Gildan Activewear Inc (GIL) 2012 Q4 法說會逐字稿

Welcome to the fourth quarter 2012 Gildan Activewear earnings conference call. My name is Christine and I will be your operator for today's conference. At this time, all participants are in a listen only mode. Later we will conduct a question and answer session. Please note, today's conference is being recorded. I will now turn the call over to Sophie Argiriou, Director Investor Communications. You may begin.

Thank you, Christine. Good morning everyone and thank you for joining us. Earlier this morning we issued our press lease announcing our earnings results for the fourth-quarter and fiscal 2012. During the week of December 3, we will be filing our shareholder report containing management discussion and analysis and our 2012 audited, consolidated financial statement with the Canadian Securities Regulatory Authorities and the US Securities and Exchange Commission. These documents will also be made available on our website at www.gildan.com.

I am joined here today by Glenn Chamandy, our President and Chief Executive Officer, and Laurence Sellyn, our Executive Vice President and Chief Financial and Administrative Officer. Before Laurence takes you through the results and our business outlook, I would like to remind everyone that certain statements included in this conference call may constitute forward-looking statements within the meaning of the US Private Securities Litigation Reform Act of 1995.

Such forward-looking statements involve unknown and known risks, uncertainties and other factors which could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. We refer you to the Company's filings with the US Securities and Exchange Commission and Canadian Securities Regulatory Authorities that may affect the Company's future results. I would now like to turn the call over to Laurence.

Good morning. This morning we announced our fourth-quarter results which were a record for any fiscal quarter. And, initiated our guidance for fiscal 2013 with projected EPS of $2.60 to $2.70 per share. Our earnings were mirrored by strong free cash flows and we were pleased to announce a 20% increase in our quarterly dividend, which we raised to $0.09 per share.

In addition, we announced two positive strategic developments in the business. Firstly, we announced that we've attained important new branded retail programs which will phase in during fiscal 2013, and provide greatly enhanced national exposure and visibility for the Gildan brand. Our fiscal 2013 EPS guidance includes a $15 million increase in advertising expenses in order to further strengthen the equity of the Gildan brand and the Gold Toe portfolio of brands.

The second strategic initiative is a major investment in vertical yarn spinning in the US. This investment is intended to support the Company's planned sales growth in the coming years and reflects our business model to always support our growth with capital investments and global low-cost production, and superior product technology. We believe that these investments in our brands and in our vertically integrated manufacturing will solidify the foundation for the Company's continuing long-term growth back.

Adjusted EPS for the fourth quarter was $0.78 per share, up 81.4% from $0.43 in the fourth quarter of last year. The increase in EPS was due to lower cotton costs, which are continuing to decline from the peak of the cotton bubble which impacted our margins in the fourth quarter of last year and the first half of the current year, together with increased Printwear unit sales volumes in both the US and international markets. More favorable product mix in Branded Apparel, due to the Company's strategy to replace private label retail programs with higher value branded programs. More favorable selling prices for Branded Apparel and the accretive impact of the acquisition of Anvil.

These positive factors were partially offset by lower selling prices, mainly due to the reduction in Printwear selling prices implemented in the first quarter of fiscal 2012. Unfavorable Printwear product mix, manufacturing inefficiencies which include the impact of inflation and labor and electricity costs, a $0.02 per share charge for the labeling issue discussed in our press release in October and higher income taxes due to the improved results for Branded Apparel compared to last year.

Market conditions in the US Printwear industry continue to be relatively stable throughout the fourth quarter, resulting in relatively low promotional discounting. In addition, while we no longer have the press data for other manufacturers, inventories of Gildan brand in the US distributor channel at the end of the quarter were lower than at the end of fiscal 2011 and in good balance in relation to demand.

We have introduced our guidance for fiscal 2013 with projected EPS of $2.60 to $2.70 per share on projected sales revenues of approximately $2.1 billion. Our guidance reflects a continuation of the strong recovery in earnings in the fourth quarter fiscal 2012. The projected growth in earnings in fiscal 2013 compared to the current year, is based on the assumptions of lower cotton costs, which are assumed to continue to decline during the course of fiscal 2013, together with higher unit sales volumes, more favorable product mix in Branded Apparel and Printwear, and increased manufacturing efficiencies, mainly due to the impact of Rio Nance V and the Biomass project. And further cost synergies from implementing our acquisition integration plans.

The ramp-up of Rio Nance V has largely completed at this time and Rio Nance I is projected to begin to come back on stream in the third quarter of fiscal 2013, once the refurbishment and modernization of the facility is complete.

These positive factors are assumed to be partially offset by lower Printwear selling prices, inflation and labor, electricity and other manufacturing cost inputs, higher SG&A expenses and an increase in our effective tax rate. SG&A expenses are projected to be approximately 13% of sales, compared to 11.6% in fiscal 2012. The projected increase in SG&A expenses reflects the approximate $15 million increase in brand advertising expenses and a significant increase in variable compensation expenses from the low rates in fiscal 2012 to reflect the projected improvement in earnings and return in capital in our guidance. The higher tax rate reflects the improved results for Branded Apparel.

We generated approximately $300 million of free cash flow in the second half of 2012 due to the recovery in our operating earnings and the declining cost of cotton in our inventories. And ended the year with low debt leverage, after having increased the utilization of our bank credit facility to finance the acquisitions of Gold Toe and Anvil. We're projecting free cash flow in excess of $200 million in fiscal 2013, after projected capital expenditures of approximately $200 million.

Although we are continuing to seek selective acquisition opportunities similar to Gold Toe and Anvil, which will complement our organic growth strategies, we feel comfortable increasing our quarterly dividend. Consequently, we announced today that our Board of Directors has approved a 20% increase in the quarterly dividend from $0.075 per share to $0.09 per share.

We will now briefly discuss our strategic announcements regarding new branded retail programs and our yarn spinning initiative. While we will not discuss individual retailer programs, either now or in the future, we are announcing that we've made an important breakthrough in our retail strategy by obtaining Gildan branded programs with our major national retail customers, as well as with regional retailers. These new programs are in all product categories, namely underwear, socks and active wear, and are largely expected to begin to shape in the second half of fiscal 2013.

We are continuing to pursue further branded programs for Gildan and Gold Toe and also to explore further opportunities with Under Armour and New Balance. We are excited about our advertising and marketing programs which we believe will be impactful and resonate with consumers, and reinforce our brand equity which is underpinned by our reputation for product quality and volume for money.

Our other strategic announcement is our investment in yarn spinning, where we are planning to invest approximately $85 million to expand and modernize our two existing yarn spinning facilities in the US and in the new ring spun yarn spinning facility in the US. We completed the acquisition of the remaining 50% of our CanAm yarn spinning joint venture in the first quarter. This strategy is consistent with our model to make major capital investments throughout our supply chain to position Gildan as a global low-cost producer and to invest in the best technology to continuously enhance product quality. Ring spun products will be utilized to support our branding strategy and our investment in ring spinning in the US will allow Gildan to access US markets dutifully under CAFTA, which requires the use of yard spun in the US or other CAFTA countries.

In summary, while we continue to be cautious about overall economic conditions and uncertainties, we are excited about the continuing positive momentum in our company. We've achieved the best result in the history of the Company in the fourth quarter of fiscal 2013 and are projecting continued strong results in fiscal 2013. We are generating significant free cash flow and we have one of the strongest balance sheets in the apparel industry. Consequently, we are in a position to make significant investments in SG&A and capital expenditures and to increase our dividend at the same time that we pursue our growth strategies and position Gildan for the future.

Thank you, Laurence. This concludes our formal remarks. Before moving to the Q&A, as always, I would ask that everyone limit the number of their questions to two or three in order to give everyone the opportunity to ask a question. We will circle back for a second round if time permits. Thank you. Christine, we are now ready to start the Q&A session.

Thank you. We will now begin the question-and-answer session.

(Operator Instructions)

Martin Landry, GMP Securities.

If possible would it be -- I would like to get a little more details on the assumptions that you've used to set up your guidance, especially with regards to the US screen print market? For example, market growth assumption, market share assumption, selling price assumptions and as well maybe anything, any color you can give us on international sales volumes?

We will try to be as helpful as we can, although we are not comfortable to give detailed information on some of our forward-looking information for competitive reasons. The positive factors driving the growth in EPS are the significant reduction of the cost of cotton, our volume growth, more favorable product mix, particularly as we operate the programs in Branded Apparel, our manufacturing cost reductions and the accretion impact from Anvil. And the negatives are lower Printwear selling prices, higher labor energy and other cost inputs, higher SG&A and higher taxes.

As far as promotional discounting is concerned, promotional discounting is constantly changing and we are taking a prudent approach assuming increased discounting in Q2 and the balance of the year due to the uncertain economic environment. As far as the growth environment, we are assuming very modest economic growth, although we don't have the data now to split actual performance between our growth and market share. And the accretion from Anvil is expected to be approximately $0.10 per share in fiscal 2013 and we will be continuing to pursue additional revenue growth from the Anvil side of the business.

Okay. Last year -- maybe on the market growth -- last year I think you were expecting the market to grow between 4% and 5%. Is it fair to say that your expectations are somewhat in line with that for fiscal '13?

No, they would be lower than that. It's early days, Martin, we are early in the year. The overall economic environment is uncertain and we felt it prudent to assume lower demand growth in that as well as at this point more discounting.

In terms of market share, are you expecting stable market share in the US?

We are introducing new products into --

What's going to drive our Printwear business is the introduction of new Gildan products. We've introduced a line of performance T-shirts, we have introduction of our New Balance product line and we made the significant enhancements of our fleece line this year with significant additions in products, so we have quite an extensive product line launched this year, which is almost, in SKU wise, almost about another 20% additional product coming to the markets. So we are very excited about the opportunities to not only continue to drive our core business but also to continue to create opportunity not just for ourselves, but also for customers.

We also are going to be levering the Anvil brand as well. Anvil stands for eco. We have a lot of recycled, organic and other products in our line which are growing in the marketplace. And also, Anvil is positioned in terms of higher end ring spun combed cotton type products which is really going to be -- we think is an area which is growing in the marketplace. So all in all, in our US market, we think we are positioned well to continue the growth drivers. And in international, we are excited. We expect to have significant growth in 2013.

Lastly, can you share your cotton cost expectations for Q1?

I think all we are prepared to say, they'll be lower than Q4.

Okay. Thank you very much.

Anthony Zicha, Scotiabank.

I just wanted a bit more clarity with Martin was asking in terms of inventory destocking we saw in Q4, as well as the increased promotional discounting that you expect in 2013, is it demand related or is it because of the cotton price decline?

Maybe we'll start with inventory. Our inventories are in line with our expectations and we feel very comfortable with the inventory as of the end of our fiscal 2012, which we're approximately down 15% from last year in days. As far as the demand is concerned, overall demand in the marketplace has been relatively stable I think if you look through Q4, and was consistently running at the rate in October through about November 15. November 15, we actually felt a slight downturn in the market. The question is was it related to Sandy or other factors, it's a little hard for us to evaluate but this week we've seen things come back a little bit, so hopefully it was Sandy. So all in all, I would say that from a demand perspective, we've had pretty consistent, stable sell through for quite a while right now and we have a good consistent flow.

There has been a little more promotional spending in Q1 versus Q4 but that's typically normal due to seasonality and that's obviously the lowest point in the season, so this is sort of in line with our expectations. The reality is that we just don't have a crystal ball right now to see what's going to happen for the balance of the fiscal year. So, therefore, we projected -- we think it's prudent to project additional discounting as we go through 2013 which as we -- that is sort of our plan.

Last question, you increased $15 million in advertising costs, what is the focus of advertising and is this a level that we could expect going forward?

Well for us first of all, we think we've made a major breakthrough in our Branded Apparel segment. Maybe just to take it back a little bit, in 2011, private label represented about 65% of our Branded sales and our projection for 2013 is roughly about 29%. So the bulk of all of our sales in 2013, or a large portion or two thirds of it, will be Branded product either Gildan or one of the Gold Toe or Gold Toe related brands. And we project that number to continue to grow into 2014.

With this -- with all of the opportunity in the shelf games that we've won in fiscal 2013, which is a combination of every single product we sell, we're talking underwear, we're talking activewear, socks which will go to national retailers as well as regional retailers is quite significant. In this fiscal year, a lot of these products are only going to be launched in halfway through the year and set the retail stores will be set in half the year, so we're only going to probably allow us to generate in the year around $50 million of new revenue. But on an annualized basis, it will be more like $100 million. It is quite significant in terms of opportunity.

And to continue to support not just this opportunity and these wins we've made, but also future wins, we are going -- we are stepping up our advertising and we are investing in the brand equity of Gildan as well as our Gold Toe brand. And as far as Gildan is concerned, we are going to launch and continue with our New England kickoff with our ball AAA baseball and we have a big print campaign, we're going to be doing TV, social media and a lot of the timing of our advertising in fiscal '13 will be around the new launches that we've been able to secure for this year. So we're very excited about the opportunity and this is just going to be a snowball effect and lead into bigger and better things as we go forward into '14.

Excellent. Thank you, Glenn.

Chris Li, Bank of America.

Just wondering if you can tell us what was the growth in the international segment for this quarter and also for the year?

Around 20%.

For the year?

Yes. And it's projected to be similar for next year.

Okay, and in terms of your national accounts performance, can you give us an update on how that performed during the quarter?

The way we like to look at it is our overall US Printwear business is up over last year and we're very comfortable with our performance in the US market and we'd rather not separate the two at this point.

Okay and my last question is just on the SG&A expense, based on your guidance, you are expecting more or less about $275 million of expense for this year, that's up about $50 million and you mentioned $15 million of that is advertising. Can you may be provide some colors on the rest of where the other increase is coming from?

The increase in SG&A in 2013 versus 2012?

Yes, please.

The other major item is increased variable compensation. Although we felt we did a good job this year managing through the cotton bubble and positioning the business, our EPS was down from last year so there's negligible variable compensation this year. And next year, we're hoping to have a good year as reflected in our guidance and that will translate into higher variable composition.

Thanks.

Tal Woolley, RBC Capital Markets.

Just wondering, Glenn, if you can talk to what the expected operational capacities are this year for both socks and activewear, underwear?

Activewear and underwear is one category because obviously they are made in the same facility, so we are running at pretty much our capacity goal which is just over 70 million dozens on an annualized basis. And as we bring on Rio Nance I in the third quarter, that would obviously give us additional capacity to support 2014. Our socks facilities are running pretty well at Rio Nance III. Rio Nance IV has a little bit of capacity but we are in the process of continuing integrating both socks and also we have some new opportunities. So hopefully during the course of this year, we will fill that as well.

So that will be about 75 million dozen too?

We source a lot of socks through Gold Toe, so we really look at it form twofold, what we produce internally and what we source externally. So net, we have much bigger volume than what I just said in terms of our in-house volume.

For next year, Gold Toe will have been like what was planned to brought in-house, that in housing process has basically been completed?

Yes.

Okay. When you are looking ahead to 2013, what are the big -- verses where your guidance is currently -- what are the big potential upside opportunities and what do you see as the bigger risks?

I think what we look at is we're pretty excited with our positioning where we are today. We think that we've made a major breakthrough in terms of our branding strategy and as we support this branding strategy with our advertising campaign, we're looking to secure additional programs as we go forward. A lot of these programs won't impact 2013 significantly as the timing of when they start to get shipped, but really our focus is always long-term and we are focusing ourselves on continue driving the top line and the bottom-line of the Company as we go forward in the 2014. I think that's really our position right now.

And the thing is that these programs also, because they are setting only in half the year, we're already going to be going into 2014 with a pretty significant base on year over year opportunity in terms of sales. So we are pretty excited about the top line. Our international business is growing at a very good clip and with all the new product launches we have in our domestic Printwear business, we're very excited about our opportunity.

One of the things we are going to be doing in Rio Nance and the reason why we took it off-line is actually to reconfigure that facility to be -- to handle a lot more of our performance type products as we're bringing to market and we have a whole slew of additional performance products we're going to be bringing into market for 2014. So we're really continuing to look at driving our sales by product innovation and that's what has brought Gildan to the table and we're looking forward from a top line perspective.

Okay and just on the yarn investments, that is a twofold investment, that's investing on the spending side in the US and is that also including the new recycling facility in Honduras too?

No, what we are doing here is we are basically -- we purchased the joint venture that we had on the two yarn plants that we were running in the United States, we own them solely 100% today. Our objective in those plants are producing open-end yarn. Our objective is to, as we increase our capacity going forward into 2014, they will be retrofitted in 2013 and as we increase our capacity in 2014, they are going to support our capacity increase and be modernized to reduce cost, say for example, on a go forward basis. And then what we've announced is that we're building another plant so we will have a third plant, which will be probably one of the largest ring spun plants in the United States and that facility will allow us to make ring spun yarn which is really not available today in the US market in abundance.

We're looking to produce finer yarns that are very difficult to find and these types of yarns are, we think, are going to be a strategic advantage in terms of driving our branded retail segment by adding and continually putting better products in the market than what is available through our competition. So we are pretty excited about it and having a domestic capacity at a favorable cost structure, we think is going to give us a significant cost advantage.

Was that based on feedback that you got from retail customers, having more ring spun product in the stores would be --

The fact is what's driven Gildan and why we have close to 73% market share in the wholesale market is because we constantly are innovative in terms of how we bring product to market. So this is just another way for us to continue driving the top line of the Company and reinvest in our free cash and our equity into our future growth initiatives, and it's just one of many things we are going to continue to do to drive the top line of the Company.

Thanks a lot, guys.

Eric Tracy, Janney Capital Markets.

If we could talk a little bit about the top line assumptions next year. I think the $2.1 billion assumes, call it, 7% to 8% top line growth year-over-year. International is expected to be up 20% and I know you don't want to get too specific between Printwear an Branded Apparel, but is there anyway, just for modeling purposes, for us to think about each of those businesses and what they are contributing next year?

Between Printwear and Branded Apparel?

Yes. Year-over-year growth.

We haven't broken down the sales guidance between the two segments, sorry.

Okay.

1.4 for Branded and 700 -- sorry 1.4 for Printwear an 700 Branded on the 2.1 is the split.

In terms of the Branded Apparel side, given the level of investment, is it just being overly conservative or again this is just taking time and by the time these programs kick in this is really setting up for FY '14?

When you look at -- like I said, the new programs, we have a combination of a couple things. This year what we've done is we are able to successfully replace some of our private label business with Gildan brand, as well as we were able to obtain roughly about $100 million worth of new business on an annualized basis. $50 million of that new business will be shipped this year and $50 million will be analyzed into 2014 and from that base, our objective is to continue getting new programs that will continue driving 2014 sales. That's sort of the position, I think when you look at the sales breakdown for this fiscal year.

As far as our advertising spend is concerned, we're spending for the future. We're going to continue to invest in our brand and that will ultimately lead into new opportunities and significant top line growth as we go forward.

Okay and obviously the lower cotton cost driving the normalization on the gross margin side this year, any other kind of, just again, supply chain, manufacturing efficiency, way to sort of quantify the contribution for that in '13? And then as we sort of go forward, the expectation on the gross margin line for opportunities to grow there?

We are constantly investing in low cost manufacturing. So we do have a lot of negative factors in terms of input costs that are going into our manufacturing, but those are offset by manufacturing savings through our initiatives in Biomass and all the things that we've been working on over the last year. Rio Nance V is going to be a major contributor to us this year. So we are constantly looking to have cost savings initiatives that have hopefully offset the inflationary factors and continue to drive our margins as we go forward.

Okay and lastly, you talked about the Printwear segment and sort of the expectation of sort of promotion, promotional cadence remaining in '13. In terms of the Branded Apparel side or mass retail, kind of what you're seeing from a pricing environment?

Well we feel very comfortable where we're positioned in retail today. In most cases we're significantly priced less than competitive brands out in the marketplace. We never took our prices up to the level of the peak cotton costs in 2011, so we are very comfortable with our pricing in the marketplace and we think it's going to be a great opportunity for us.

Okay, great guys. Thanks, best of luck.

Andrew Burns, D.A. Davidson.

Thanks, good morning. The first question was to better understand the pricing assumptions baked into FY '13. Is it fair to say that when you're building out your guidance, do you have pricing in your model that would be set for current cotton prices in the $0.71, $0.75 by the time we exit FY '13?

We haven't changed our price list I think is maybe the way you should approach it. So we are still selling our products off the same price list as 2012. What we've projected as additional discounting after Q1 which is Q2, Q3, Q4, because of the unknown in the market and so it would be a short-term discount type promotions but not a reflection of a reduction in price off our price list.

The current pricing is, back of envelope, towards the $0.90, $0.95 cotton price, correct?

Yes, correct.

Okay and then could you maybe elaborate a little bit on the strategy here to acquire the rest of the JV on yarn? Some of -- one of your larger competitors divested their yarn operations two years back, just hoping you could maybe spend a little more time on some of the advantages you see for promoting that going more vertical. Thank you.

Well the advantages for us is twofold, one, its is obviously a good return on our investment and that is our criteria in terms of making any investment in the Company. Two, it allows us to get one step further to purchasing cotton versus buying cotton directly from the third-party. Now we're going to directly to the merchants and to the farmers, which will give us better insights into cotton and swings in cotton. And third, it's going to give us the ability to be technologically advanced over the marketplace because one of the things that is maybe different than some of our competitors and also what is different in the market is there is not a lot of new spend going on in yarn spinning because of a lack of capital, let's say for example.

So the one thing Gildan does do is we have abundant amounts of capital and as we invest our capital, it will be invested into obviously allowing us to get good returns and lower costs but most importantly, making sure that we have the latest technology to keep driving the top line of our company. And I think that's really the focus for us. It is a combination of all of these events but our goal is to continue driving sales and earnings as we go forward and we feel this is a strategic initiative that will allow us to do that.

Thanks and last question just on the ring spun investments there. How should we think about the margin profile once that facility is put in place and the percentage of ring spun products starts to tick up in Branded? Those are higher price points, I was just wondering if there is a favorable margin profile to that product.

It's going to be unfavorable because the yarn is not readily available in our marketplace. So one of the things that when you are making an investment in something that you can't find easily, it allows you to obviously enhance your margin. So that's one of the reasons why we are making this investment. So we will be one of the few companies, in fact, we'll be the only vertical company for sure with capabilities of producing ring spun yarns at favorable prices. So we're pretty excited about that opportunity.

Thanks and good luck.

Thank you.

Susan Anderson, Citi.

I was wondering if you could maybe talk a little bit more about the new retail programs excluding Anvil, because I think I calculated at least $50 million next year from Anvil which would leave $25 million for new programs though. How does the new programs come into play and what is the carryover from the new fleece program this year, which I believe is midyear?

First of all, I would say that's probably about 50/50 split when you look at the new programs contributions this year. And what was the second part of your question?

The overall increase is $100 million in Branded Apparel sales, Susan, so 100 minus 50 is 50.

Okay. And so part of that is the fleece program from this year carried over into next year then?

No. That's not because that's not new business, that will be carried over business. Basically what we are saying is that business that we didn't have in 2000 -- in fiscal '12, what we've been able to do is generate new programs in underwear, socks and activewear in excess of what we shipped in 2012. So there is all new programs that will be launched in 2013. The annualized run rate of these programs will be roughly about $100 million, $50 million will be contributed to earnings and sales in 2012 and $50 million on an annualized basis will go through in 2014 for $100 million.

Okay, I get it. That makes sense. And did you guys break out what the actual accretion was from Anvil this year?

It's about $0.07 per share.

Okay. And then maybe also if you could talk a little bit about the ramp up of Rio Nance I, I think beginning midyear next year, what is the expectation by the end of the year and when do you expect it to be fully ramped up?

Typically, I think from the time we start, 12 months is a good timeframe for us to get fully ramped up.

Okay. And then I don't think you guys have mentioned anything on that direct screen print market, maybe if you can give us an update where you are there in terms of share versus last year and your expectation for next year?

What I said is that really we would look at our Printwear business today as we are looking at it in aggregate, so our overall US Printwear business in general is moving forward and we'd rather not disclose it from this point.

The sales for the two together were up about 15% in the fourth quarter versus the previous year.

Okay. Got it. And one last maintenance question on the tax rate, was it a little better than you guys were expecting? I think at the beginning of the year, the full year was supposed to be 1% because of Gold Toe so maybe just a little bit of color there.

Well what's influencing changes in the tax rate is the improved profitability of Branded Apparel where -- which is located in the US. So that's what's driving the change in the tax rate and is underlined the increase in our tax rate, which is estimated at 4% in 2013.

Okay and so why was it so much better this quarter than a positive tax rate?

I think the tax rate was in line with their expectations in the quarter.

Okay. Great. Thanks you guys.

David Glick, Buckingham Research.

Just a follow-up on the Printwear assumptions for the year, it looks like sales are going to be up in the $65 million to $70 million range and when you get past the destocking in Q1 and then you lap the Anvil acquisition I believe at some point in Q3, and I look at the annual guidance, it suggests kind of flattish Printwear dollar growth in the second half. I'm just trying to get a better handle on specifically how much is Anvil adding to that category and what is underlying kind of dollar sales assumptions are and just try to weigh how much of that is conservatism and how much of that is the topsy-turvy nature of kind of November given all of the disruption you have seen in the screen print business, that we've seen across retail as well? Thanks.

What you have to remember, David, is that when you look at the growth in the sales dollars, they are net of the price reductions in 2013 versus 2012. Clearly with lower-cost cotton selling prices are down year over year and we've been further cautious with our discounting assumptions. And then we've also assumed an environment of low economic growth and we already have a market share between the two businesses of 73% in North America. The international side, as Glenn said, we're projecting to grow by about 20% and the other main driver of our overall top line growth for the Company is our retail strategy. So, the two drivers are the growth initiatives in retail and our international sales in Printwear.

All right. Thank you very much. Good luck.

Stephen MacLeod, BMO Capital Markets.

Thank you, good morning. Just on the Branded Apparel contracts that you've secured for 2013, can you discuss whether they are with existing customers or new customers?

Both.

Both. Okay. And can you just also talk a little bit about what the drivers were that supported the shelf gains that you've achieved in the Branded Apparel segment?

The drivers what has allowed Gildan to be successful over the last 15 years is adding better quality features, better garments, levering our low-cost manufacturing and allowing the consumer to get a better value relationship for the product. It what's been our success and what we keep reinvesting. That's why we're investing in ring spinning and all the technology that Gildan has and that is in low cost manufacturing is really what we're levering to be successful in Branded Apparel and it's as simple as that.

Okay, so it sounds like it's a combination of price and quality?

Yes.

Yes. Okay. And can you just talk a little bit about your cotton costs in the fourth quarter and what you expect for 2013?

Cotton costs in the fourth quarter were just a little bit over $1 per pound and then as I said, we're not going to give details of our cotton costs going forward other than to say that they will continue to come down in line with what you've seen with the cotton futures. So Q1 will be lower than Q4, Q2 will be lower than Q1.

Okay. Great. And then finally on the dividend, do you have a targeted payout ratio? I know we are seeing CapEx pick up in 2013 but beyond, do you have a targeted payout on earnings?

No, we haven't established a formal dividend. Obviously our primary use of cash will be continue to look for strategic acquisitions which complement one or the other of our organic growth strategies. But we will continue to reevaluate the amount of the dividend as we go along as we've just done with this increase, and we believe we can be both a growth company and a company that pays a dividend.

Okay, great. Thank you.

Thank you.

Mark Petrie, CIBC World Markets.

Just in terms of the retail account wins, do you have a sense of what you're replacing in terms of shelf space or if it's possible that retailers are giving more shelf space but really do you feel like you are replacing private label programs or other brands, national brands?

Well we would rather not say, to be honest with you, but I would say that in certain cases we are -- we've actually replaced our own private labels, which is one of our own personal goals is to convert the space that we do have in private label into Gildan brand. And I'd rather not comment on the other part of the question.

And in terms of the yarn spinning, what is the capacity now and what's the capacity that you would expect in fiscal 2014 once you're able to finish your retooling in the new facility?

Right now the capacity of the two facilities represents about 20%. The two facilities we bought represent about 20% of our requirements. As we retool the facilities, they are going to increase the capacity but as we bring on Rio Nance I, it is a significant increase in volume, so our objective is to bring these online with Rio Nance I, let's say for example, so that we support really the ramp-up of Rio I. So the percentage will go up but the bulk of the production will be to support the future growth of the Company.

Okay and I think at one point you had mentioned the possibility of having yarn spinning down in Honduras, is that still possible or is this effectively replacing that?

This is effectively replacing it.

What was the rationale for doing it there as opposed to Honduras?

Well the reality is that the United States is still the probably most favorable place in the world to spin yarn in terms of we take everything into account, the infrastructure, the power costs, the labor costs. A lot of the facilities that we have today, with the technology and the type of equipment, you don't need a lot of labor but you need a lot of power, and obviously power costs in Honduras are significantly higher than they are in United States. It is conducive to still put these plants up in the States.

Okay and just lastly, the variable comp expenses, is your expectation that, that would be bigger than the advertising increase in advertising spend or smaller?

The increase would be less than that.

Okay. Thanks a lot.

Vishal Shreedhar, National Bank.

Glenn, you noted some good wins in the Branded segment. How should we think about the Branded segment looking several years out? So give you context, should we think of the Gold Toe and the Gildan brand as the cornerstones of the strategy or should we also be thinking about license opportunities like New Balance and where do Starter and Danskin fit into that?

First of all, our objective is to continue levering the brands that we have. Gildan is really in its early stages of development. Obviously with the new opportunities we have, our objective is to lever these and continue to maximize our distribution. There's so much opportunity for us, it's incredible. At the same time, we're going to also continue to reinvest our free cash and look for other brands that we need or could buy to fill in the gaps in terms of where we think there could be opportunity in the market.

So, our commitment in terms of Branded Apparel is to continue growing the top line. We are going to maximize our organic growth strategy in the brands we do own. We're reinvesting in the equity of the Gold Toe brand this year, which has proven to be very exciting for all the retailers that have been selling Gold Toe for many years and we're pretty excited about the opportunities. We're levering actually the Gold Toe brand into apparel, into activewear, into underwear, and other categories as well. So we're going to continue to drive the existing brands and as well as look at new potential opportunities for us as we go forward.

In terms of the Branded programs, I think in the press release you noted that you're continuing to pursue opportunities for Under Armour and New Balance, can we think of new potential wins through the year or do you largely know what you have now?

No, we're constantly looking for new opportunity and also new product innovation as well. So there's a lot of opportunity we have with the brands. New Balance, we just licensed it for the activewear, more to Printwear category and that's going to be -- we're very excited about it. Levering these relationships and looking for ways to expand the distribution or the sales is what we are going to do. That's what we do when we have a relationship with -- so keep trying and maximize our sales opportunities.

Okay. I understand the Branded programs have long lead times though, so is there a point at which it is a fiscal '14 story? I'm just trying to get a gauge --

We think there is still opportunity for us in the back half of '13 but it won't be material to the earnings because the fact that we said anything in the late fall obviously it won't be a major impact. So most -- from this point on, anything we do obtain into new programs will really impact '14. And '14, we already have a base from the annualized basis of the programs we have now so that will allow us, I think, to have significant top line growth in '14 as we exit '13.

In terms of the increase in advertising spend, you've been pursuing this Branded strategy for many years. Why now?

Well the reality is that we've been at this for many years but we've been focusing and building the infrastructure, the sales base, the relationships with all the major retailers and as we've been able to get placement, the placement we do have is significant. That's not prudent to really make huge investments in something that you don't have placement. So first you have to get the placement and the commitment we have in advertising is -- just to give you an idea of the type of placement we have -- it is significant. So the spend is really in line with what we think of the opportunity and the sell through for the products and the distribution that has been obtained.

Is the right way to think about it $15 million of spend in fiscal 2013 against $50 million in new Branded programs or is that not the right way?

Like I said before, in 2011, private label was 65% of our business. Today it represents only 29% in this fiscal year. So the bulk of our sales or two thirds of our sales in Branded Apparel are actually Branded products. And that number will increase even as we go forward into next year and the sales will also increase at the same time. Private label is basically becoming a smaller piece of our business and we keep investing in our brands, and this is just our commitment to our retailers and for us to continue driving new shelf space.

Okay and lastly, in terms of Rio Nance I in your outlook, does it reflect any capacity from Rio Nance I in there?

Not for this year.

Got it.

Rio Nance I will really support 2014.

Thanks a lot. I appreciate your time.

That concludes today's question-and-answer session. I will now turn the call back over to Sophie Argiriou for final remarks.

Thank you all once again for joining us. I would also like to take this opportunity to wish you all the very best for the holiday season. And we look forward to speaking to you in the new year at our next earnings conference call in February. Have a great day.

Thank you for participating in the fourth quarter 2012 Gildan Activewear earnings conference call. This concludes the conference for today. You may all disconnect at this time.