Gildan Activewear Inc (GIL) 2013 Q2 法說會逐字稿

Welcome to the Q2 2013, Gildan Activewear, earnings conference call. My name is Christine and I will be your operator for today's call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Sophie Argiriou, Director of Investor Communications, you may begin.

Thank you Christine. Good morning everyone and thank you for joining us. Earlier this morning, we issued our press release announcing our earnings results for the second quarter, of fiscal 2013, and our interim shareholder report. Containing management's discussion and analysis and consolidated financial statement. 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. I'm 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. Laurence will first take you through our second quarter performance and provide an update on our business outlook. After which a Q&A session will follow.

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 in the US the Securities and Exchange Commission and Canadian Securities Regulatory Authorities that may affect the Company's future results. I will now turn the call over to Laurence.

Good morning. We were pleased today to report record results for the second quarter of the fiscal year. Which were ahead of expectations. These results were achieved in weak industry conditions in both operating segments. We also provided strong sales and EPS guidance for our June quarter, and now feel comfortable to narrow our EPS guidance range for the full fiscal year, to $2.65 and $2.70, compared to our prior range of $2.60 to $2.70. In spite of the impact of higher than anticipated cotton costs, for the second half of the year. Adjusted EPS for the second quarter was $0.59 per share, compared to our previous guidance range of $0.54 to $0.57, and $0.23 per share in the second quarter of last year.

Consolidated gross margins for the second quarter were approximately 29%, compared with approximately 18% in the second quarter of last year. The main factors impacting the results for the second quarter, compared to the second quarter of last year, were as follows. Firstly, the significant reduction in cotton cost compared to the second quarter of fiscal 2012. Cotton costs in the second quarter were approximately $0.85 per pound, compared with $1.60 per pound of this order of fiscal 2012. Secondly, the impact of lower print wear net selling prices, including the approximate $5 million impact of a distributor inventory devaluation discount in the second quarter. It should be noted that the majority of the benefit of the reduction in the price of cotton from peak cotton prices had already been passed through in advance to print wear customers, in the reduction of print wear selling prices in the first quarter of 2012, even though we continued to consume high cost cotton in cost of sales. We believe that selling prices are currently in good alignment with cotton prices.

The third factor was the 4% increase in unit sales volumes in the US print wear market, primarily due to the acquisition of Anvil. This increase was achieved in spite of the impact of lower industry demand for T-shirts the last year, which is being attributed within the industry largely to the unseasonably cooler weather. In addition, print wear sales volumes were negatively impacted by lower seasonal inventory replenishment than last year, due to the high level of restocking in the second quarter of fiscal 2012. Following the normally high level of inventory destocking, in the first quarter of 2012. Inventories of our brands in the channel were in good balance at the end of the second quarter, and were at approximately the same level as a year ago. The decision was made in the quarter to focus Anvil brand on contemporary ring spun products, and discontinue products which do not fit with this brand positioning. Results for the second quarter include a charge of $0.02 per share for the discontinuation of certain Anvil product lines.

The mix factor is that we achieved close to 20% growth in sales volumes in international markets, compared to the second quarter of last year. Results for branded apparel continue to improve, due to a higher volume mix of Gildan and Gold Toe products. And the volume impact of the acquisition of Anvil. Sales of socks were slightly lower than last year as consumer spending in the US retail market in the second quarter was negatively impacted by colder weather conditions, the later timing of income tax refunds, and an increase in apparel taxes. Mix factor impacting our results in the second quarter is that we incurred higher manufacturing costs, due to short-term issues in the first quarter, which impacted the cost of goods sold, as inventories were consumed during the second quarter. Together with earlier timing of the Easter holiday shutdown, and inflation cost increases, which more than offset the benefits of the ramp-up of Rio Nance 5, and the energy cost savings from the new biomass facility at Rio Nance.

Finally, results in the second quarter reflected increased SG&A expenses and higher income taxes. SG&A expenses were 14.1% of net sales in the quarter, compared to 11.2% last year, due to increased brand advertising expenses, including the cost of the Super Bowl commercial. And higher performance driven management incentive compensation. The income tax rate in the second quarter was approximately 4%. The strong trend in our financial performance is projected to continue into the third quarter. We are projecting EPS for the third quarter of $0.92 to $0.95 up 39% to 44% from the third quarter fiscal 2012. On projected sales revenues of approximately $630 million. The projected EPS growth in the third quarter of this year, is due to lower cotton costs, continuing unit sales volume growth in all target markets, including the impact of new branded retail programs.

More favorable product mix in both operating segments, and the approximate $0.10 per share impact of increased supply chain and manufacturing efficiencies in the quarter, compared to Q3 last year. Due to the ramp up of Rio Nance 5, lower energy costs due to the biomass projects the non-recurrence of the write-off of assets of Rio Nance 1 last year, and the benefit of the earlier timing of the Easter holiday shutdown. These positive factors are projected to be partially offset by lower net selling prices for print wear compared with last year, inflationary cost increases, increased SG&A expenses, and higher income taxes. As stated earlier, we are now comfortable to guide to the upper half of our previous EPS guidance range for the full fiscal year. Consequently, we are updating our guidance to indicate a narrower range of $2.65 to $2.70, compared with our previous guidance, we are reflecting higher cotton costs in the fourth quarter of the fiscal year, which are projected to negatively impact EPS by approximately $0.05 per share.

Cost for cotton to be consumed in cost of sales in the balance of the year, are now essentially fixed. The updated guidance assumes that there is no material change in overall economic and market conditions in the second half of the fiscal year. We are continuing to project that we will generate in excess of $200 million of free cash flow for the full year. After approximately $200 million in capital expenditures. The fiscal 2013 capital expenditure program includes approximate $10 million, to modernize the former Anvil textile manufacturing facility, and further expand its product capabilities. Notwithstanding the investment in the Anvil facility, it is still planned to begin to ramp up Rio Nance 1 in the fourth quarter with a focus on ring spun products.

Our capital expenditure program also includes further expansion of our biomass facilities and the construction of the new Honduran distribution center. As well as $85 million for upgrading our two existing yarn spinning facilities and for a new ring spun yarn facility in North Carolina, which is expected to be completed and ramped up during fiscal 2014. The cost reduction benefit from the ring spun yarn facility, will significantly impact earnings only beginning in fiscal 2015. Based on our current assumptions, we expect to have essentially no indebtedness outstanding at the end of the fiscal year on our bank credit facility, which we had increased and utilized to finance the acquisitions of Gold Toe and Anvil.

At the time that we increased the amount of the bank facility, we swapped a portion of our bank indebtedness into fixed rate debt, to protect against a possible increase in interest rates from historically low levels. Since then, interest rates have continued to decline further, depending on our potential uses of cash in 2014, it may no longer be economically justified to maintain our interest rate's swaps Based on today's interest rates unwinding the swaps would result in a one-time charge of approximately $0.04 per share. This possible charge is not currently reflected in our guidance for fiscal 2013.

We would like to conclude our comments today by summarizing some of the key points, which we discussed with institutional investors during recent investor conferences in March, relative to our ongoing growth strategy and initiatives. Firstly, we continue to have significant growth opportunities in the overall North American print wear business, including performance and other new high value products. And will continue to increase penetration of international markets as we continue to ramp up new production capacity. Our full-year guidance for fiscal 2013 includes the assumption of low-teens unit volume growth in print wear. Our largest growth opportunity is the continued implementation of our strategy to develop Gildan as a consumer brand sold through mass and other retailers.

Our new retail programs in active wear, underwear and socks in the second half of fiscal 2013 including our national Gildan branded underwear program, will provide significant exposure for Gildan as a full-line supplier of branded family apparel. We will continue to support our brands with investments in brand advertising and marketing, as well as with capital investments for manufacturing capacity, and product technology. The Gildan brand is increasingly being recognized and trusted by consumers for quality and comfort, durability, and value for money. In the same way it has become the brand of choice for screen printers. Our retail products will contain enhanced product design features, but be sold to retailers at prices which will allow retailers to generate superior margins and still sell to consumers at lower prices.

We are also investing in further developing the Gold Toe portfolio brands including not only the iconic Gold Toe brand itself, but also brand extensions such as the G brand. Which expanding beyond socks into new categories such as active wear and underwear in national chains and department stores. We're also pursuing growth opportunities to expand our relationships as a strategic long-term supply chain partner, to global consumer brands. These brands are increasingly seeking to consolidate their sourcing, with large-scale strategically located vertical suppliers, with solid financing, which can be trusted not to compromise their corporate values and brand image with consumers. It goes without saying that the succession of recent events has increasingly given brands which outsource their manufacturing, has increasingly giving them reason to become concerned about safety and other social responsibility issues at contractor facilities.

In addition, brands have been impacted by costly product recalls, and by servicing issues. Which one major brand called out last week as a key criteria for its supply chain decision-making going forward. Large-scale vertical manufacturing is a critical success factor in both our print wear and branded apparel businesses in support of our brands. Our continuous capital investments, and new production capacity, and product technology over the past 15 years, have given us a competitive advantage as a globally low-cost producer, and as a supplier of consistent high quality products, produced in superior working conditions. Our unique positioning as a manufacturer, is recognized by our major customers who have been impressed by their visits to our manufacturing facilities. In this regard we were proud to be the recipient of Walmart's Annual Supplier Award for Excellence and Sustainability in apparel in 2012.

Our continuing investments in our textile manufacturing, and our strategy to increase vertical integration in yarn spinning, will further reinforce our low-cost manufacturing, and provide further differentiation in product quality. In summary, we are achieving record financial results, and we are well-positioned for continued growth in sales and earnings. We believe we are at a major inflection point in Gildan's history as we involve from being the most successful trade brand, into a consumer brand. With the same brand positioning and the same competitive strengths as in print wear. And we are facing the future with confidence and optimism.

Thank you Laurence. Before moving to the Q&A session of the call, I would ask that you limit the number of your questions to two, in order to give everyone the opportunity to ask a question. Time permitting we will circle back for a second round of questions. Thank you. Christine we are now ready to start the Q&A session.

(Operator Instructions)

Martin Landry, GMP Securities.

In your print wear business, you mentioned that volumes were up 4% year-over-year. Can you tell us how does that compare on an organic basis?

Well I will walk you through the change in sales dollars for print wear compared with last year. So, last year sales were $360 million. Lower selling prices this year compared with last year including the $5 million impact of the deval, reduced selling prices by about $20 million. Organic growth in the Gildan brand, combined with the impact of Anvil added about $30 million to sales in the US. The impact of lower replenishment compared with last year, when replenishment was higher than normal because it was starting from a low base after the destocking in the first quarter plus the decline in overall market demand reduced sales by about $15 million, and then our growth in international markets was close to $10 million, which brings you to the $367 million this year.

Okay. Okay. I was trying to see what your volumes were on a organic basis? But I guess -- yes.

So the $30 million about $20 million was the impact of the Anvil acquisition and about $10 million was organic growth.

Okay. That is great. And on your branded apparel, the profit margin was down a little bit sequentially. Is that mainly due to the Super Bowl ad?

Yes that is SG&A, not gross margins, gross margins were again close to the gross margins in the print wear business.

Okay. Thank you very much.

Kenric Tyghe, Raymond James.

I wonder if we could just touch base on the sock discussion, specifically last quarter there was short shipping and mindful of the challenging retail backdrop. Could you just perhaps highlight if there are any other dynamics we should be sensitive to with respect to the sock business through the balance of the year?

No. If you take a look at Q2, we are somewhat a little bit disappointed ourselves but that is mainly due to the cold weather obviously, and the tax refunds and payroll taxes which primarily occurred in January and February, which we saw a larger decline in socks than we originally anticipated. March we saw sales come back, and in April I would say that things are back to normal. We had more of a decline in Q2 in the mass area versus the national chains and specialty, which we actually grew, primarily because of the Gold Toe, as we are seeing a revivance of the Gold Toe brand in the national chains and the specialty stores.

Our market share actually in Gold Toe which is paying off through all of the advertising, our market share in Gold Toe in Q2 and then in department basically went up about 4 percentage points and [varied] number one brand but we are up to about 27.5% share. So overall we are optimistic, we are projecting to have growth in the single-digits but in the high single-digits in the back half of the year in socks. And we are projecting to see new growth next year based on programs we perceive that we will be obtaining as we go forward into 2014.

Great. Thank you. With respect to the inventory devaluation and your commentary with respect to selling prices being in alignment with current cotton costs et cetera, would it be reasonable to assume that we now sort of cycled through a period where these inventory devaluations are good business or necessary? And that it's not indicative of the new normal in the industry by any measure? And rather just the [dislocation] upon volatile cotton?

Well, that's exactly it. Cotton prices spiked and objectively we've now aligned we think pricing with the future price of cotton. If you look at where we'll end up this year as an average and where the futures are, you are relatively at the same price. And if pricing was to -- if we need to reduce pricing, it would come off more promotions or we can reduce the amount of promotions so we can adjust I think pricing based on a reasonable level of cotton within the marketplace. So we are happy with our pricing and I would say that this is a normal go forward price list, and then there might be a little bit more or less promotion activity but price is pretty stable at this point.

Great thank you just a final point of clarification. You Laurence you commented that you are covered through fiscal '13, that was fiscal '13, not calendar '13 correct?

Fiscal '13, yes.

Great. Thank you. I will leave it there.

Andrew Burns, DA Davidson.

Thanks congratulations on a strong quarter. In the prepared remarks you talked about ending some of the commodity Anvil programs. How much of the legacy Anvil mix is that? Could you quantify that?

The proportion of the Anvil products that we could discontinued, maybe just explain the Anvil --.

So what we have done basically there was a large duplication in some product categories between Anvil and Gildan, and our strategy for the Anvil brand is to have the unique position within the market. And the position that we have chosen is to be a little bit more contemporary, and have a little bit different fabrications. So the Anvil brand on a go forward basis would be 100% ring spun type of products, as well as a portion of sustainability -- sustainable products like recycled organic cotton and so forth. And the fit of those garments is going to be a little bit more, I would say, different than Gildan in terms of the end demand and end user of that product. We are trying to position it a little bit different. And the products in which we continued are products that we can cover with the Gildan product lines that we are currently carrying in our Gildan line up.

Was it a significant portion of the mix? Or relatively small of the legacy Anvil?

You know what in style numbers, whatever we've discontinued let's say for example in some of these products that were similar and that would replaced by Gildan, we've added additional styles, so from a go-forward basis, we really are going to be having about the same amount of SKUs let's say in the market relative to what we had in the past. They will be more contemporary, and geared to a different part of the market so we can capture an overall larger part of the market and generate more sales as we go forward.

Got you. Thanks. Your strategic long-term supplier commentary was interesting. How much capacity would you be willing to allocate to that business model? And what type of returns would you expect to achieve if you were to grow -- pursue that avenue of growth?

We will continue to add capacity Andrew to support all of our growth initiatives in all of the markets. And I do not think in our minds we are allocating it in any particular way. Obviously, we want to support and service our core print wear business, our main thrust is driving our brand in retail, but this is also a very important and big opportunity for us as we go forward.

And just for reference point, a another thing in terms of capacity, we are revamping the Anvil textile facility, where we're going to be spending approximately $10 million this year and additional $5 million next year for its full completion. And the purpose of the Anvil facility is to focus on performance type fabrics, and specialty fabrics such as stretch and other things that are going to be used to service not only our existing customer base but also that segment. And overall net, net when you bring on Rio Nance 1, we will be looking at approximately, based on basic T-shirts because mix changes our capacity but roughly but 100 million [dozens] the capacity. We have room to grow, we're bringing on the capacity as fast as we can, Rio Nance 1 will be coming online in our Q4 and Anvil will be refurbished by totally by Christmas of 2013.

Great. Thanks.

Taposh Bari, Goldman Sachs.

I was hoping you could quantify this opportunity as you invest in higher quality, ring spun manufacturing. I guess ultimately how big is that opportunity both in the US and globally? Maybe the question really is, are you planing taking share from another competitor? Or is this more of a initiative to catalyze growth in the print wear category overall?

Ring spun for us as an area of opportunity. I mean for two reasons, one is that typically most of these products are coming -- are not produced in this hemisphere. So with our investment, we will be able to produce ring spun yarns at very attractive pricing and add value to our customers particularly in our retail segment. But as well as in the wholesale segment. So objectively, what we're trying to do is create a niche for ourselves and what's made Gildan at what has grown our sales from day one, even in wholesale is how we make a difference by adding value. Either in fabrications, detailing in our garments, and ring spun for us is just a big added value, where we think that we can make a difference, and provide consumers with better products than they can currently get in the market place today. We think it is going to be a big sales driver for us in all segments of the business.

So how large do you think that category is right now? How much of that is manufactured in the Western Hemisphere?

Probably about less than 10% of the overall capacity in this hemisphere. That is something that we will evaluate as we go forward, we are putting up our first big facility that will be up and running in 2014. And we will consider putting up additional facilities in ring spun as we go along.

Okay.

We are moving the market more in the direction of ring spun products.

Great. A follow-up on capital structure. We're seeing a lot of companies take on debt, take advantages of these historically low interest rates. The question for you is, do you consider your balance sheet to be under levered? Would you consider taking on more leverage? What would it take for that to happen?

Well our issue is that even though we are continuing to spend the most capital in the industry and reinvesting in new capacity expansion and cost reduction, we are financing all of our organic capital expenditures and our working capital for our organic growth out of our internally generated cash flow and generating free cash flow. Our issue is finding the uses for the excess cash flow that is really taking our balance sheet.

So we bought Gold Toe and Anvil which we think are very good acquisitions. We've communicated our acquisition criteria. We will be looking for further acquisition opportunities that are comparable with these and that fit with one of the other aspect of our organic growth. And to the extent that we do not find acquisition opportunities that provide us with a higher risk adjusted return, then buying back our own shares we will look at share repurchases. And also of course we will evaluate our dividend as we go along.

So should we interpret that as the priority set? M&A being number one, share repurchase number two, and then followed by dividends?

Well we are going to re-evaluate our dividend, and then I would say we'd set acquisitions provided they provide a higher return on risk adjusted basis and buying back our own shares. We would look at doing further complimentary acquisitions. And we've also said as part of our criteria which was part of your question, that we will not take on high level of leverage to finance acquisitions, we are comfortable with the increase in the bank facility to finance Gold Toe and Anvil, but we would not over lever ourselves to a finance acquisition so it will primarily be financed by our internally generated cash flow.

Is there a leverage metric that you can share that you feel comfortable with?

Well I do not really want to -- you know -- throw out a number. But you know -- we certainly -- it would be important to us to continue to be investment grade from a leverage point of view. So you know I would say if you got up to three times that would be on the high side.

Okay. Thank you very much.

Vishal Shreedhar, National Bank.

Thank you very much, Laurence just on the acquisitions you noted you stated some criteria. I was hoping -- on the acquisitions, you noted that you highlighted some criteria I was hoping you could remind us of what that criteria was? Perhaps give us your thoughts on what the market is like for acquisitions right now? If you see several opportunities or not very many? Any color you can provide on that would be helpful? Thank you.

Well I guess I just touched upon the main acquisition criteria that we communicated. One, is that acquisitions have to fit with one or the other aspect of our organic growth strategies. So an acquisition like Gold Toe which is a brand that compliments our retail strategy. An acquisition that consolidates our position in our existing businesses, something that positions us in an international market. We also said that we are looking for acquisitions that can be well integrated from the point of view of size and culture fit. And that are not significant turnaround situations, and then for terms of financial metrics like I said, acquisitions that provide a higher IRR and a risk adjusted basis, then buying back our shares and well in excess of our cost of capital. And that do not stretch our comfort level with financial leverage.

Okay. Thank you. And in terms of the market --.

As far as acquisitions the world is full of opportunities, we are in no rush to rush out and do acquisitions. We do not mind having cash accumulate in our balance sheet for a while till we are comfortable with the right opportunity. But you know -- yes we think there are plenty of good opportunities out there.

Okay thank you very much. Glenn, I you ramp up capacity, as Anvil and Rio Nance 1 comes online, is lower price something that investors should consider is a tactic you might use to help drive capacity utilization?

Prices are a small portion of what makes companies successful, in fact we know prices -- you look at our Company I would say the value equation, the quality, the product, and then price is probably the fourth dimension, because you had to do almost everything to be successful, and that's the reason why we have been able to grow our capacity at the levels we have. So, it's all about for us is building a better mouse trap. You will see that as we develop, for example ring spun, we think we are going to create a niche in the marketplace that is not there today, that will allow us to drive additional sales in active wear and underwear in pretty well all of our product segments. That's the way we have sort of positioned ourselves, it's by making huge capital investments, and taking those capital investments and putting them into price or quality of features and that's what drives the top line of the Company and that is what we have consistently been doing for the last 15 years.

Thank you very much

Brian Morrison, TD Securities.

Hi good morning this question has been alluded to a couple of times but can you elaborate on the restart of Rio Nance 1 just in terms of production as it re-starts in the fourth quarter? And how we should see it ramping up moving into fiscal '14? And also, do we have organic growth currently to fill that capacity?

Well what we are planning to do is continue to the modernization of the facility it will start operations in the fourth quarter and it will be fully ramped up through the following fiscal year basically through that '14 year and be completely ramped up within 12 months. At the same time, as ramping up Rio Nance 1, at this point in time we are also in the process evaluating our next geographical expansion and our next major expansion which is something we have been working on as we speak. We will communicating that as well to the market in the upcoming months or maybe by the beginning of next year.

Okay. Then just in terms of housekeeping in terms of your heightened advertising expense of $15 million, I think you year-over-year increase, I think the total budget is somewhere in the high 20s. Can you just provide an update in terms of the percentage of that, that you have incurred to date?

Well we have incurred the major thrust was obviously, we did the New Mexico Bowl, and then the Super Bowl ad, and just to be your reference point, the Super Bowl ad generated over 300 million impressions for Gildan which we think is a catalyst for us in terms of our whole branding strategy. We are investing still in AAA baseball and we have a series of back to school ads. So still a large portion of the money that we are going to be spending is going to be focused on the placements we have to support our back to school launch in underwear, and our active wear segments. So we have not spent probably I would say to answer your question, probably around 35% to 40% of the many has been spent and the balance will be spent in the back half.

Just putting things in perspective for us, we're not only just spending money in advertising about we are also spending money on promotional spending as well which some of that is actually in our margins for example, we're going to have quite a bit of pallet drops in some of our mass retailers which will give us good visibility in our launch of our underwear. Where we are going to be promoting our products as well, as they launch. We introduced and placed over 1,500 fixtures in regional accounts this year, which permanent fixtures under the Gildan brand that will house our underwear, our active wear, and various products. So continue to drive signage within the stores, our whole advertising plan and you know -- we have seen a big spike in our awareness, not just in Gildan but as well as our Gold Toe advertising has been very effective.

And just maybe one more point on Gildan, this year we are going to have about a 200% increase of retail sales in Gildan. Our sales at retail, it's not our sales but the retailer sales, will close to $300 million in this year and we see a significant increase next year based on all the programs we placed that will be sold on a year-over-year basis. As well as the new placements we're driving for next year.

That is very helpful. Congratulations.

David Glick, Buckingham Research.

Glenn, wanted to get some sense what to expect when we see your new major underwear program, maybe you can take T-shirts as an example, and kind of walk us through how you're placing those packs relative to the competition? What we should expect from, should we see the traditional value pack strategy periodically? Will it be promotional just so we have some sense going into the launch here very shortly in that program.

Well first of all, look I do not want to comment about our competition, but I would say when you go to the stores, first of all, you will see that the quality of the products that we are placing in retail are far superior than what is available today. You will see that from the fabric, from the elastic, from the packaging. And really I would say that when you are looking at our pricing and where we are priced in the market, we are priced to grow, I will leave it at that. We are very comfortable with our placement, and we think this is a good opportunity and it will be the catalyst for Gildan as we go forward.

So we will so those on the floor in the next week or two?

Yes.

Okay. And then a follow up Laurence just on the print wear business, your guidance suggests, I think you had mentioned low double-digit increases in units I don't know is that was this year or the second half? But your sales guidance implies low single-digit print wear growth. As we think about this business, obviously you are about to anniversary some price decreases when you get into FY '14. If we think about this as a more of a growth business on the top line relative to the second half, is it your assumption that once you anniversary the pricing you are going to get a healthier dollar increase driven by units and less erosion in price?

Absolutely. You saw the analysis that I went through in Q2 that lower pricing had a big impact. The same thing in Q3, pricing is a big impact in mass unit volume growth. And absolutely, as we anniversary the year-over-year price declines, we will get the full benefit of our continuing volume growth.

And so that low double-digit unit growth is that for the second half or for the year?

That was for the full year.

Okay, thank you very much. Good luck.

Chase Bussell, Desjardins Capital Markets.

I just had a quick question on the branded apparel segment. I believe in the past you had said, about $15 million annualized would hit this year, mostly in the back half, so I was hoping if you could please provide some color on how that might break down? Would it be weighted more towards back to school or holiday? Any color would be helpful.

I think you maybe missed Glenn's answer to a previous question, I think as I know Glenn explained --. Is it the new programs or the advertising spend you're asking about Chase?

The new programs.

I am sorry. Okay.

We had some of the new programs were launched for Spring. But the major new programs will basically launching for back half of the year for Q3 and Q4 basically we will see the big impact for sales. What we said was, the annualized sales for these new programs or the end of the year sales for these new programs were $50 million but the annualized sales for the year-over-year basis will be about roughly $100 million, so we will get about $50 million lift from next year just on having it for the full year.

Okay. Thank you. This probably more relates more to fiscal '14, but for the Starter brand, the brand owner recently announced several collaborations with the NFL, NBA, NCAA, et cetera, so I was wondering if you would expect to see, with the increased profile of the Starter brand at certain retail outlets, perhaps some spillover into other categories such as socks and underwear?

We already have quite a large program in some of the categories. So the more they promote, but we are supporting Walmart and it is their decision really to decide how they are going to expand those categories.

Okay. Great. Thanks.

Steven MacLeod, BMO Capital Markets.

Most of my questions have been answered, I just want to follow-up on a couple of things. First in the branded apparel segment, Laurence would you be able to provide sort of a year-over-year breakdown similar to what you did in print wear?

Year-over-year breakdown of the sales?

Yes.

Or the EPS?

The sales for branded apparel.

Yes so most of the year-over-year increase was the impact of the Anvil business that is included in branded apparel. We did have growth in our retail active wear business, we had strong growth from a small base. And we had lower sales in socks that offset the increase in active wear, which you know as we said earlier, we attribute to the weak overall retail demand in January and February because of the factors that we mentioned.

One point, with most of the new programs being dropped right now in Q3 and Q4 we'll have a major pickup in our branded [year-end] sales.

Great. Okay. Great. And in terms of industry demand in the retail channel, have you seen it pickup subsequent to the end of the second order?

Yes and like we said earlier, January and February were actually the worst months, March we saw some big improvement, but April really I would say is back to normal high single-digit growth basically in some of the categories in that. I think that things are more normalized now. And you know we see this actually in both segments, it is weather, and a combination of everything I think that April is sort of -- we think things are moving in the right direction.

Okay. Great. And then Laurence you mentioned with respect to the cotton costs in the fourth quarter, you said it was a negative impact of $0.05. Is that negative $0.05 on a year-over-year basis or relative to your previous --?

$0.05 higher than what was assumed in our previous forecasts. So that was the impact of the recent spike in cotton. So -- our cotton costs in Q3 will be slightly lower than Q2. And Q4 will be slightly higher than in Q2.

Great. Okay, thank you very much.

Tal Woolley, RBC Capital Markets.

I was just wondering if you could speak -- you know you talked a bit about your cotton view you've raised your expectations for Q4 in guidance. You talked in the past that you thought cotton might move lower given the demand supply imbalances. Have either of you changed much there in terms what you may think cotton might trend at for the medium term?

We really don't prefer not to discuss our view because for competitive nature. But I think we've locked in our cotton for this year. We are comfortable with our positioning. And we will see what happens as we go forward. But I think most importantly is that we feel comfortable with our positioning. And our price is aligned with cotton as we go forward.

And but your -- the long-term -- I'm not talking specifically about your positioning relative to the cotton price. I'm just talking about the cotton price overall that do you have a --?

Our view is long-term, where prices are today is really what I think the long-term price would be in the $0.85 range and that's probably if you do any research on cotton I would say that is probably a pretty good range.

Okay. That's great. Thank you very much.

Mark Petrie, CIBC.

I want to ask about the retail accounts that you guys are selling into. And as you grow that business, or as you have been growing that business, is it much of a proliferation in terms who you are selling to? Or is it a matter of selling more product and Gildan branded product to a lot of your existing customers? I guess just as that relates to leveraging off, you know the other distribution points that your Gold Toe acquisition would have brought for example.

Well look at our strategy, we have really a strategy for both brands. Our strategy for Gildan is to really to be the opening price value brand in every channel of distribution. This year we have been able to place our Gildan brand in all channels of distribution. Including national accounts, and national account stores, which we use the Gildan platinum brand, we use Gildan for mass, and we use smart basics for the Dollar chains and discounts. So you know we have a synergy where we are basically driving our brand strategy sort of a good, better, best strategy in every channel of distribution. And being the value brand within that channel.

Consequently the same thing we're doing for Gold Toe is we have Gold Toe in every channel of distribution, and it's the better brand, so our objective is we have good distribution, we'll continue to grow our distribution. A lot of our products and programs we have, our new placements and new channels of distribution for our Gildan brand this year. And that's the reason why we're seeing our sales retail close to $300 million, and $200 million increase, and that will grow significantly next year on the momentum we have and all of the opportunities we have. And as we continue to get new placement for Spring '14.

So just as a ballpark then, for the $100 million in retail wins how many -- how much of that would be at retailers that you hadn't previously been selling or supplying private label to? And how much would have been --?

Between our private label business and the acquisition of Gold Toe we saw almost every single retailer that's out there, and that's the reason why we did the acquisition. So, partly because of the brand strategy, partly because of the [management] that they had, and as well as the ability for us to have relationships with all of the different channels of distribution. So, with the acquisition of Gold Toe, we saw almost every single aspect of specialties, sport specialty, clubs, you know department stores, Dollar stores for Gildan, we have now relationships. One of the things we're doing, is we are continuing focusing on working on our relationships. And that's sort of the part that takes time. But we are working with the senior management at all of our big customers, we are continuing to build the -- tell them the Gildan story, our investment strategy, our quality strategy and our brand strategy. We are just basically optimistic about the future and every single aspect of our business.

Okay. That's helpful and just on that last point, have you felt like you needed to or will make any changes to your sales team in terms of investing in that regard as you build those relationships? Or are you satisfied with your team as it is.

I think we have the best sales team in both of our operating divisions, we have the best sales guys in the industry because everybody wants to come work for Gildan.

All right, sounds good, thanks.

Jim Duffy, Stifel Nicolaus.

Laurence in your prepared remarks you listed off a number of growth opportunities. It sounds like you're very excited about the retail opportunity. Could you perhaps rank order those in terms of their expected contribution to incremental revenue in 2014?

No. You know we will do that Jim when we initiate our guidance for next year. But they are all significant opportunities which are major areas of focus for the Company. And I would not want to say anything is more important than anything else. So we are bringing on capacity to support our growth initiatives in all of these areas.

Fair enough. Follow-up question, you have been in the retail initiative for a number of years now, can you speak to some of the key things you have learned over those years which you think will now make you a better Company from a retail standpoint and will help you on a go-forward basis?

One thing I will say while Glenn answers that, remember that while we've been in retail for a number of years, we've only been in socks. Because we needed all of our capacity where we make active wear and underwear to keep servicing our increasing market share in the print wear markets. So it is only with Rio Nance 5 coming on-stream that for the first time we've had the capacity to support growth both in active wear and underwear, and up to now our growth has been -- our retail business has been in socks were we built separate facilities.

As far as retail, our plan is for history to repeat itself. We are applying the same matrix that made us successful in wholesale again by the better quality, better products, better prices, working with our customers. So they're successful selling Gildan products and making sure the consumer gets better prices. So when you look at our strategy in retail it is really replicating the strategy we had in wholesale that successfully penetrated and allowed us to get 70% share over the last 15 years.

There are some nuances in retail and through the acquisitions of the three acquisitions we made that really positioned ourselves to have the management team as well as all the systems and distribution requirements to service these retailers. We think that we are poised for major expansion. We are prepared to invest not only in capital, but we are prepared to invest significantly in our brand strategies and looking obviously to acquire new brands if needed to even open up other channels of distribution. So the great thing about our Company is that we have a great capital base, we are going to spend as much as we can to drive our strategy, and we think there is nothing stopping us and we will be very successful.

Thank you and good luck.

Anthony Zicha, Scotiabank.

With reference to retails reviewing their supply chain how soon could Gildan capture some of the volume?

Well -- look -- the thing for us is that we -- we are recognized today as probably the leader in CSR. At the end of the day that is what our brand stands for, what our objective is, is that Gildan is being a value product with great quality, great prices, and most importantly I think, is great CSR practices. That is really what is going to drive our brand strategy. And our emphasis will be on Gildan as a brand, and hopefully we will see significant placements in Gildan as we go forward as part of the reliability, replenishment, CSR aspects and all the other features that we put into our garment. So we think it is a big opportunity for us. But our objective is, is to take that opportunity and drive our brand strategy.

Okay. Well thank you.

Chris Li, Bank of America.

Good morning I was just wondering if you can maybe share with us how much cost savings have been realized through your biomass energy initiatives so far and how much more runway is there to go?

(multiple speakers) Where we are with our biomass?

Biomass represents about 80% of our usage right now. And with the new phase that we are in the process of constructing, will allow us to increase the amount of biomass to capture the increase production of our Rio Nance 1, and take us roughly to about 100% of our consumption of steam.

So it's fair to say a lot of the benefits are still to be realized in your numbers?

We are going to benefit about 20% on the existing production, and as we bring on Rio Nance 1 obviously it's going to come on at a low cost because it will benefit from the new investments in biomass as well. As well as all of the technology we are putting into the plant. And just for your reference point, Rio Nance 1, the equipment in that plant is only eight years old and we basically gutted the facility and put in a whole brand new infrastructure and all brand new equipment. So, Rio Nance 1 will come on-stream as equal to in the cost structure as our latest equipment in Rio 5.

And then just a quick follow-up on the yarn spinning. I know it's still two years away before the benefits are realized, but I think in the past you mentioned the capital you are investing you expect an internal rate of return in excess of 30%. Just curious to see what would be driving those returns?

Those returns are driven from all these capital improvements we are putting in. I mean the biomass, distribution center, the yarn spinning, this year we are going to spend over $200 million. By time all of the equipment is installed and running, and you look through our cost of goods sold, basically a lot of the cost benefit will actually materialize or savings will materialize in 2015. If you look at the investment we made and you figure you have a 30% return, those are the types of earnings power we will be creating in 2015 as we go forward. We're not only going to spent $200 million this year, but we're going to have a significant capital program next year as well. We are going to have continue to spend -- as we go forward not only are we going to have top line growth, but what has driven our Company is continuing driving bottom line and cost reductions basically, so we'll have a big tailwind as we go into '15 and '16 in terms of big synergies from manufacturing savings.

Okay. Thanks Glenn

That is all the time we have for questions, I will now turn the call back over to Sophie Argiriou.

Thank you. Once again we appreciate your interest and thank you for your participation. And we look forward to updating you again at our next earnings conference call. Thank you and have a good day.

Thank you and thank you ladies and gentlemen this concludes today's conference. Thank you for participating. You may now disconnect.