Gildan Activewear Inc (GIL) 2012 Q3 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Q3 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.

(Operator Instructions). I would like to turn the call over to your host for today, Ms. Sophie Argiriou, Director of Investor Communications. Please proceed, Ms. Argiriou.

Thank you, Valerie. Good morning everyone. Thank you for joining us. Earlier this morning we issued our Press Release announcing our earnings results for the third fiscal quarter of 2012.

We also issued our interim Shareholder Report containing Management's Discussion & 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 are Glenn Chamandy, our President and Chief Executive Officer, and Laurence Sellyn, our Executive Vice President and Chief Financial Administrative Officer. First an overview of our third quarter financial results and our business outlook will be provided by Laurence. Following that, Glenn and Laurence will be taking your questions.

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

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

Good morning, as Sophie said, this morning we announced our third quarter results, which were in line with our guidance. We reiterated our guidance for the fourth quarter and the full fiscal year. Our Q3 results and Q4 guidance both reflect the second half recovery in our earnings, which we had projected at the beginning of the fiscal year. The sequential improvement in results in successive quarters is largely due to the benefit of increasingly lower cotton costs, which in fourth quarter will be in better alignment with selling prices.

In addition, our results in fiscal 2012 reflect the impact of our ongoing initiatives to drive the sales growth and profitability of the Company, including the actions taken to improve the margins and branded product mix of our Branded Apparel Segment, continuing top line organic growth in our Printwear Business, and the positive earnings impact of the acquisitions of Gold Toe and Anvil, which will provide further accretion as we continue to implement our integration plans, and realize the projected acquisition synergies.

Adjusted EPS for the third quarter was $0.66 on sales of $600 million, compared to $0.76 in the third quarter of last year. Cotton costs and costs of goods sold, were essentially the same as the third quarter of fiscal 2011, when cotton costs were increasing. The reduction in EPS is due to lower printwear selling prices, which were reduced in the first quarter of fiscal 2012,and textile manufacturing inefficiencies due to the transition from Rio Nance I to Rio Nance V.

In the second half of the fiscal year we are consuming inventory which was produced as Rio Nance I was being ramped down, and Rio Nance V was at the initial phase of its ramp up. In addition, manufacturing costs included in our EPS of $0.66 in the third quarter, include the previously announced $0.03 per share charge to write-off obsolete equipment at Rio Nance I.

Manufacturing efficiencies were also negatively impacted by higher electricity, labor and transportation costs. These two factors were partially offset by the positive impact of the higher Printwear sales volume, higher margins in Branded Apparel, and $0.03 per share accretion in the quarter from the acquisition of Anvil. The volume growth in Printwear in the third quarter was due to higher market share in the US distributor channel, a 4.3% increase in screen printer demand from distributors, and 35% growth in international unit sales volumes.

Industry demand for Printwear is continuing to recover well. In addition, market share for the Gildan Brand in the third quarter was 65% versus 63% in the second quarter of fiscal 2012, and 61% in the third quarter of fiscal 2011, when we were capacity constrained and had suboptimal inventory levels to service distributor replenishment demand. Our combined market share including the Anvil brand was 71.5% for the third quarter.

We have decided that we had will no longer provide support for the CREST Report, which provides detailed monthly data on US distributor sales to screen printers. Although this report provided some good information for Gildan management, including data which allows us to separate sales by our distributors between growth and screen printer demand and changes in market share. The report includes too much Gildan information, which is confidential and competitively sensitive.

Our Branded Apparel Division generated operating income of $14.2 million in the third quarter, compared to $2.1 million in the third quarter of last year. The improvement in segment operating results is due primarily to our strategy to exit from unprofitable private label Programs, and replace these programs with higher valued branded programs, together with improved sock manufacturing efficiency, and higher net selling prices in the forth quarter of last year. Branded Apparel results in the third quarter also include the impact of the acquisition of Anvil. As a reminder, Anvil's wholesale Printwear Business is being integrated into Gildan's Printwear Segment. While its business supplying consumer brands is being reported and managed as part of Branded Apparel. Excluding the sales Anvil, sales of branded apparel were up by 6.5%, compared to the third quarter of last year.

We have reconfirmed our sales and EPS guidance for the fourth quarter and the full year. We are projecting adjusted EPS for the fourth quarter of close to $0.80 per share, on sales of approximately $560 million. Full year EPS is projected to be approximately $1.30 per share on sales of approximately $1.95 billion. Our guidance assumes 4% growth in US Screen Printer demand in the fourth quarter, and combined market share in the US distributor channel for the Gildan and Anvil brand of approximately 71.5%. These assumptions reflect the continuation of the same performance as the third quarter. We are also assuming no significant change in pricing from the third quarter.

Our sales performance in the month of July is in line with our projected growth for the fourth quarter, and we believe that inventories in the distributor channel continue to be in good balance. Sales for Branded Apparel in the fourth quarter are projected to be in excess of 30% higher than the fourth quarter of fiscal 2011, due to new Gildan Branded Programs and Back to School placements, and the impact of Anvil, combined with more favorable product mix and higher selling prices. Excluding Anvil, Branded Apparel sales are projected to be up approximately 15% for the fourth quarter of last year. Our focus in Branded Apparel during fiscal 2012 has been primarily in improving the margins and profitability of this division. We are continuing to pursue further profit enhancements, including the cost synergies from the integration of Gold Toe, and we will continue to pursue new retail Branded Programs to drive unit sales growth as we bring on new production capacity.

Also we have announced two new initiatives today, which extend and expand brand licences included in the acquisition of Gold Toe. We have announced a further expansion of our US sock licence with Under Armour. We believe we have opportunities to build further with our relationship with underwear. We have also announced a new Brand licence to distribute activewear for the New Balance brand in the Printwear market, building on our existing sock licensing relationship with New Balance.

Cotton costs and costs of sales in the fourth quarter will be lower than the third quarter, and significantly lower than the fourth quarter of last year. The benefit of lower cotton costs is assumed to be partially offset by inflation in labor, electricity, transportation, and other cost inputs.

The ramp-up of Rio Nance V is progressing well, and the facility is on track to become our lowest cost operation, although we will continue throughout the fourth quarter to consume inventories produced during the earlier stages of ramp-up. The installation of manufacturing equipment is expected to be complete by the end of the fourth quarter. And the facility is expected to achieve full cost efficiency by the end of the first quarter of fiscal 2013. We have begun the refurbishment of Rio Nance I, and the capacity of Rio Nance I will begin to ramp up again in the second half of fiscal 2013.

The Honduras Biomass facility is now fully operational, and will significantly reduce our cost of bunkered sea oil in Honduras. Which have increased by approximately 40% over the past few years, since we made the decision to invest in this facility. We are progressing well with the expansion of our Bangladesh facility, and evaluating plans for further expansion of our Asian manufacturing hub, to support our projected sales growth in Asia and Europe.

We generated free cash flow of $142.4 million in the third quarter, which was used to finance the acquisition of Anvil and reduce the utilization of our bank credit facility, as well as to pay the quarterly dividend. We are projecting free cash flow of approximately $120 million in the fourth quarter, and expect to end the year with very low debt leverage and significant unutilized debt financing capacity. Capital expenditures for the full year are projected at approximately $90 million. Today we also announced our regular quarterly dividend of $0.075 per share.

In summary, we are pleased with our strong earnings recovery in the second half of fiscal 2012. We believe that we are well-positioned for fiscal 2013, with strong momentum in both of our operating segments,favorable market conditions for Printwear, new low cost capacity coming onstream, capital investment projects for cost reductions, and further product quality enhancement, projected synergies from our two recent strategic acquisitions, and a very strong balance sheet which gives us significant financing capacity and flexibility to finance potential complimentary brand acquisitions, and further investments in reinforcing our global low cost vertical manufacturing.

Thank you, Laurence. This concludes our formal remarks. Before we begin the Q&A session, I would ask that you limit your questions to two, in order to give everyone the opportunity to ask their questions, and we will circle back for a second round of questions if time permits. Thank you. Valerie, we are now ready to take questions.

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

Good morning. Your Branded Apparel sales were up 20% year-over-year. I think you mentioned that they were up 6.5% if we exclude Anvil. Does that include any contribution from Gold Toe in that number?

Well, sure. Gold Toe we had for the entire second, the entire quarter.

I am just trying to get the organic growth of the segment?

Gold Toe is now part of our organic growth. We had it for the second quarter of last year and for the third quarter of last year, and we had it for the third quarter of this year. The answer is 6% is the organic sales growth.

Okay.

Including both Gildan and Gold Toe.

And your guiding, am I correct you are guiding for organic growth in the segment for 15% in Q4?

That is correct.

Can you give us a little bit of a color on what type of apparel you are getting the best traction for your Back to School Programs?

Our Back to School Programs consist of promotions that typically occur during that time of the year, which we are well-positioned for in Back to School, as well as new activewear placements that we have achieved for Back to School.

So we are talking about fleece, shirts, golf shirts?

We are talking about fleece, which is new, and promotions in socks and underwear.

Okay. And lastly, last quarter you mentioned that your performance at the National accounts was a bit below your expectations. Can you comment on where it stands this quarter?

We achieved sequentially better results in Q3 than Q2, but still slightly below last year. But as we go into Q4, where we comp pretty bad sales in Q4 last year, where we should see some big increases.

And in 2013.

And in 2013 as we go into 2013.

Is there a reason why Q4, is there a seasonal impact there?

No. What happened is that last year there was destocking with retailers in channels, so it was a function of just bringing down inventories. We think that is pretty well in line right now, and that is why we're seeing good sales momentum. We were just basically slightly below last year Q3 year-over-year sales, and Q4 we will have a significant increase.

Okay. Thank you very much.

Thanks.

Thank you. Our next question comes from Kenric Tyghe from Raymond James.

Thank you. Good morning. Glenn, I was wondering if you could give us an update on how the Anvil integration is tracking, both in terms of timeline to be fully integrated into September, and the extent to which there have been any surprises in that integration process or other?

There haven't been any surprises, we are pretty excited about the acquisition. The integration, which is really in two parts. The first initial big phase, we are going to achieve significant synergy, will be completed by the end of September.

So as we start fiscal 2013, all of the Printwear sales and production will be fully integrated into the Gildan Printwear Division. And at that point there will still be some integration, but that will be really during 2013, which will be some integration that still needs to be completed with the Branded Apparel Segment. We will start seeing significant synergy savings as we go through next year.

Great. Thank you. And just with respect to cotton, recognizing that you have now fully cycled through the high cotton costs in inventory. Laurence, you referenced that cotton will below this quarter sequentially, significantly below on the fourth, would you care to put an order of magnitude to that, on the futures curve, or however we would be looking at levels closer to $1.00 or $0.90 to a $1.00. Is that a little aggressive, or are you not willing to get into that discussion?

For what period?

I'm sorry, just looking at the fourth quarter, just looking at what the curve would imply by the way of realizable cotton cost, and your comment that it will below $1.25. I am just trying to get a read on whether it's below $1.25 will be $1.00, $0.90 or $1.10?

That will be in the ballpark. Maybe just one thing to point out in cotton is that when cotton, a year ago in August was trading at future pricing in August last year was trading in the $0.90 range, cotton when it got off the board this July it was also trading roughly around the $0.90 range. Cotton, really during most of 2012 fiscal year has been pretty stable in the $0.90 range. One thing you should take into account too, is that I would say generally in the industry through people's cost of goods sold as we go into next year. That would be sort of a good average that we will see cotton prices for example for the significant part of next year.

Alright, thanks very much. I leave it at that.

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

Good morning. Thank you. Laurence, you kind of gave some very, very high level thoughts of going forward.

I was just wondering, I know you're not going to give FY 2013 guidance, but there are a lot of puts and takes as we look at next year, and you are through the cotton bubble. It sounds like pricing is relatively stable, demand seems stable and recovering, how do we think about the Gildan financial model going forward as you think about the income statement is Q4 a reasonable proxy for what the income statement should look like as we head into 2013, and what gives you the confidence that pricing can remain stable here, given where cotton is?

Well to address your question on pricing, first, Dave, we have said as we have gone throughout the year that we believe current pricing is aligned with $0.90 to $0.95 cotton. And it is realistic to expect to retain the benefit down to this level as long as pricing remains rational, and there is no major change in the economy.

Remember also, that there is inflation and other cost elements that offset the benefit of cotton, what happens as far as incremental reductions to the cotton price below that level, it is premature to say that would be the assumption of many factors. Apart from that, the other drivers of our growth as we go forward in 2013 and beyond, are the same ones that we always talk about are different, top line sales growth, initiatives are continuing, investment and cost reductions, synergies from our acquisitions, the impact of our branding strategy, and the upgrading of our product mix and profitability in that branded apparel, and we look forward to continuing to achieve our goals in 2013 and beyond.

So can we look at Q4 in terms of the margin structure, obviously there's some differences by quarter?

I think what I'm telling you, as you say it is premature as you say to discuss 2013, what we are really saying is we believe that the cotton costs and the selling prices are in good alignment. To that extent it sets the stage for 2013, and in 2013 obviously we are bringing on new capacity, we expect to utilize that capacity to drive topline sales growth to the benefit of our Biomass, and other cost reduction projects will be continuing with our integration of our two acquisitions, and we will add up all of the puts and takes, and initiate our guidance in a couple of months.

Last question, the capacity in FY 2013, can you give us a sense of what that is going to be on a run rate basis?

We discussed last quarter just over around $70 million, and that is currently our run rate as we speak and that is as of September of this year.

Okay, great, thank you very much, and good luck.

Thank you.

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

Good morning. I wanted to follow up on that last question, so $70 million capacity next year, you said that is essentially what you're going to exit fiscal 2012 at, so no real impact from Rio Nance I in the second half?

That is the not including the restarting of Rio Nance I, so we will exit September just over $70 million of Activewear and Underwear capacity. We will have more capacity as we go forward, and will adjust accordingly as Rio Nance I comes on, and gives us opportunity for incremental sales. Rio Nance I will start sometime in Q3, our Q3, so it will be ready. So it won't have a big impact on our fiscal 2013. It will be just really driving 2014 sales.

And how long do you think that it will take that facility to ramp up?

Well, Rio Nance V started a year ago in September, and it's virtually almost 100% ramped up, and it was a brand new facility. We can ramp up the facility in 12 months, given the opportunity from the sales perspective.

Okay, thanks, and so in terms of retail business, part of the goal to acquisitions obviously getting access into some other channels. Can you just give us a sense of how you feel about your success in terms of penetrating those other channels with new product going forward?

Sure, well, really when you look at our whole Branded Apparel Group, we set forth three strategic initiatives this year, first was to drive the brand strategy and over the last two years what we have been doing is divesting ourselves and discontinuing unprofitable private label sales, and replacing those sales with what we think is branded both Gildan and Gold Toe sales, which have better mix and better pricing and better profitability. Maybe just to give you a little bit of flavor in 2011 our Branded sales were roughly about 25% of the group. Which primarily most of that was Gold Toe.

And this year will be about 50%, and next year our branded sales will be 65% of the Branded Group, and we are projecting a significant increase in the Gildan brand next year, which would be roughly about a150% increase over this year. So everything we put in place and to drive our brand strategy is working. We are losing Private Label sales, but we are replacing those sales with better sales and that is really what is driving our earnings right now. As you see that the earnings trajectory in the Branded Group is consistently going to be going up and we're very happy with the mix.

And the other component is to really get the synergies of the Gold Toe through both product expansion and distribution expansion, as well as the synergies of the $0.30 a share that we set forth, which is to consolidate the distribution centers which we have done, a reduction of back office. We have now begun to source, all the outsourcing of Gold Toes athletic socks are now being produced in our Rio Nance facilities. And obviously the renewal of the Under Armour licence will be a big opportunity for us for continued growth as we go forward. That is really what is driving our topline growth right now, we are well-positioned. We are starting to achieve new penetration of the Gildan brand, and as can you see in Q4 we will have 15% increase in sales. We are very bullish about next year, and we think we are positioned perfectly, and we are also going to start investing more significantly to drive our brand strategies and continue our earnings trajectory.

Okay, thanks. And how much, you mentioned the Gildan brand up about150% next year. How much of that is the replacement of old programs with Gildan branded product, and how much of that is new business, roughly speaking?

It is hard to say, because it is never really the same product, so when we replace our Gildan products, I mean in certain cases we have been successful to replace some of the private label, but a lot of that is really new business, and that is really what our focus is.

Okay, thanks a lot.

Thank you. And our next question comes from Tal Woolley of RBC Capital Markets. Please go ahead.

Good morning everybody. Glenn, wondering if you can talk, when you are talking to your sales people right now across all of the different channels, when they are talking to their customers what are they saying are the biggest concerns and biggest opportunities, given what is going on in the macro environment right now?

Well really for us we have two different business groups, I think in each one of them, we have different situations, but I mean in wholesale, I think that we are really continuing to do more of the same. We are pretty excited, and I think when you look at our wholesale business, our ability was quite shocking early in the year when we lowered prices, and brought our pricing to market. What we accomplished by doing so was really bringing the market back and allowing the market to start to grow again.

I think we have been pretty consistent. We have seen pretty good growth since the beginning of the year. So far July is continuing on that track. We are also looking at adding new products into our wholesale group.

We have a whole line of performance products partly through the New Balance license, where we are going to have a little higher end, New Balance is going to positioned for the Company to do a little bit of a higher end performance product, but we also have a brand of performance products under Gildan Brand called Core Performance, which will be a little bit more popular price. We are also looking for those niches in the market, and we have a slew of other products in which we are bringing to market in ladies and other areas.

So we are continuing to drive what we think are the opportunities in the market, and to continue gaining incremental share and helping our customers to grow. And in retail it is similar, somewhat the same story. Retail environment is in terms of comps, anything you see in retail, sales are up but units are flattish from most categories, but we are driving that through penetrating new programs, and really doing what we have done so successfully in wholesale, is adding value to our products that is offering our customers and our customers consumers better products, better prices, and better value.

And that is really what I think is going to continue driving our success in retail, and listen to the customers and making sure that we fill their needs and the needs of the consumers. So we are very well-positioned. Like I said before, that we are very happy with our turnaround from divesting of our unprofitable private label, to where we see our branding positioning right now, and that is going to continue to grow as we go forward. We are very happy with that positioning now.

Okay. And then just two quick financial questions. One, if you can just, has your cotton purchasing strategy changed at all? Are we sort of more a normal cadence of when you would be going into the market and buying, not any shorter or longer than usual? And just if you can talk about free cash flow deployment you initiated the dividend a couple of years ago, any thoughts where that might be going forward?

As far as the cotton we don't want to comment on our cotton strategy obviously. As far as our free cash, we have been successfully investing our free cash into the topline of the Company through the last acquisitions, both Gold Toe and Anvil. As we go forward into next year, obviously it will generate significant free cash as we going forward.

The primarily use of cash is to continuing growing the top line of the Company either through complimentary acquisitions, either to brands or product categories that Gildan is currently not servicing, or potentially even international markets. As well as investing heavily I think in low cost manufacturing, we see ourselves with a the lot of opportunity to continue investing. I think that is one thing you will see from us as we go forward.

We are not going to take the pedal off in terms of our investing and our low cost manufacturing, because that is really our competitive advantage. We have we think a pretty good gap built into the competitive landscape. We just want to widen that as we go forward. We are constantly working with our Board, looking at ways and what we are going to do with our free cash, but we are going to invest in our business and that is really what is going to drive our EPS as we go forward.

Okay. That is great. Thank you very much.

Thank you. And our next question comes from Meryl Witmer, Eagle Capital, please go ahead.

Hi, we have changed from Eagle to Siegel for the summer. (laughter)Anyway, I was wondering if you could give an update on the performance T-shirt outlook for the business? You had made some small mention of it I think on the last call, and also I am wondering if a fabric like that is appropriate for the screen printing market, as you look out five years or so, is that something you see happening? And that is it, thanks.

We are putting in performance fabrics in both our Brands, New Balance as well as we developed a sub-brand of Gildan called Core Performance. Most of these products are really sold through the running area, it is more athletic driven, let's say for example. In our core business where we are in the souvenir promotional products. Cotton is still the dominant fabric because of its ability to print.

Printing on performance fabric is not as easy as printing on a cotton fabric. So it is a little bit more technical. It is a niche in the market, it is not a large volume relative to what you see in cotton shirts, but with the products that Gildan is bringing to market, at least we will have an opportunity to capture that portion of what we think is a potential niche, but a growing one.

We will be well-positioned both from what we think is the more high-end technical fabric, all of the way down to the more popular priced product, and so we will have a full range. We also, in our basic 50/ 50 T-shirt last year put wicking properties in it as well. We think we have the market covered in terms of anybody who wants to buy a performance enhancing fabrication.

Great. Thank you.

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

Good morning everyone. I was wondering if you could talk about what you are expecting in the back half for the retail business? It seems like a lot of the branded competitors are adding extra pairs to the pack, or doing special promotions for the back half,but it doesn't sound like you are planning anything like that. Maybe if you can talk a little bit about that?

Typically, anything promotional for Back to School you do add additional pairs. So we have different promotions in our line up that we do offer additional pairs in our bags, and that is that is with the line, typically that happens with the Back to School period. But that is a normal occurrence let's say, for example in promoting Back to School.

So it has nothing to do with just lower cotton costs, it is just going to be a Back to School promotion?

Yes, that happens every year.

Okay. And maybe if you could, I thought you guys did a good job on improving the retail EBIT margins. If you could provide more color, did Anvil contribute to that, and then Gold Toe, or was a lot of it also lower cotton costs?

It was a function of upgrading our product mix like we talked about, and replacing low value programs with higher value programs. It was a function of continuing improvements in our sock manufacturing efficiencies, as we complete the ramp-up of our sock manufacturing facilities, and transition of our manufacturing offshore. Also in the fourth quarter of last year we raised selling prices up to the level that aligned with the current cotton costs.

We never passed through peak cotton costs in retail, but we increased prices up to, so that they are aligned with today's level of cotton. And these are the main elements that are driving the significant improvement in margin in our organic sock business. On top of that, of course, we are implementing our integration plans for acquisitions, for both Gold Toe and Anvil, and we expect to continue to realize significant further synergies as we complete our integration plans.

Okay, great, thanks, that was really helpful. One last question, I think you broke out Anvil in the Branded Segment. Can you also break it out in the Printwear Segment, so we can get an idea of the or organic growth there?

You can really go by the market share, that is really the best guidelines that can give you where Gildan is 65% and 66%, and [Fipsy] 5% and Anvil, 6.5%.

Okay. Great. Thank you.

Thank you. And our next question comes from Vishal Shreedhar of National Bank Financial.

Thank you very much. Laurence, I was hoping you could help me better understand what drove the Company to increase it's market share expectations in Printwear in Q4, and also modestly lower its expectations for industry growth?

We are not increasing, we are bringing, we increased our market share in Printwear from what we had previously guided, but its in line with what we actually achieved in the third quarter. It is simply continuing our actual performance that was achieved in the third quarter. And as far as industry growth, it is really a minor tweak from 5% to 4%. Again, it is just continuing the actual performance of the third quarter where the market is up 4.3%, so we are calling it 4%. It is continuing the current actual performance and trends of the industry.

Okay. Now economic concerns have somewhat escalated over the last couple of months. You have noted that on your MD&A, and if you look forward and look at your outlook some of what you alluded to. How do you put that into your forecast, and account for that correctly given the historical volatility of the Printwear segment?

We are continuing to reflect the current environment, which is what we are seeing in the month of July, which is the first month of the quarter that is already behind us. Clearly if there is a dramatic change in the economic outlook, that will affect our outlook, as it will all companies. But we are reflecting the current environment with whatever uncertainty is reflected in that.

Okay. Thank you. And Glenn, I was hoping you could help me understand, when Rio Nance I comes online, I understand we are looking at the back end of fiscal 2013, but when it comes online, what are your plans, where do you intend to place that capacity, is it going to be Printwear national accounts, is it Branded are there new acquisition opportunities available to you that you could perhaps be investigating? How shall we think about it?

Well, like everything else, you need to build a little bit of capacity before you obtain and go after for the opportunity of driving new sales. So Rio Nance I is coming online. Each one of our plants is also geared to do, Rio Nance II today is making fleece today, for example, and Rio Nance V is a big T-shirt facility. Rio Nance I is being redesigned to make lightweight underwear type products.

That is really where we are going to drive the initiative of that facility as we develop and drive our overall lightweight goods, which is a trend in the market. One of the fastest growing T-shirt areas that we have in Printwear is our lightweight 64,000, it is a 4.5-ounce shirt, which is the same fabrication that we use for underwear. So that plant is going to be designed to handle, and the equipment in it is into handling more lighter weight products. We are pretty comfortable of bringing it on and we will sell that capacity obviously as fast as we can obtain new sales.

And as go forward, ultimately the capacity may not be sold in the first year, because by the time we bring on Rio Nance I, like we said, our total installed capacity, will be just over 90 million dozen, so we will just see how it goes, and we are working hard to land new programs. Our planning strategy is working and we are well-positioned to look forward to new opportunities as we go forward in every segment. I think that is the key with our Company, we are growing in every single segment. The Printwear market share is continuing to grow, and we have the Anvil acquisition.

We have got new product extensions coming in our line. We are growing internationally pretty aggressively at 35%. We just opened up two new distributors in China, our first two really official distributors in China for 2013, and retail is really at its early stages, primarily its a pretty big piece of our business today, and we still have an inventory of socks, as we lever that into the activewear and underwear category, that is how we will fill up with capacity. Our big turn is going to be when we bring on our next traunch of capacity even after that. That is how we are looking at this right now.

Can you provide any indication for us on the size of the New Balance contract?

For the what?

In your Press Release you indicated that you have an agreement to license New Balance apparel for Printwear in the US and Canada?

Yes.

Can you give us a--?

That basically is going to be a license with the Printwear Group. They are going to be selling those goods, to the screen print trade, and it is going to be primarily performance fabrics, and that license is exciting for us, because it is an area that we don't currently cater to, so it is going to be incremental sales growth opportunity, and profits for the division as we go forward.

Is there anyway to think of the size of that market?

The market is not huge, but we think that there is still a pretty good potential in the category to grow, it is high value and it is a good margin business for us.

Okay. Thank you very much.

Thank you. (Operator Instructions). The next question comes from Eric Tracy of Janney Capital Markets.

Good morning, if you could talk about or quantify for us the pricing versus unit volume within the Branded Apparel Section, for both 3Q and 4Q organic, so 6.5% full contribution from pricing, and then the 15% organic in 4Q, what type of contribution from pricing?

Well the fist thing I would say, is to emphasize the point that we are more focused on the quality of volume than volume. And that is why we are placing so much focus on high value Branded Programs. we are less pursuing units, we are more pursuing high value profitable volume. Having said that, volume was essentially flat in Q3 versus last year with a significantly better mix and a higher proportion of Branded Programs. We are forecasting volume to be up in the fourth quarter, which is reflected in the 15% organic growth, and the Anvil programs that are behind it.

Is it possible to discern between kind of the mix benefits of moving toward Branded, versus just the outright price increases that were implemented?

Well, the two are somewhat inseparable, because there were many new programs which are high value.

You have got to look at it from that perspective. Where we are discontinuing programs, so a lot of programs are not year-over-year the same, so as we develop these new Branded Programs, we are discontinuing Private Label Programs. So it is not exactly comparing apples to apples.

And the main point about pricing and Branded Apparel is that we are, I repeat, that we never passed through peak cotton price costs into our pricing. We implemented price increases after cotton had already come down. So our price increases were to align with generally the cotton costs that are being consumed at the present time.

Okay. And then, as you think about, you continue that shift towards the Branded side of the business in retail. Maybe you can speak to the learning that you had, and then what from a marketing perspective, you are still relatively, I think $5 million marketing spent this year. Again is there a need to increase that to support more of the major programs as you develop that Branded side of the business over time, or are you comfortable with that type of run rate?

No we are going to invest next year in our Brand Strategy. We already have in place the process to increase our investments in our Branding Strategy. It is really going to be the focus as we go through into next year, to support potentially new placements we are going to get and to drive the overall awareness of our Brand. We are going to invest, obviously our free cash and our increased earnings, and like we have done every round, it is not just investments in our low cost manufacturing, but we are also going to invest into our Brand strategy. I think that is the commitment that we set forth.

Anyway to kind of think about it from a marketing spend perspective, as a percentage of revenue that we should be thinking about?

Well, we will give you that guidance when we come to it in December, but we are going to spend more money next year than we did this year to support our brand efforts, and it is a function obviously of the growth opportunity that we think they will bear in the market.

Okay. And maybe lastly if I could, Laurence, I think you said you were thinking about $0.90 cotton to $1.00 next year. I know you don't want to get too specific on how you are buying, but it would seem particularly in the back half, you might have an opportunity to lock in a little bit lower, given the existing spot rates in other spaces to factor in? Any chance for us to maybe think about that as sort of you being a little bit conservative on that?

That is for sure. Like Glenn said, we for competitive reasons obviously we don't want to talk about our coverage. Clearly as we go through the year, we will be positioned like all manufactures to benefit from the continuing decline in the cotton futures from these levels.

Okay. I appreciate it, guys. Thanks, best of luck.

Thank you.

Thank you. There are no further questions from the phone lines at this time. Please continue.

With that I would like to thank everyone for joining us today. We look forward to talking to you again at our next earnings conference call. Thank you, and have a good 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 a great day.