales. we are losing some unprofitable business, but we are regaining business that's go forward that meets our criteria from a branding perspective and market perspective.

Okay. And then just lastly on Anvil, if you could talk about what's the production strategy is there right now, and the sourcing team -- any sourcing team, things like that, that are there and how you see that evolving under your initiative?

There is lots of opportunity for us, and the integration of Anvil will happen very quickly. By the end of this fiscal year all of the wholesale volume they have, which is sold obviously to our US distributors, will be fully integrated into our SRL division. And that's including manufacturing, distribution, sales, everything will be produced and serviced out of our existing infrastructure. So we will capitalize significantly on synergies as we go forward into 2013 on that part of the business.

As well as we will continue to right away let them lever all of our costs of raw material, dyes and chemicals, transportation, et cetera, and also provide them the expertise that they could use to continue lowering their overall cost structure. They also have a significant amount of work being performed at contractors, which are high cost. So all of these synergies we will be able to help them with immediately, and we think this would be a very easy integration in terms of our facilities.

And the thing about Anvil which is I think unique, which is -- and the reason why we looked at the company, was two-fold. Is that the brand stands for are a little bit different than Gildan. And that is the reason why we believe that our -- historically in our own internal minds we thought we could generate our own volume close to 70%. We think with Anvil we can definitely grow that market share closer to 75%, because they're going -- we are going to be selling products that are unique to Gildan, like for example the organic, the recycled, the sustainable type products, as well as the whole brand is more youthful in terms of some of the styling and the line that they have versus what Gildan has.

And they also offer distributors, tearaway type products that they can sell to large screen printers that they can't service today under the Gildan brand. So we think that the combination of the two, aligning our distributors with more competitive pricing under Anvil, will allow them to grow the overall market, and it allow us to grow our market share with our existing wholesalers. So we are very excited about the opportunity.

So there is no production there, no production there at all, or is it --

They have some small production assets.

Okay, great. Thanks very much, guys.

Thank you. And our next question comes from Kenric Tyghe of Raymond James.

Thank you. Good morning. Just wanted to follow up on the cotton guidance for the third quarter, specifically given that volumes were ahead of your initial expectations and your initial expectations assumed that you would cycle high cotton cost inventory during the third quarter? Certainly, I would have thought, given the volume performance, that you would have cycled the high cotton cost inventory very early in the third quarter if not already having cycled it, and yet we are still calling out cotton pressures through the third quarter and even the back half. Wonder if you could walk us through that, please, Laurence.

Sure. What you are focusing on, Kenric, is the higher market growth and stronger market recovery in the distributor channel, but that was offset by the lower than forecast growth in the national accounts. Plus our international sales were up 25%, but we forecasted slightly higher growth than that even. But that was impacted by the situation in Europe. So not withstanding the stronger growth in the distributor channel, sales were the same or marginally lower than what we had forecast, so that is why you are not seeing faster consumption of cotton.

And the cost of cotton is close to our cost of goods sold as we forecasted and as we turn our inventories as we go forward.

Fair enough, [Glenn]. Thanks. And if I could then, you commented on Anvil being well positioned with the likes of Nike, Adidas and Reebok. Obviously on the Gold Toe Moretz we had Under Armour and New Balance, et cetera. Can you just perhaps build out some of your thinking there? How does well positioned translate or flow through with the Gildan branded products, the licenses you have acquired for a number of other non-national retailers that are brands?Just trying to see -- connect a few of the dots here if you would.

Just like the licenses that we do own today or have today with Under Armour and New Balance, our objective is to try to exploit and try to expand our opportunity with these companies into other product categories through licensing is one thing we are working on. And all of these other companies you just mentioned, like Nike, Adidas, Puma, which are branded companies, are all looking for partners to help them through either licensing to drive their brand strategy, as well as potentially supporting them through manufacturing, so -- and that is primarily what Anvil did. So we think that through those relationships there could be opportunities for us on both those fronts.

There is a big movement also from a compliance point of view and sustainability point of view to produce -- branding companies are looking to produce and align themselves with companies that have environmentally and sustainable practices, which Anvil has positioned themselves as a company, but we are the leader in terms of sustainability in our industry. So that will also allow us to build relationships with these types of companies. So it opens up a door. It is another area of opportunity for us, and we are pretty excited about the future outlook.

And just finally, if I could, on the Anvil acquisition you call out that you are not assuming any of Anvil's outstanding debt. I may have missed it, but could you put a number to what their outstanding debt is and how you are structuring the acquisition.

I think the only thing that is relevant is that we are financing the acquisition out of utilization of our bank facility. And not withstanding the use of the facility to finance acquisitions, we are projecting to generate that our bank -- our use of the bank facility will come down dramatically in the second half of the year due to our very strong internally generated free cash flow in the second half of the year.

So just on Anvil itself, the -- is there -- what -- I can't find any reference to what their indebtedness that you are not assuming, or the debt that Anvil was carrying when you acquired the 100% of the common shares?

Well, I think the point is that we are paying $88 million for the company debt free. They are going to pay off their existing debt, so that is their information how their capitalization is divided between equity and debt. We are paying $88 million and acquiring the company without any debt.

And maybe the other thing I would add is that one of the synergies I mentioned is that we believe that we will reduce their working capital as we go forward, which would have an effect of slightly reducing the effective cost of the acquisition as we go forward.

All right. Thanks very much. I'll leave it there.

Thank you. And our next question comes from Eric Tracy of Janney Capital Market. Please go ahead.

Thanks. Good morning. I guess a follow-up on the Anvil. I guess, Laurence or Glenn, it seems like you are going to be set up by the end of this year in terms of being fully integrated. Why shouldn't we expect some levels of synergies and therefore accretion to come through in 2013? Is that just a level of conservatism? Is there something else is going on there?

What Glenn said is the sales side of the distributer business will be integrated into our screen print -- or printwear sales division in Barbados, but the manufacturing integration will take place during 2013.

Okay. And then I guess back to just the core business within screen print, a lot of favorable things now. Picking up share with Anvil. I know Hanes is exiting a portion of their screen print business, which translates to, call it an incremental $200 million to $250 million opportunity for you all. So looks like there is kind of incremental growth opportunities relative to what seems like are some still pricing issues. It seems like the national accounts are relatively flat year-over-year. A little bit of downtick on the share that you are expecting. Can you kind of just walk through those various puts and takes within the core?

I don't think we quite -- we are not sure we have got the thrust of the question, Eric. What period of time are you talking about?

Well, again, as we look forward, [first focused on then] from a pricing perspective, it clearly seems like there is some irrational -- other vendors being irrational out there or at least continuing to press. Is that driving the industry demand side? When do we reach equilibrium there, and how do you drive share just at the core? And then secondarily, again, seems like there incremental volume opportunities out there for you to take as well.

Maybe to start in terms of pricing, irrational I would say is not necessarily the word where we are today. It may have been irrational when high cost cotton was flowing through at $1.60 a pound, but if you look at the pricing that we are selling at today relative to the future price of cotton, we are very comfortable with the pricing in the marketplace today. And I think that has proven to be very successful from all fronts in terms of generating demand and as well generating market share.

And as well as, if you look at some of the recent announcements of some of our competitors who are not part of what Crest is, let's say for example, they as well are having significant issues in terms of their earnings and earnings power. So where we are in pricing today and our low cost manufacturing, we feel very comfortable that we are going to continue to drive market share. And based on what we see happening in April, we are very excited about our momentum in the marketplace.

The opportunity I think that what we are trying to do now in combination of Gildan and slash bring Anvil as part of the Gildan cost structure is to allow our customers, which is our wholesale distributors to capture more share of the broader market. Because not all of the sales in the market are captured [out of] Crest. It is a representation of where the market is heading, but Crest is probably only really 60% of the broader market, because a lot of our manufacturers, like Delta and A&G for example, don't -- are not part of Crest in terms of their sales.

So with Anvil we are going to give our distributors a tool, pricing and product line really to reach a piece of the market that we never served before as Gildan. So -- and that is where we see the big opportunity, not just for us, but also for our customers. And we believe that will drive additional share for us and as well as our customers as we go forward.

I just want to reinforce the one point that Glenn made, is that as we benefit from low cost cotton at the end of the year and cotton comes in line with industry pricing, that is going to translate into attractive economics for the printwear business, which will be back to its historical levels of profitability.

Okay. Just a real quick question. Are you able maybe state -- maybe not absolute where you are locked in, but how far are you are locked in on cotton into 2013? I would imagine you are relatively --

Well, we would rather not say right now to be perfectly honest with you.

Okay, that's fair. I appreciate it. Thanks, guys.

We are covered for the balance of this year.

Okay. Thank you.

Thank you. And our next question comes from Andrew Burns of D.A. Davidson.

Hi, everyone. Just to follow up on the pricing. I just wanted to clarify. In the guidance it talks about for the printwear business slightly lower pricing than the second quarter, and you talk about being comfortable with the current pricing. Could you just help me reconcile those two comments?And then it seems a bit counterintuitive there would be any further pricing degradation with our acquisition of Anvil and Hanes brands downsizing. Thank you.

The pricing in the back half of the year is more mix related as we promote some of our fall products, like fleece and so forth. For that is just a larger discount relative to -- but that is historically consistent on a year-over-year basis.

Okay. And could -- you provided a very detailed EPS bridge between the old guidance and the new guidance. Would there be any way to do that for the top line as well? Volumes, lower market share, the acquisition?

So, we are -- the impact of the incremental sales from Anvil, less the effect of capping Gildan share at 63% compared with 65%. So the net of these two things is adding about $65 million to our sales. The stronger market recovery in the distributor channel is adding about $25 million. And the lower sales in the national accounts, which was primarily in Q2, is offsetting the stronger market recovery. So you are left with $65 million, $70 million of incremental sales, which is essentially the impact of Anvil less the fact that we capped our organic share.

Great. Thank you.

Thank you. And our next question comes from Mark Petrie of CIBC World Markets. Please go ahead.

Good morning. Just wanted to clarify a couple of small things on Anvil. What percentage of their revenues right now overlap with current Gildan product?

It's about 60/40 between printwear and what we [saw in terms of] branded apparel.

You mean what's wholesale -- what's their wholesale side of the business? Is that your question?

I just mean in terms of your don't compete on the organic and recycled and all that kind of stuff, you say it is bringing kind of a bit of a different angle to your assortment. What percentage of their sales are in SKUs that you would actually directly compete with already?

They have two core t-shirts that are relatively similar to Gildan's, but those shirts are sold with what they call tearaway labels to allow printers to relabel the shirts, so they're actually [uniquely] different, to be honest, than the ones we have. The only issue they have right now is they are not price competitive on those shirts. So the answer is that there is really nothing that is going to be on a go forward basis similar to what will be sold in Gildan on a unit by unit basis. I mean, they're similar -- a couple of the styles are similar, but by and large most of the products are completely different than what Gildan is offering today.

Thanks, that helps.

I'll also add that about 60% of their sales are in the printwear side of the business, and about 40% is the non-retailer brand that would be part of branded apparel. And that is the side of their business that has been growing.

Okay, thanks. And then on that wholesale, how much of that is US and how much of it is Europe and Asia?

The bulk of it is US.

Okay. And is the stuff that you are going to be supplying into Europe and Asia, is that -- are you going to move that into Bangladesh?

Whatever we supply into Asia is obviously produced in Bangladesh, and what we supply out of our -- for Europe, we supply both Bangladeshi product as well as Honduran product. We have flexible to go on either supply chain, so depending on the product and what quality the product is made in specific factories.

Okay. Is Bangladesh -- so Bangladesh is still at 3.5 million dozens capacity?

Yes, it is, and we have a major expansion project in Bangladesh, and next year the capacity there will be closer to the 5 million level.

Okay. And, sorry, just one other, just to clarify. How much of the actual capacity -- manufacturing at Anvil will be brought in house at Gildan, and how much will remain third part. I'm just wondering in term of, are there some low volume SKUs that you don't want to be producing in your facilities?

We are currently meeting with Anvil management today, as we've announced the acquisition, and discuss the integration plans, and we will give you more color later on.

Okay. Thanks a lot.

Thank you. Our next question comes from Susan Anderson of Citi. Please go ahead.

Thanks. On the retail part of the business, maybe if you could just give a little bit more color on the destocking? Are you seeing it in your core Gold Toe operations, or is it more the private label, and is there any expectation of when this should end?

Well, we feel that has probably come to a point where we have been destocked. I mean, retailers are managing their inventory very tight and to the point where some of our retailers have holes in the pegs on the shelves. So we hopefully will see a restock.

And we are not sure why they are managing their inventory so tight. It could be because of all of the holiday seasonal products that didn't sell so well. But as we go into our back to school, hopefully that will correct itself.

Okay, thanks. And so it is in both the Gold Toe and private label, like across the board then?

It's very much across the board.

Okay. And then on the Anvil acquisition, I think you mentioned they had a couple of plants of their own. So will you guys be closing those plants?

Like Laurence said, we haven't met with management, and so far we have no intention to closing their are facilities, but they he also work with contractors as well. And so we are going to set our plan with management as we meet with them in the coming weeks.

Okay, great. Thanks, you guys.

Thank you. Our next question comes from David Glick of Buckingham Research Group. Please go ahead.

Thank you. Laurence and Glenn, just wondering if -- now that you are -- you made the decision to modernize and reopen Rio Nance I, can you give us a sense for your latest outlook as to how you going to utilize each of our textile manufacturing facilities? Was the Anvil acquisition kind of a trigger to make this decision? Just wondering if you could give us some color on that?

Well, the existing plants, after we shutter Rio Nance I, which is DR Rio II and Rio V, are going be running at the end of this fiscal year at 100% utilization. Andobviously our utilization is all a function of mix, and with the new programs -- fleece programs we just picked up, we will see the mix of those facilities somewhere in the neighborhood around 70 million dozen, and we will be running at that run rate as we complete this fiscal year. And we project to run at that rate through next year.

We absorbed a significant amount of our inventory as we went through this fiscal year, as you can see in terms of our working cap and cash flow as we go forward, but there are actually still a little bit of inventory drive down we think we will still occur in 2013. So based on that capacity and drawing down inventories, we feel comfortable we have the capacity to support our needs for 2013.

And we are going to pursue one, and then depending on market conditions, that plant will start in the back half of the year and re-ramp up, and we will have a little bit of flexibility obviously, because when it comes online it is going to have a significant amount of capacity, and we will go accordingly. So we will be pretty full, to answer your question, with the existing facilities and looking for additional capacity and opportunity.

Okay, thanks. And then secondarily, on the branded apparel side I was wondering if you could give us a sense for your sales trends in the quarter, excluding the acquisition of Gold Toe?

Our trends are going okay. Like anything else, retailers aren't going gangbusters, but wefeel comfort with the guidance we set forth. Obviously we'd would like to see the retail more robust, but it is a function of the overall broader economy. But we think we are positioned well.

And really, if you look at what we are achieving as a Company, is we are looking at two things. One is the continuing improving of profitability. So you'll see in Q4 we will have a significant increase the profitability in our branded apparel, and as we go into next year that is going to significantly increase on a year over year basis. So branded apparel will be a big contributory our EPS growth as we go into 2013.

At the same time we are focusing on our brand strategy, where Gildan brand right now, we have over doubled the volume of Gildan brand this year. We have a lot of opportunity to continue growing that. We would like to see that grow significantly next year. So we are pretty happy with our positioning, and first of all, and most importantly we want to continue making good earnings, and secondly, we want to continue to drive our Gildan brand and make sure we reinvigorate Gold Toe.

We have done a lot of work this year with retailers under on Gold Toe side to continue reinvigorating it. The young men's Gold Toe brand, which is our G brand at Kohl's, which is successful. And looking to lever our Gold Toe brands in product expansions, like we said before, and some tests going on in retail, and hopefully that will materialize into new programs as we go into 2013.

Great. Just to clarify, is it fair to assume that, excluding Gold Toe, that your sales were down in the quarter?

They were flat.

Flat, okay. Great. Thank you very much. Good luck.

Thank you. And our next question comes from [Pat Necerato] of Canada Pension Plan. Please go ahead.

Good morning. Also just a follow-up question regarding shutting down Rio Nance I a little bit early. Can you just help explain why the $0.02 impact this year, because I'm assuming you have enough capacity in Rio Nance V to take up the capacity. So is it just the incremental cost of construction? And then as a result, if you are closing it down a quarter earlier, do you believe that you will open it up a quarter earlier next year and you will get that impact back this time next year?

Well, I think that -- two things. One is that the impact that you are talking about was some infrastructure that we had to write off because we are doing some infrastructure in Rio I, which is maybe the impact you're talking about -- the charge we took for the --

Is it the charge that we took that you are talking about, Patrick?

Yes, yes.

That has nothing to do with the timing of the facility. This is just now that we have made the decision to restart the facility and defined our plans for starting up the facility, there is some equipment that will not be reutilized and that is being written off now that we have formalized and crystallized our refurbishment plan.

Right, okay.

And the timing is being accelerated based on the projections we have for sales and when we are going to need further capacity.

And also because of the successful ramp up of Rio Nance V, which is on schedule and meeting objectives in terms of ramping up to its full capacity. So we have enough capacity to continue driving our sales for this fiscal year, as well as we run into next year with the three facilities on annualized run rate running at full capacity, which will give us manufacturing synergies as we move into next year.

Also on the manufacturing side, in terms of synergies as we move into next year, we have now completed all of our biomass in Honduras. So all of our plants are running on biomass, which is a significant savings, and that impact will also be felt next year. And also the full integration of sock manufacturing out of the United States is complete, and we have a significant amount of the Gold Toe socks integrated into our facilities, which will also continue to increase the earnings in branded retail as we go forward into 2013 as well.

Thank you.

Thank you. And our next question comes from Jim Duffy of Stifel Nicolaus. Please go ahead.

Thank you. Good morning. A question on the acquisition of Anvil. Do you anticipate an antitrust review of that?

We have no regulatory approvals that are required, and any conditions to closing at this point are standard red tape, and we expect to close the transaction in the next couple of weeks.

Okay. Great. And then, Laurence, can you speak to how much revenue Gold Toe brought during the quarter?

Gold Toe is tracking the same sales level that it had when we acquired the company, which is close to $300 million.

How about for the quarter?

The business is now integrated into Gildan, and I don't think we want to separate out the sales for the Gold Toe brand versus Gildan. I think you can assume it is pretty well half and half.

Okay. Because where I'm going with this is you mentioned over 100% increase in the branded apparel as evidence of your return on the marketing spend, but it seems all that increase is coming from Gold Toe.

No, I was talking about the Gildan brand increased 100% this year as our forecast on a year-over-year basis, which is what our strategy is. But last year we -- the beginning of the year we announced we are going to divest ourselves, because the Gildan -- before Gold Toe, the Gildan stand alone retail strategy was comprised of very little Gildan brand and mainly private label sales to mass market retailers.

What we have been able to achieve is the same sales level volume. We divested ourselves of unprofitable private label sales, and converted those sales into go forward branded Gildan sales, and that was our objective. And we are on that path, and what we were able to achieve was to double the amount of sales in our Gildan brand this year.

This is one of the main reasons, Jim, why the profitability of the branded apparel division is improving, because we are seeing more favorable mix within the Gildan side of the business. So it is not necessarily higher volumes. It is more the fact that we are replacing, as Glenn says, low margin programs with high margin branded programs, so that is favorably impacting the results for the branded apparel division.

I see. That's helpful. Can you speak to maybe how much of that lower volume margin is remaining in the mix, or are you at a point at this juncture where you feel like you have successfully navigated from that to the higher margin businesses?

We still have some, but part of that low volume business is generating volume. So let's -- we still have some, but as we continue to go forward, we are going to continue to improve our mix. I think is the way you have to look at it. And that is really our objective is to increase the mix, improve the mix, and significantly improve the bottom line basically and get a better return in our use of capital.

I understand. Thank you.

Thank you. And our next question comes from Susan Sansbury of Miller Tabak. Please go ahead.

Hi. Thanks very much. Way back at the beginning of this presentation I think you mentioned something about startup expenses at Rio Nance V and plant down time. Laurence, can you quantify what those expenses are going to be? I don't know if it was for the -- I guess it was for the year -- or so far this year. Or can you give us some idea what these expenses are?

What I said is to the third quarter there will be some of the initial production from the startup of Rio Nance V that was produced at the beginning of the year being consumed in inventory. That was planned, and it impacts our results in the -- manufacturing efficiencies in the third quarter negatively by a few cents.

Okay. And the plant shutdown, which I didn't --

[In addition to that] we just took a couple of extra days at Easter, which is also impacting manufacturing efficiencies for the third quarter.

But not enough down time to have an EPS impact? Or de minimus?

It is reflected in our guidance. Overall we have year-over-year about, excluding the Rio Nance I one-time charge, we have $0.10 worth of negative manufacturing efficiencies that are nonrecurring that are flowing through our results in Q3 and reflected this our guidance. And these are coming from consuming startup production from Rio Nance V and the additional downtime, plus some input -- and some increases in input -- purchase input costs that will be eliminated from the startup with biomass.

Okay. I appreciate this. This working capital reduction -- going back to Anvil, you expect to be able to increase their working capital -- I don't know -- efficiency, if you will. Is there any ratio or number that you can point to at this point to tell me how much more free cash flow equivalent or efficient you are going to be now that you own Anvil?

Maybe about $10 million, Susan.

Okay. Perfect. Thanks ever so much. Good luck for the back half.

Thank you. And our next question comes from Scott Rattee of Stonecap Securities. Please go ahead.

Good morning.

Good morning.

Laurence, just a question for you. Just to be clear on taking the downtime, will you still be taking the down time in the fourth quarter as you normally do, or was that -- or was what you were saying is that downtime that you would normally take in the fourth quarter was just move inside the Easter period, so we will not necessarily see it in the fourth quarter?

We basically took the extra downtime in the Easter period. Based on where we are today, we are still contemplating and looking to see if we will take -- if we need any additional downtime in the fourth quarter. But with the integration of Anvil, that will consume some of our capacity let's say for example, and hopefully we will have our inventories in balance where we think we want to have them by the end of the year.

Okay. So put another way, what you are saying is your current guidance does not actually explicitly have any downtime in the fourth quarter at this point?

We have a little bit of downtime still planned in our guidance in Q4.

You do. Okay. Okay. And then switching gears, I just wanted to circle back around. At the beginning of the year you noted that you were going to introduce some new higher value product, more stylized women apparel, polo shirts and stuff like that. I guess we haven't touched on that in a little bit. You have also just brought back -- obviously brought back your market share guidance, so I guess I'm wondering if you could maybe give us a little bit of color on what that initiative is looking like year-to-date?

Well these types of products in which we anticipate to continue developing as we go forward are usually developed on an annualized basis. So really our catalog was put to bed in June of last year for this fiscal year, and now we are looking to place new product for 2013. And we do have some new exciting products if our lineup as we go forward that we are offering and showing to our customers as we speak.

A lot of the trend right more youth products that we maybe could have put in the Gildan line now we just acquired through Anvil. We have a good diversity of, I would say, trend right fashion products that are going to be now in the Anvil brand that already have distribution placement and support from costumers. So that is something that accelerated our ability to have product placement in the market, and that's one of the advantages of the acquisition.

We are also looking, as we go forward next year, into the performance category. We are going have a lineup of performance type fabrics. So we are continuing to have lots innovations in our products, and we are very excited about our positioning, and we think that this will all generate more market share than we anticipate. The 70% base that we are talking about we think is a conservative number, and we would be disappointed not to continue generating market share closer to the 75% level as we go forward with all of these initiatives we have in place.

Okay, Glenn, I appreciate that. Thanks for the color.

Thank you. We have time for only one last question. And our next question comes from the Anthony Zicha of Scotiabank. Please go ahead.

Good morning. Glenn, if we look at the new SKU count you introduced this year, maybe you could give us an idea of how many that were introduced, but I figure there are several hundreds of them. Further, more now you are adding the Anvil acquisition to the numbers. Considering the cost of carry forward distribution, do you believe that there is any risk of distributor pushback?

No, what we are going to do -- look, we spent a lot of energy making sure we partner up with our distributors, and there is not going to be any product in either of the brands that won't make sense to our customers, because if it doesn't make sense for them, it doesn't make sense for Gildan. So what is why I said earlier is that all of the products that Anvil will sell in the future will be distinct in nature and provide value to our customer and our customer's customer, and that is really what our objective is.

So there are some of Anvil's SKUs eliminated and will be replaced with more productive SKUs as we go forward, but that's what our sales group is in the process of doing right now, is making sure that we convey this message to our customers. In fact, that's really where I think that our customers going to be, in a sense, better off with Gildan acquiring the company, because truthfully in the past there might have been some duplication. And now we are going to eliminate the duplication for our customers and allow them to be more productive in terms of their SKUs and their warehouses as we go forward.

Excellent. Well, thank you very much.

Thank you.

And with that, I thank everyone for joining us today, and we look forward to talking to you again at our next earnings conference call in August. Thank you and have a nice day.

Thank you. Ladies and gentlemen, this does conclude your conference call for today. We thank you for your participation. You may now disconnect your lines, and have great day.