Gildan Activewear Inc (GIL) 2014 Q2 法說會逐字稿

Welcome to the Q2 2014 Gildan Activewear earnings conference call. My name is Vivian, and I'll 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 Ms. Sophie Argiriou. Ms. Sophie, you may begin.

Thank you, Vivian. 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 2014 and our interim shareholder report containing management's discussion and analysis and consolidated financial statements.

These documents will be filed with the Canadian Securities Regulatory Authorities and the US Securities Commission and are available on our web site. Joining me today are Glenn Chamandy, our President and Chief Executive Officer, and Laurence Sellyn, our Executive Vice President and Chief Financial and Administrative Officer.

Our call today will begin with Laurence taking you through our second quarter performance and our business outlook for the fiscal year and will be followed by a Q&A session, during which Laurence and Glenn will respond to your questions. As always, before we begin, I would like to remind you that today's conference contains certain statements which 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. And with that, I'll turn the call over to Laurence.

Good morning.

Today we announced record results for the second quarter, at the top end of our prior guidance. In spite of the impact of the colder weather which negatively impacted demand for T-shirts, a contributor to softer retail market conditions.

We have also reconfirmed our full-year earnings guidance range. The positive impact of higher than previously projected sales in the second half of the year is projected to be offset by transitional manufacturing inefficiencies to support new programs and the introduction of new products. These costs will impact results primarily in the third quarter. We expect to end FY14 with strong sales and earnings momentum in the fourth quarter, due to the impact of new retail programs and the initial cost reduction benefits of capital expenditure programs.

On a consolidated basis, EPS increased by 8.5% in the second quarter, to $0.64 compared to $0.59 in the second quarter of last year. Sales volumes increased due to strong growth in sales of branded underwear to US retailers, growth in sales of licensed brands, increased sales to global lifestyle brands, and increased sales to international Printwear markets.

Printwear net selling prices were higher than the second quarter of last year, due primarily to the non-recurrence of the $0.04 per share impact of a special distributor inventory devaluation last year. These positive factors were largely offset by the $0.08 per share impact of higher cotton costs compared to the second quarter of last year.

Manufacturing costs were slightly favorable compared to Q2 of last year. Positive efficiencies in textile manufacturing due to Rio Nance V and other capital projects were largely offset by inflationary cost increases and by short-term transitional manufacturing inefficiencies in sock manufacturing operations and the former Anvil facility, related to the upgrading of facilities and development of new product capabilities, as well as by start-up inefficiencies at Rio Nance I related to the integration of increased underwear production into the ramp-up plans.

In spite of the colder weather conditions, which resulted in lower demand for T-shirts in the US, sales revenues for the Printwear business increased by approximately 3% from the second quarter of last year, due to approximately 20% growth in international Printwear markets, a higher proportion of higher valued fleece and long-sleeved T-shirts, and slightly higher net selling prices due to the non-recurrence of the distributor inventory devaluation in the second quarter of last year.

Operating margins for Printwear were 24.3% compared with 23.7% in the second quarter of last year. Gross margins for Printwear increased due to the non-recurrence of the inventory devaluation, lower promotional discounting and increased textile manufacturing efficiencies, which together more than offset the negative impact to prior cotton costs and inflationary cost increases.

Branded apparel sales revenues increased by 10% from the second quarter of last year in spite of soft retail market conditions due to the continuing success of our Gildan branded national mass market underwear program, the growth of premium Gildan Platinum socks and underwear in national chains and department stores, increased market share for Gold Toe, and new activewear and underwear programs for the G by Gold Toe brand, increased sales for licensed brands and increased sales to global lifestyle brands.

Sales of Gildan branded programs increased by approximately 50% compared to the second quarter of last year. And we are continuing to secure increased shelf space and new programs in multiple channels of retail distribution for FY15. Operating margins for branded apparel declined slightly in the second quarter, compared to a year ago from 8.6% to 7.8%, in spite of the increased sales volume leverage, which reduced SG&A expenses as a percentage of sales.

The lower operating margins for branded apparel in the second quarter were due to the impact of higher cotton costs, which were not passed through into higher selling prices to retailers, the transitional manufacturing costs in order to upgrade facilities to support new branded programs and broaden product capabilities, and inflationary cost increases.

Our updated full year guidance for FY14 reflects slightly higher than previously projected top line sales growth. Full-year sales revenues are now projected at approximately $2.4 billion. Sales revenues for Printwear are now projected to increase by approximately 5.5% from FY13.

Projected sales revenues for branded apparel are now projected to be approximately $850 million, up from our previous projection of $825 million, and up approximately 19% from FY13. The positive earnings impact to the projected higher sales revenues will, however, be fully offset short-term by additional transitional manufacturing costs to upgrade facilities to support our sales growth, and by some further inflationary cost increases.

On our previous call in February, we had indicated the results for the third quarter would be negatively impacted by short-term manufacturing inefficiencies to expand our product capabilities and to support new retail programs. These inefficiencies are now projected to be higher than previously forecast.

In addition, we will incur training costs in our sewing operations to support a planned significant further increase in branded underwear sales and increased sales of new high volume products in FY15. The net effect of these revised assumptions is that we are reconfirming our prior full-year EPS guidance of $3.00 to $3.10. EPS for the third quarter is projected to be approximately the same as the third quarter of FY13, which was a very strong quarter.

The favorable impact of the projected approximate 14% growth in sales revenues in the quarter and the benefit of manufacturing cost reduction projects are expected to be fully offset by higher cotton costs, the impact of the short-term manufacturing inefficiencies, and inflationary cost increases. Strong EPS growth is projected in the fourth quarter, compared to the fourth quarter of last year.

The projected higher EPS in Q4 compared to Q3 is due to higher volume retail programs and branded apparel, and more favorable Printwear product mix, which are projected to result in higher margins for both segments, compared to the third quarter, and more than offset the lower seasonal demand for T-shirts and Printwear in the fourth quarter, compared to the third quarter.

We expect to generate approximately $200 million of free cash flow in the second half of the year. Our updated guidance continues to assume no material deterioration in overall economic conditions, which would negatively impact overall market demand. Cotton costs will decline slightly in the second half of the fiscal year compared to the second quarter.

In the third quarter, cotton costs will be higher than the third quarter of last year, and negatively impact EPS in the quarter compared to last year by approximately $0.10 per share. Cotton costs in the fourth quarter will be comparable to last year. Our cotton costs, including the cost of basis, have remained at approximately the same level in the high $0.80s to the $0.90 range since the fourth quarter of last year.

We are continuing with our major program of capital expenditures, and now expect to be at the higher end of our previous full-year guidance for capital expenditures for FY14 of $300 million to $350 million. About half of the FY14 capital spending is for the new yarn spinning facilities, including the ramp -up of the Salisbury ring-spun facility which began operations in the second quarter. The balance is for the ramp-up of Rio Nance I, further new underwear knitting machines at Rio Nance I, new sock manufacturing equipment, equipment to upgrade the Anvil textile facility, further biomass investments, the new Honduras distribution center, and the initial investment in our new textile facility in Central America.

As stated in our press release this morning, the location of this facility has now been confirmed as being in Costa Rica, which is strategically located for duty-free, quota-free access to US markets, and which allows us to leverage our management infrastructure and expertise in Honduras, while at the same time, obtaining a degree of geographical diversification.

In addition, this site is well-located for our sewing operations in Nicaragua and has good access to ports for transportation to both the East and West Coast of the US. We will present a plan for the ramp-up of this facility on our next call when we report our third quarter results, in conjunction, with the ramp up at the Costa Rica textile facility, we are reviewing our overall capacity requirements and plans to support our sales growth, integrate new high value products, and alleviate manufacturing capacity constraints which we are currently experiencing for certain products.

As we go forward, the drivers of our EPS growth and value creation continue to be: firstly, continuing top line growth in Printwear in both the US and international markets, including the introduction through the distributor channel, of new higher value products such as ring-spun sports shirts with high end, premium design features, the new Anvil product line of ring-spun contemporary fashion basic T-shirts, and the Gildan Core Performance T-shirt product line, which all command higher price points and higher margins.

Our main growth opportunity is a continuing development of Gildan as a consumer brand. The success of our initial Gildan, Gildan Platinum and Gildan Smart Basics branded programs is continuing to result in new branded programs, increased shelf space, and better placement within retailers, as both retailers and consumers recognize our value proposition of better quality and design features for basic family apparel, and innovation combined with lower prices.

We are very excited about our momentum in retail, and our opportunities for new branded programs in FY15 in all product categories. Also, we have now begun implementation of our plans to penetrate the retail market in Canada.

Thirdly, we are continuing to build in our leading market share for Gold Toe men's socks and to leverage the Gold Toe brand and brand extensions into other markets and other product categories. We are continuing to expand placement of G by Gold Toe for underwear and activewear in national chains and department stores.

Next is growth in licensed brands: we have obtained a national underwear program for Mossy Oak and expect to obtain new programs for 2015 for Mossy Oak in multiple channels of retail distribution. We will continue to seek other complementary new brand licensings. We also believe that we are uniquely positioned as a long-term strategic supplier for replenishment programs to global lifestyle brands.

We have now begun to supply socks, as well as T-shirts to these brands. We are continuing to support our brands with major capital investments in our vertically integrated manufacturing, to further differentiate our product technology and product quality, and to widen our cost competitive advantage.

In this regard, we have projected $100 million of annual cost savings, which are expected to phase in over three years beginning in FY15. And finally with our organic strategies in place, we are placing strategic focus on acquisition opportunities which will complement our organic growth and allow us to utilize our unused debt capacity and free cash flow to enhance return on capital and further increase EPS growth.

Thank you Laurence.

That concludes our formal remarks on the second quarter results. Before moving to the Q&A session of the call, I ask that everyone please limit the number of their questions to two in order to give everyone the opportunity to ask a couple of questions. If time permits, we'll circle back for a second round of questions.

I'll now turn the call over back to the operator to begin the question-and-answer session.

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

(Operator Instructions)

And our first question comes from Kenric Tyghe from Raymond James. Please go ahead.

Thank you. Good morning.

Glenn, good momentum in retail shelf space gains and new program wins that you're calling out. I wonder if you can give us a little more color or name names, perhaps, with respect to those program wins.

Well, what I would say is that, first of all, we have great momentum in our retail strategy.

Twofold -- one is that we've seen a bigger increase in our existing products and the share with the products we're selling today at retail, and as well as we've obtained new programs, both in the Gildan brand underwear as well as our Platinum underwear.

I'd rather not say who it is at this point, but you can shop the stores. We have expanded our Gildan brand underwear into four new retailers, and we've now expanded our Platinum brand into four additional retailers as well.

So we continue to see good product, good brand extension in our underwear, which has resulted in, obviously, us increasing our sales guidance for this year.

Most of the sales guidance increases are coming from underwear, partly because of the additional sell-through because of our brand positioning within the market, and as well as the shelf space that we're obtaining, which most of it is coming towards the end of the year.

But that's really what we think and what really excites us is the fact that we have huge momentum going into 2015, a huge headwind with all of the programs and expansion of our distribution in the brand, particularly in underwear.

One thing I would like to point out, and we'll get into it a little bit later, but that we're significantly increasing our underwear capacity as we speak. And that's one of the drivers to our efficiency issues that we have.

But we'll actually going to be increasing our underwear capacity, over 100% versus the original plan for 2014.

Great. Thank you, Glenn.

And then, Laurence, just with respect to the succession planning, you have indicated you're now there through the calendar year versus prior expectations.

Could you perhaps share some color on how short the short list is, or at what point you would expect to be making a decision such that you have the runway you would expect for the transition?

Well, I'm not the one hiring my successor, Kenric. That's Glenn.

He's always known he has the luxury of me bridging if he needed a little bit more time. And I think the new time frame, he appears to be confident that that will provide enough time to both bring in a successor and ensure an orderly transition of all of my responsibilities to the new person.

Fair enough. I'm sorry to just to sneak in a very quick last one.

You're approximately the same as last year EPS guidance for this next quarter. Could you just clarify the point of reference you made at around $0.95?

Is that the midpoint of your expected sort of range on this next quarter? Or is that really a floor in the next quarter? I just want to clarify the terminology with respect to approximate on this next quarter earnings.

I would say approximately means $0.02 on either side. I think the important thing, from our point of view, is not $0.02 in the quarter, but providing the platform for our continuing sales growth and value creation as we go forward.

Great. Thank you. I'll leave it there.

And our next question comes from Taposh Bari from Goldman Sachs. Please go ahead.

Good morning, it's Chad Sutherland on for Taposh. Hi, guys.

Hello.

First question, again on retail, just wondering, you obviously talked about good growth and encouraging to hear the shelf space gains. But for the time being, at least not passing through the higher production costs, higher cotton costs.

Over time, is that something that you plan to do? Or is the dialogue with retailers a little different relative to Printwear? How do you think about costs in that business?

Well, we're pretty comfortable with our pricing in the market. And the fact is that we have the negative variances that have flowed through in Q3, which represent roughly about $0.15. So normalizing that, we had pretty good margins.

The fact is, is that the inefficiencies are coming from a couple of areas. One is that we're still in the process of developing and modernizing the technology for the Anvil facility, which has extended beyond what we originally anticipated, which has resulted in a little bit lower volume and some higher costs.

We're ramping up still our sock factory. And in terms of our configuring it to make more higher-value-added products, part of that added value of products is the fact is that we've put in additional [steam building] capabilities for better quality open pack socks, which has left us with about a $0.04 to non-cash charge in the quarter of Q3.

And the bigger part of all this is the ramp up of our underwear, which is something that we really put the pedal to the metal, really, I would say, as we started developing in Q2 because of the momentum in the sales we had in our underwear business and our sell-through.

It's a combination of training.

We're going to be doubling our underwear capacity in a very short period of time. So we're going through an extensive training of labor, as well as we're doing some outsourcing with (inaudible) into all the equipment that we've purchased until (inaudible) comes in.

So those costs, once they normalize, we're pretty comfortable with that pricing and our margins on a go-forward basis.

Understood. Thanks.

And then just to follow-up on doubling the capacity of underwear, does that come at the expense of expanding T-shirt or fleece capacity? Or how does that dynamic work? Obviously, you are ramping up facilities, but if you could just provide some context. Thanks.

Well, the thing is that we always talk about mix, and I would say to you today that our mix is evolving for sure.

And maybe just to look at an aggregate of our total overall capacity. As we ramp up our underwear and ramp up all of the performance and other things we have in our fleece business, which is growing considerably this year, once we get fully ramped up come September, we will be running at a 100% utilization of our capacity.

And I would say that based on the sales momentum that we have with all these categories, we will need a 100% of that capacity to support 2015.

So one of the things that we're going to do, and what Laurence mentioned, is that when we come to our August call, we're going to give an update. Although we're excited about the Costa Rica and developing of that facility, we need to have some incremental capacity coming online in 2015 to really give us a chance to support our growth rate that we have for 2016.

We're in the process right now of evaluating additional capacity before even Costa Rica comes online. And we'll give you the whole breakdown when we come to our August call basically, in terms of our full-capacity expansion plans.

But we're running at a 100% today. We will be running at a 100% come September to support next year's growth.

Great. Thank you very much.

And our next question comes from Martin Landry from GMP Securities. Please go ahead.

Good morning.

Morning.

Glenn, can you give us some -- or refresh our memory in terms of time frame as to when your construction is going to start for your Costa Rica facility?

How long is it going to take to build it? When is the production going to start? And when you think that production's going to be fully ramped up? And how much do you think you can come out to that new facility?

Well, what Laurence referred to is that we're going to give you a full update in August. But the plan is for us to start construction in the 2014; and then obviously bring the facility on some time in 2016. But to give you the exact buildup and breakdown, we'll do that in August.

But I think referring to what I just said earlier, the point for us is that we need to bring incremental capacity on prior to Costa Rica, just as support, because we need to have installed capacity in 2015 to support our growth for 2016, based on the momentum we have.

The new programs in underwear and Activewear we're generating at retail and to support our international growth.

Okay. Any plan to share point-of-sale data on the retail side at some point in time?

Well, what we're planning to do is, I think what we said last call as well, is that we're going to provide point-of-sale market share in our August call, only because that's going to be really a fairer number in terms of having our products in the market for the full year.

And we're going to be pretty excited about it. I think that when we share the numbers, they're going to be quite exciting.

I don't think that there's been any brand in any industry that's been able to penetrate market share in 12 months that have the level of share that we're going to have in underwear, come our Q3 call.

So we'd rather wait till then, just so we can give you a full analyzed number. But it's going to be pretty exciting when we see where we stand.

Okay. Thanks so much.

Thanks.

And our next question comes from Andrew Burns from D.A. Davidson. Please go ahead.

Good morning.

Morning.

I was hoping you could comment on your ability to capture this opportunity of manufacturing higher-value product in 2014 and 2015, the timeline here.

You're refurbishing the Anvil facility, you're ramping the ARM, increasing training in sewing facilities. When do you think you'll have the full capacity and capabilities to really push that strategy at a 100%?

Well, right now, we're ramping up, like we said earlier. We'll be at 100% operational capacity by September, which means every single one of our plants will be running at 100% capacity, which we'll need to support our 2015.

So we will be optimizing our cost structure and our capacity at the same time. Our Salisbury yarn facility and the two facilities, Clarkton and Cedartown facilities, that we modernized are completely finished in modernization. Salisbury is ramping up as we speak, and almost at full capacity probably by the end of our third quarter.

So all of the installed capacity that we have, either yarn or textiles, will be fully operational and at optimal capacity and efficiency levels by September.

Great, thanks.

And just on the distributor channel, you highlighted some promotional activities. Some of the smaller competitors emphasized it as well.

Wondering if the promotional levels you saw in the channel were above or below your plan, and if they changed your views for the balance of the year in any way.

Well, as far as we're concerned, what we're saying is that pricing is actually slightly up on a year-over-year basis. So we feel that the market is stable.

We didn't see any significant promotional activity, I would say, in the quarter or so. POS is a little bit on the weak side due to weather. Unfortunately, we saw that a little bit in January when we were on our call. It's continued through March and slightly into April so far.

But we're pretty optimistic about the season kicking in. It always does, and we're really excited about the continued growth in our international business, which has continued to show great growth and good momentum.

Thank you.

Thank you.

And our next question comes from Stephen MacLeod from BMO Capital Markets. Please go ahead.

Thank you. Good morning.

Good morning.

Just wondering if you can -- you mentioned new shelf space in 2015. And I thought what I understood was that you said good momentum coming into 2015, particularly in underwear.

So is that where a lot of your expected growth is coming from right now on the retail side?

Well, I think two things are going to happen, and we expect the growth actually in other categories as well.

But I'll start with underwear. And the first thing is that we're expanding the shelf space on our existing programs. We're also looking at adding new products.

Because like anything else, as you develop your business, you start off with a limited product offering. So there's a big opportunity for us, we think, to continue to expand within the category, which also will expand margins as we go forward. Because obviously, as you add more product, you can get more styles which allows you, like we see it in Printwear over the years, expand our margins.

And at the same time, we're expanding distribution into new retail space. So it's a combination in underwear of those three opportunities, really, that will allow us to what we think is be comfortable to double our capacity from our existing plan of 2014.

And also we're focusing on driving our Activewear as well. Activewear is a huge opportunity for us. And we're looking to get placement as we go forward into 2015. We have a lot of irons in the fire right now.

So we're pretty excited about going into next year and we're running at capacity and we're gearing up. And we think we're positioned perfectly to continue driving our brand strategy in every single segment of Gildan.

The Gildan brand, our Platinum, our Gold Toe brands -- we're expanding in most categories as well, both in underwear and Activewear.

And we're also driving our sock business as well. And in socks, we continue to look at reductions of private label, which is becoming a smaller and smaller piece of our business as we drive our brand strategy. And produce higher-value products, which ultimately will bring us better sales level as well as higher margins.

Okay. Great.

And then just my second question was surrounding global lifestyle brands and national accounts. Are you able to just sort of quantify where you are in those growth initiatives?

Well, our global lifestyle brands is continuing to grow. A lot of the opportunity and the future opportunity of that segment for us is developing the Anvil facility, which we're in the process of doing. So part of the inefficiencies of Anvil today are the flowing through our costs in Q3, are a function of developing those fabrics that we need to actually drive the sales into 2015.

So we're very comfortable that we will have a pretty good sales increase in that area for 2015.

And as far as the national accounts business, that business is somewhat flattish because it's a function of the weather and retail environment, basically. But we're still comfortable with our position in the market.

In the second quarter, sales of global lifestyle brands were up 15%. And growth in all of our major target growth markets was up significantly in the second quarter.

Do you mean the target markets, specifically with respect to global lifestyle brands?

So what I mean is if you look at the markets we have identified as our major growth opportunities, all of these showed strong growth in Q2.

As I said in the call, overall Gildan branded programs were up 50% compared with Q2 a year ago; underwear was up 60%; even socks, in a weak market, was up 3%.

Activewear was up 12%; licensed brands were up 30%; global lifestyle brands were up 15%; international Printwear markets were up 20%. And the only market where our sales were down were retailer private label.

Great. Okay. Thank you.

And our next question comes from Vishal Shreedhar from National Bank. Please go ahead.

Thanks for taking my question.

Just on acquisitions, Glenn, I know you signed the share disposition plan in February; and you had no material information at that point in time. But as you look at the outlook today and the files on your desk, what's your take on the opportunity related to the quality of the acquisitions, the availability, the pricing -- just your thoughts there?

Well, it's a major initiative for our Company right now. We are in the process of continuing to go look at ways to reinvest our free cash, which is, again, somewhat cumulative on our balance sheet.

We should be debt free come the end of the year and have some surplus cash. So that's part of our focus.

And again, part of what we're looking to do in terms of acquisition criteria is to continue looking for opportunities to expand distribution, expand product offering, looking at new brands. So there's a lot of opportunity for us. And we're comfortable that we can complement our organic growth with potential acquisitions as we go forward.

We'll be very selective, and we definitely believe there is opportunity out there for us.

Okay. So in terms of the files on your desk, there are files that you're looking at which you may or may not act on?

I don't want to comment on what's on my desk. Thanks.

Okay. Fair enough.

In terms of the underwear brand, given that the Gildan brand has momentum that you're commenting on, do you also plan to continue to aggressively grow the Gold Toe underwear brand? I guess I'll leave it at that.

Well, really, both of those brands are sold to really different consumers. Basically Gold Toe is an iconic brand. It's growing in department and specialty stores.

We have expanded the socks into underwear, Activewear. We're moving into ladies as well. So it's growing everywhere, and the market share now is 15 -- what is it, 15?

15%

No, no, we've had significant market share --

15 consecutive months.

We've had 15 consecutive months of basically market share growth in the Gold Toe. It's back to what it used to be, in the high 28%, pushing that 30% range in terms of its awareness in the department stores and national accounts.

So we've reinvigorated that brand through advertising, and we're comfortable that we can continue levering that opportunity.

Gildan is a little bit different beast because it's the value product in every one of the channels of distribution we're in. So if you walk into any type of mass market retailer or even the national accounts, you'll see that Gildan will be the value equation in their stores.

It's the best value, but it's also the best quality. And that's one thing that's the difference between Gildan and I think what's making our sell-through so successful is that we don't just have the best value; we've got also the best quality.

You can look at it, and you can go and take any garment apart in any of these retailers and look at the elastic, our fabrication. We put value and quality and innovation in all of our products basically, and we price them to sell.

And I think that's sort of been the success of our launch in our underwear, and that's what's given us what we think if the big opportunity. And we're just getting going. And as we go into next year, the momentum is pretty strong right now.

Thank you.

And our next question comes from Chase Bethel from Desjardins Securities. Please go ahead.

Thanks and good morning. I just had a question with regards to the subject of capacity.

Can you talk about maybe the incremental factors that led you to choose Costa Rica over Nicaragua?

And then secondly, as you think about where to put money to work -- whether it be capacity, cost savings with yarn spinning or a power plant or acquisitions -- can you just talk through how you're looking at each of those and prioritizing what we should expect maybe over the near to medium term?

Well, I'll start with Costa Rica. There are a lot of factors that made us choose Costa Rica. But I don't want to get into all of them on the call right now.

The fact is that we did a complete analysis. And obviously for us, it was the right decision for us to be in Costa Rica. The key things that Laurence mentioned, we're levering our management, additional port access, our selling infrastructure in Nicaragua. At the end of the day, it's very close proximity to Nicaragua.

So there are all kinds of other requirements that needed to be looked at in terms of building textile facilities: infrastructure, power, water availability. So based on everything that we saw, Costa Rica was a better site for us, and that's what we've chosen.

And as far as our use of cash and I guess in capital, one thing that we're doing this year, obviously, is we have an extensive investment in capital. We're investing $350 million, which will generate about $100 million in cost savings that will float through the next successful three years of 2015, 2016, 2017.

That's been really the key component to our success. And one of the things that we're going to continue to do and as we go into 2015, you'll see that we are going to have another major capital expense year that will not just increase capacity, but will also have significant cost reductions that will add onto our $100 million already committed to.

So we're going to continue to spend capital on our capacity expansion, cost reductions. And as well, we're looking to use part of our cash flow to look at acquisitions that will continue to help our organic growth through, like I said before, new brands, new channels of distribution, products. Whatever it takes for us to continue to keep expanding and maximizing our penetration into retail, wholesale and international markets.

If you're talking, Chase, about priority for allocation of capital, clearly, the first priority is to support the capacity expansion, to support our organic growth.

But even in a year like this year, where we're spending $350 million of capital for our existing business, we're generating free cash flow. So we're going to continue to build up our cash and use our cash and our unused debt capacity to do acquisitions that will complement our organic growth strategies.

That's great, thanks. And just a follow up on Costa Rica.

Glenn, what sort of manufacturing footprint are you envisioning in terms of the land package that you require over there?

Well, we have enough space to build three Rio Nance facilities, if that's what you're asking for. So we have a big infrastructure we're going to be putting in Costa Rica that will allow us to grow our capacities over time. So we're making a major infrastructure in space, and obviously opportunity to expand beyond one facility.

Okay. Thank you.

And our next question comes from David Glick from Buckingham Research.

David, please go ahead.

Thank you.

Glenn, just a question about the operating margin of the business. Clearly, you have really strong revenue momentum, a couple factors that, that you alluded to, at least near term constraining the gross margins.

And as I look at cotton, you had talked about high $0.80s, $0.90. Obviously, futures are a little bit higher than that. You're growing your Branded Apparel business obviously at a faster rate at a lower margin.

I'm just wondering, as you put all this together and you're obviously increasing your capital investments as well, how does this all wrap into your ability to maintain or even expand your operating margin from the current levels?

Well, I said before earlier that we're pretty comfortable with overall pricing in the market today. We're priced to get good returns on our products.

And we've always had a certain factor of negative variances built in through our momentum and built up into our sales plan because we're constantly growing, you know what I mean? So we're never at a point in time where we've got a level manufacturing capacity.

So I would say that there's definitely for us -- we're positioned and priced in the marketplace to sell our products. We think that we can get a very good return on our pricing, and we're priced significantly below what we think are other products in the marketplace.

So there is definitely, at the end of the day, we feel that in the short term, we're going to continue to keep our pricing aggressive. And we're going to lever the top line and the bottom line, obviously, to continue expanding our earnings. And we're comfortable with our position today.

As we drive new incremental capacity and cost reductions, these will increase our margins as we go forward on top of our existing base today.

So we have over a $100 million of cost reductions coming in. And a lot of these cost reductions that we will have as we flow through will support our Branded division in terms of some of the yarn-spinning initiatives that we have.

So we think that we're well-positioned today as we flow through these cost initiatives, of pricing, and our momentum in the top line. I'm pretty comfortable with our position right now.

And further to what Glenn's saying, implicit in our full-year guidance is that we will see margin expansion in the fourth quarter compared to the third quarter. And strong margins for Branded Apparel as well as for Printwear, which is coming from new, high-value retail programs and from the initial impact of our cost-reduction programs.

And one thing I said also that is important is that the mix is a bigger driver. So when you look at even the underwear space, for example, there's lots of opportunity for us to continue adding products to our existing assortment.

And as you add more product, you actually enhance your margins basically. So that comes with maturity as you develop your brand strategy.

We're just in the beginning stages, so the products that we actually have in the market are probably the more price-sensitive ones. And as we continue to add new products, by merchandising ourselves, we'll actually increase our margins.

So what you're saying is that these cost reductions and the top-line momentum should enable you to sustain the operating margin increase that you're projecting this year into the next couple of years?

Yes.

Okay. Thank you.

And our next question comes from Sabahat Khan from RBC Capital Markets. Please go ahead.

Thank you and good morning.

Are you able to comment on where you're seeing cotton futures trend for 2015 versus your costs that you realized in 2014?

The outlook on futures is look at the -- you can see what the future curve is right now. I mean, obviously, cotton is trading in the $0.80s, let's say for example, for next crop year. It's early days to see exactly where it will end up. There's always puts and takes.

But I would suggest that look from a long-range perspective. What Laurence said earlier is that cotton being in the high $0.80s, low $0.90s, where it ended up this year, I think is a pretty good look at what it potentially could be for next year.

So we don't really have a view today. But that's just where the market is now.

Okay, thank you.

And you called out some wins on the Mossy Oak programs. Are you able to maybe quantify how big those might be or maybe how big you expect that brand to get eventually?

Well, we definitely think that the brand is going to achieve and exceed our expectations; that's for sure. We have placed some Activewear, and we are going to be placing some underwear products this year. And we think that there's a big opportunity here to expand into 2015.

I prefer not to say how big we think we can get, but it's much bigger than we thought originally when we took the license.

Thank you.

And our next question comes from Derek Dley from Cannacord Genuity. Please go ahead.

Hi, good morning.

I was just wondering if you guys could give us a little bit more color on some of these inefficiencies you are experiencing here, Q2, Q3,. And will they essentially be cycled through by the time we get to Q4?

The answer is that the inefficiencies right now are probably, I guess, three pieces of inefficiencies.

One is the modernization of our Anvil facility with the new technology put in that plant as we gear up for our global lifestyle brands. And that resulted in lower volumes, et cetera.

We also had experienced continued variances in socks. That was primarily the continued installation of higher-value products and equipment to support them.

And the idle assets of some of the boarding equipment as we invested heavily in steam boarding, which I said earlier, which is about a $0.04 non-cash charge. And also the ramp up of our underwear business in terms of training all of the operators required to double our capacity.

And that comes from twofold -- one is to externally go out and make textiles, just the (inaudible) of the textiles, until we get the equipment in Rio Nance I which we've ordered. And the second is to massively train people.

When we train people, we usually train in an organized manner, so we can train so many people. But we're training exponentially so that's an incremental expense for us in a very short period of time. ¶

Most of these costs will be running through Q3, but there are some costs that will go into Q4.

That was great. Very helpful.

And then I was just wondering if you could just remind us -- in September, when you are running at a 100% capacity, what will be your exit rate capacity at that point both overall and in terms of underwear?

Well, I'd rather not say. We don't want to give the actual dozens down now at this point in time, obviously, because we don't want to get into that.

And also the dozens are so impacted by product mix, we can't really talk about dozens anymore.

But I would say that we're going to plan a substantial increase in, obviously, sales for next year. And once we're running at full capacity, we should be able to support those sales.

Okay. That's great.

And our next question comes from Jim Duffy from Stifel. Please go ahead.

Thanks. Good morning, everyone.

I'm looking at the return on invested capital. Over the last --

Jim, we can't hear you, I'm afraid.

Is that better, Laurence?

Yes, that is.

Okay. Great. Well, good morning. Hope you're well.

Good morning.

My question. I'm looking at return on invested capital over the past ten years. It seems acquisitions and growth in branded apparel have been dilutive to that.

Is that a metric of focus for you? And if so, I guess that brings me to the operating margins for the Branded Apparel business.

Can you speak to the expected trajectory of the margins there? And any targets you might have for operating margins in Branded Apparel?

Well, definitely if you take all the acquisitions and you look at our Branded business, it's definitely been dilutive. But the objective for us is to build this business threefold from where it is today.

So when you look at the acquisitions we did make, they were very strategic in the development of our retail strategy. So based on the current level of earnings, yes, they are.

But if you project out into the future, where we think our sales and momentum and earnings power will be, we will be getting significantly good returns on these investments that we've made. And that's really the thesis behind the acquisitions.

So you'll see continued growth in earnings, both from top line and bottom line in Branded. And we're pretty excited about our position as we go forward.

And what we stated in the past is our objective in our Branded business is to have the same type of earnings power in Branded as we have in the Printwear business.

And also, the operating margins for Branded will improve as we leverage our SG&A infrastructure with more volume, which is already happening. But we have the infrastructure in place to, as Glenn said, build up a much bigger business.

As we drive more (inaudible) the percentage of sales will continue to come down.

Is there anything you can say to put a time line to that? What the shape of the curve of that improvement may look like?

We'll provide guidance each year as we go along, and it won't be long until we're providing our outlook for 2015.

Very good. Thank you.

Thank you.

And our next question comes from Mark Petrie from CIBC. Please go ahead.

Good morning.

I just wanted to ask about the performance of the Gildan branded Tees in the mass merchant channel and your level of satisfaction with the growth there and how you're thinking about that going forward?

Well, where we have our brand placed, it always sells fantastic. So the question for us, does this continually drive our placement?

We have always outperformed every time we placed a Gildan brand, whether it be a T-shirt, a sweatshirt. So our big challenge, to be honest, and our big opportunity at the same time is looking to get expanded distribution of our Activewear products.

So we're pretty comfortable that we will. And as we lever our overall brand positioning within both mass department and the specialty channels, there's huge opportunity for us to gain share in Activewear-type products.

And you've previously talked about a $100 million in retail account wins. Is that a number that you can update?

Yes, well, the number is probably closer to like $125 million because we've increased our guidance lately. So we've expanded beyond -- and probably, like I said earlier, that's probably because of our sell-through has been our expectations.

And we've also got new placement on those five new retailers in underwear, which we'll be shipping towards the back end of this year.

I think the most important thing is that the headwind for next year, based on the existing momentum we have -- there's new programs, a new shelf space, new product expansion -- really is going to give us a huge headwind on a year-over-year basis.

And if you look at last year, what we said was that a lot of programs that we got in 2013 gave us the headwind for 2014. Well, 2015 will be a bigger headwind as we go forward.

Tailwind.

Tailwind -- I mean tailwind, that's right. Tailwind. So we're positioned perfectly in terms of driving sales into next year.

Okay, that's helpful. Thanks very much.

Thanks.

And our next question comes from David Hartley from Credit Suisse. Please go ahead.

Thanks and thanks for taking my questions.

First, I didn't see it in the release anywhere. Your SG&A as a percentage of sales, if you're guiding towards about 12% for the year, down from 13% last year. Would you expect that number to actually be even lower than that, given some of your updated guidance here?

You're talking about for this year?

Yes.

It will be slightly down as a result of the increased sales, yes.

Okay. Just wanted to clarify that.

The other thing, just on the manufacturing side and the capacity constraints, et cetera. When you look into Q3 and Q4, you'll be very tight in terms of your production and capacity utilization.

Have you ever seen a situation like this -- as tight as this is -- in previous years, and if you've had any challenges or opportunities with that?

Throughout our entire history.

Sure.

Even though we've been the only Company in the industry always making significant capital investments for capacity expansion. As much as we've brought on new capacity, we've always run at 100% capacity utilization and needed more capacity to continue to support our growth.

And with that, though, I would say that one of the new strategies we have right now in terms of building our Costa Rican facility, we're going to have enough infrastructure there to put three Rio-type facilities up. So once the first plant is up and running, we can actually incrementally add capacity relatively quick to support our future needs.

Because at the end of the day, that's our goal. We're getting bigger, and the tranches of capacity we need to add are going to be bigger at the same time as we maximize our sales growth.

So we're in position right now that we're continuing to run at 100%. We're going to bring on incremental capacity for sure before Costa Rica comes online. And then once Costa Rica comes online, we'll be in a position that we can add additional capacity, if required, within that hub that we're building.

Great, that's helpful. Thank you very much.

Thank you.

And our last question comes from Brian Morrison from TD Securities. Please go ahead.

Thanks very much. Appreciate all the color on the call. It's been very helpful.

I have just two follow-up questions.

First one, did you quantify the amount of the manufacturing inefficiencies in the quarter? And did I hear you correct that it's $0.15 for the third quarter?

And the second question I have is with all the success in retail and global lifestyle in terms of volumes, are there any reasons that the Branded margin shouldn't get to where Printwear margins are with heightened volumes over time?

If I heard you -- your voice was faint -- but I think you asked what the impact of manufacturing inefficiencies in Q3 is? The total amount of year-over-year negative impact in EPS of manufacturing inefficiencies and inflation, both together, is close to $0.15.

And for Q2?

And for Q2, it was smaller number -- about $0.03, which was mainly in Branded apparel. Overall, our manufacturing efficiencies were slightly positive in Q2 because of the textile manufacturing efficiencies.

The other factor also impacting Q3 is the higher year-over-year cotton, which negatively impacts EPS, as I said, by about $0.10 per share.

Sure.

And to the latter part of your question is, like I said earlier, that our objective in Branded is to have the same type of margins and returns as we do in the Printwear business in the long run.

Very helpful. Thank you very much.

We have no further questions at this time. I'd like to turn the call back to Sophie for closing remarks.

Thank you.

Once again, I'd like to thank everyone for joining us this morning. And we look forward to speaking to you soon. Have a great day.

Thank you, ladies and gentlemen. This concludes today's conference.

Thank you for participating. You may now disconnect.