Gildan Activewear Inc (GIL) 2014 Q3 法說會逐字稿

Welcome to the Q3 2014 Gildan Activewear earnings conference call. (Operator Instructions). Please note, that this conference is being recorded. I will now turn your call over to Sophie Argiriou. Sophie, you may begin.

Thank you, Angela. Good morning everyone, and thank you for joining us. Earlier this morning, we issued our press release announcing our earnings results for the third 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 U.S. Securities Commission and are available on our website at www.gildan.com.

With me on the call 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 third quarter performance and our business outlook for the fiscal year and will be followed by a Q&A session during, which Glenn and Laurence will respond to your questions.

Before we begin, I would like to remind you that today's conference contain certain statements which may constitute forward-looking statements within the meaning of the U.S. 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 U.S. Securities and Exchange Commission and Canadian Securities Regulatory Authorities that may affect the Company's future results.

And with that, I will turn the call over to Laurence.

Thank you, Sophie, and good morning. Today we announced our results for our third quarter and provided sales and earnings guidance for our fourth quarter. Our Q3 results were as projected in May, and projected quarterly sales and earnings for the fourth quarter would be a record for any fiscal quarter in the Company's history even though the third quarter is the peak selling season for T-shirt.

Consolidated sales revenues increased by approximately 13% in the third quarter compared to the third quarter of last year, driven by strong unit volume growth in all our target markets in both operating segment. Our brands continue to achieve market penetration in retail in spite of production constraints which limited our ability to maximize our sales growth opportunities. Branded Apparel sales were up by 16% over a strong Q3 comparative from last year which included the initial stocking of our national underwear program. NPD data shows that the Gildan brand achieved a 6.5% share in men's underwear in the June quarter. In less than one year since the start of our first major national Gildan Branded underwear program, and is now the number three underwear brand in market share. We generated double digit growth in all product categories, and continue to deemphasize private label programs. In addition we began the ramp up of major new programs for global lifestyle brands in both activewear and socks.

International sales in printwear also grew strongly. Sales to international markets in Europe and Asia-Pacific region were up over 40% compared to the third quarter of last year. Growth in these geographical markets was partially offset by lower sales to Mexico where overall market conditions were weaker than last year.

Sales growth in the third quarter benefited from the extra week which we take every six year to maintain the alignment of our 52 week fiscal year with the calendar year. The benefit of the extra week this year was mitigated as it included the extended Fourth of July holiday.

In spite of the strong growth in sales revenue, EPS was the same as the third quarter of last year. The positive impact of the strong growth unit sales volumes together with higher printwear selling prices including the non recurrence of a distributor inventory devaluation charge in the third quarter of last year and a higher valued product mix was fully offset by higher cost cotton which negative impacted results in Q3 by close to $0.10 per share and the $0.17 per share impact of inflationary cost increases and manufacturing inefficiencies which primarily impacted results for Branded Apparel. These inefficiencies were largely anticipated and were discuss in our Q2 call.

As a reminder the result primarily from the short term impact on production of installing new sock manufacturing equipment, new equipment to the former Anvil textile facility and new underwear knitting equipment at Rio Nance 1, as well as the impact of the training of new operators to support the doubling of underwear manufacturing capacity in fiscal 2015. In addition we incurred unanticipated rework and repackaging cost in Branded Apparel in the quarter to service key retail programs and mitigate the impact of production constraints. These manufacturing inefficiencies and inflationary cost increases negatively impacted consolidated margins in the third quarter by over 300 basis points, resulting in a decline in consolidated gross margins to 28% compared to 31.5% in the third quarter of last year. The impact in gross margin for Branded Apparel in the third quarter was approximately 700 basis points, which was partially offset by volume leverage on SG&A expenses as a percentage of sales. Selling prices for Branded Apparel have not been increased at this point in order to drive market share penetration as we build our initial brand platform in retail.

EPS for the fourth quarter are projected at $1.06 to $1.09 on sales revenues in excess of $700 million. Although fourth quarter EPS are projected to be a record for the Company and up 28% to 31% compared with the fourth quarter of last year, our full year guidance is now projected to be at the low end of our previous range. The reduction in projected EPS for the fourth quarter and full year compared to our prior guidance is primarily due to $0.02 per share dilution from the acquisition of Doris due to the accounting requirement to include the concept of a manufacturing margin in opening inventories, continuing manufacturing inefficiencies and slightly more unfavorable product mix. Excluding the impact of Doris, which is projected to add $20 million to sales revenues in the fourth quarter, sales revenue for Branded Apparel are projected to increase by approximately 30% -- (Inaudible)30% compared to the fourth quarter of last year. Underwear sales in the fourth quarter are forecast to more than double compared to fourth quarter of last year.

Overall sales of Gildan Branded programs are projected to increase by approximately 70%, and sales of Gold Toe Branded programs are expected to increase by over 20%. The projected growth in EPS in the fourth quarter compared to Q4 of 2013 is primarily due to sales volume growth. Manufacturing efficiencies in the fourth quarter including the initial benefit of new capital investment projects are projected to be slightly positive in spite of the continuing transitional manufacturing inefficiencies and inflationary cost increases.

Cotton costs and cost of sales in the fourth quarter are expected to be comparable to the fourth quarter of last year. Cotton costs in the first half of fiscal 2015 will be higher than the fourth quarter as we consume higher cost cotton purchased during the recent spike in the price of cotton. Cotton costs in the second half of fiscal 2015 are expected to be lower than both the first half of fiscal 2015 and the second half of fiscal 2014.

We have maintained our guidance for capital expenditures in fiscal 2014 at close to $350 million. About half of the fiscal 2014 capital spending is for our three new yarn spinning facilities including the ramp-up of the Salisbury ring-spun yarn facility which began operation in the second quarter and is ramping up according to plain. The balance is primarily for our textile and sock manufacturing operations in Honduras and the new Honduran distribution center as well as the initial investment to purchase land and initial project planning and preparation for our new textile facility in Costa Rica.

In order to alleviate capacity constraints and bridge capacity requirements to the construction and ramp-up of the new Costa Rica facility we have today announced that we have begun site development for another new textile facility which will be located at Rio Nance and be used to support our strategy to introduce more high valued products. This facility is planned to have similar production capacity as Rio Nance 1, but will be larger in size in order to accommodate sophisticated equipment and technologies to produce high value products. It is expected to begin production in time to support our sales growth in fiscal 2016. The Costa Rica facility will now begin production in 2017. The two new facilities when completed will provide an increase in textile capacity of approximately 40% compared to our current footprint today as we exit fiscal 2014.

In summary, our results and outlook provided today reinforce our continuing progress in successfully implementing our growth strategies and executing on the growth and value drivers that we have communicated. We are achieving strong top line growth in sales revenues through developing our portfolio of consumer brands in retail and continuing to build on our industry leadership position in printwear. The success of our initial Gildan, Gildan Platinum and Gildan Smart Basics branded programs is continuing to result in new branded program, increase 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 have been continuing to build in our leading market share for Gold Toe men socks, and have had great success in leveraging the Gold Toe brand and brand extensions in particular G by Gold Toe into other markets and other product categories. In addition, we will begin to shape the new Mossy Oak underwear program in the current quarter and have obtained other new programs for the Mossy Oak brand in all product categories for fiscal 2015. The Mossy Oak brand is continuing to generate high interest in multiple channels of distribution.

We are continuing to support our brands with major capital investment in our vertically integrated manufacturing to further differentiate our product technology and product quality and widen our cost competitive advantage, including our two new textile facilities and our three new yarn spinning facilities. While the rapid pace of change is resulting in some short-term stress manufacturing operations to support our growth, we are confident in achieving the significant manufacturing cost savings which we have projected.

Finally we are excited about the revenue synergies which we project to achieve from the acquisition of Doris which closed early in the fourth quarter. Doris is the third largest marketer of branded ladies legwear in North America, the market leader in Canada. Its Company owned brands include Secret one of the most recognized sheer pantyhose brands and growing brand for shapewear in Canada, the Silks brand and Therapy Plus which provides therapeutic legwear solutions for medical conditions and everyday activities. In addition to providing Gildan with a sales infrastructure and distribution for our Gildan and Gold Toe branded products in Canada, the acquisition adds well recognized ladies' brands to complement our product offering to our existing customers in the U.S. Doris also has strong presence in the food and drug channel.

Now that our organic strategies and value drivers are clearly defined and being successfully implemented we will continue to actively seek further new acquisitions which will complement our organic sales and earnings growth, utilize our unused debt capacity and projected continuing strong cash flow generation and further enhance our returns on capital.

Thank you, Laurence. That concludes our formal remarks, and now we are ready to take your questions. Since there are a number of you who would like to ask a question, I ask that you limit yourself to two questions and then reenter the queue. If time allows, we will circle back for a second round of questions. I will now turn the call back over to the operator to begin the question and answer session. Angela?

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

Good morning. When we look at cotton prices did decrease significantly in the last months, and I was wondering how does that impact your selling price in the printwear channel? I was wondering is there a risk that we can see an inventory devaluation in the future?

First of all, the price of cotton decrease after the June 22 time frame which is the end of the crop year of 2014. So what has happened right now is in our cost of goods and that is what Laurence mentioned in his commentary, that we will have higher cost cotton for the first half next year than we did in the second half of this year and then we will start benefiting from lower cost cotton in the second half. Now the thing is that when you look at historically when we had a de-val the last big one which is when cotton traded at $2 and went down to $0.90 which is a quantum change in price. Even in the current marketing year this year, in 2014, cotton traded between $0.75 and $0.95. So from where it is today even though it has gone it is not that significant relative to where it traded in the last fiscal year. So we are pretty comfortable with where cotton is going.

And as well as that there is a lot of inflationary pressures in manufacturing in general for us and as well as our whole competitive landscape, in terms of labor, transportation, dyes and chemicals. So we are feeling pretty good with our pricing. Pricing has been relatively very stable in the market, so we don't see any big impact in term of a devaluation in the near future.

Okay. Thanks, that's helpful. And I was wondering if it would be possible for you to break down the production capacity for your two new plants? I was wondering how much capacity will each of these plants have?

I think what Laurence said is that the new plant in Rio Nance will be the same size -- Rio Nance 6, we are calling it, will be the same size as Rio Nance 1 and the plant that we are building in Costa Rica will be more similar to Rio Nance 5, so just to give you an idea of the scale. But collectively tem capacity -- and this is all based on mix. So the footprint of our new facility will obviously be larger than Rio Nance 1 because of the complexity of some of the products we are going to be making there which will be more fashion, polo type products and a lot of different performance type products which we are in the process of developing for future product categories. In general I would say that if you just make the assumption and you take the footprint of 2014 and you add 40% to that number I think that is a good realistic view of it. And if you want to quantify that into potential sales, I would say that is just under $1 billion in revenue that can be generated from the textile capacities that are coming on.

Okay. All right. Thanks so much.

Our next question is from Anthony Zilch from Scotia Bank. Please go ahead.

Good morning, gentlemen. Glenn, how long will it take for Gildan to double its market share in the men's underwear category?

I would rather not say that to be honest with you. But I would just say, look, we are pretty comfortable in terms of increasing our capacity of underwear and doubling it from the current levels at which we began fiscal 2014. We are projecting to have double in terms of unit sales growth in Q4. We are continuing to have more placement amongst other retailers, so we are pretty comfortable with growing signifanctly as we go forward into 2015. We are now the number three player in the industry. And one of the things is I think is we waited before we started giving market share because we wanted to have a good visibility on a 12-month cycle. But we will definitely see the share gain grow as we move into 2015, and obviously we are projecting at doubling our capacity we are projecting to have significant higher market share.

Maybe point even to add in terms of our success in underwear winding back the clock in history when we started Gildan in the wholesale market, it took us ten years to generate 10% market share and that is the time we went public in 1998. Our ability and our success so far in terms of the share we gained in such a short amount of time just gives you an idea of the huge momentum we have, our capabilities, our cost structure, our quality message, so we are very excited about our growth in underwear as we go forward in 2015.

Okay. And with reference to Q4 results expected to be blockbuster could you give us some color on in terms of your pipeline of new prospects going into 2015 in the branded segment, and could we see the GT brand introduced over seas next year?

Well, I would say look at what's happening is that we gained a lot of shelf space. Like we said earlier in our last call that our programs that are setting and volumes in which we will be selling into Q4 and that is one of the reasons why our underwear is doubling, our Gildan brand is performing fantastically. Our Gildan brand now is going to be about the largest brand in our portfolio and it is going to increase by 70% this year, in the quarter, and we project our Gildan brand actually to increase by at least another 70% in next fiscal year. And as far as our Gold Toe brand is concerned it is growing strong as well because we are leaving in not just in the socks but obviously in the socks but obviously in the activewear and underwear. And we are going to have a strong growth in Q4 of about 20%.

As we look at Q4, I think you can see that the momentum we have in all of our brands will go into 2015. I don't want to comment on specific programs at this point in time. But we are definitely in the process of obtaining new programs, new shelf space and maximizing the existing programs we have today. As far as Gold Toe in Europe, we don't have any plans right now in the short-term to bring that brand to Europe. We have actually started to market our Gildan brand in retail in Europe. We have had some success in a small way, and we have also selling our Gildan brand in retail and all the markets that we are selling to in our international business and part of our actual growth of our 40% increase in Europe and Asia some of that is contributed to retail success as well in those markets with the Gildan brand.

Okay, excellent. Thank you very much.

Thank you.

Our next question is from Kenric Tyghe from Raymond James. Please go ahead.

Thank you. Good morning. If I could just following up on the (Inaudible) questions. Could you provide some insight on when you are currently hedged through three and four. And further to that, you have been very disciplined in terms of your pricing strategy, you haven't taken pricing in retail. Could you provide us a little color on your relative competitive position there and your perceptions on that given your price discipline versus key competitors?

I mention before as far as cotton is concerned, I think this quarter our cotton cost year-over-year will be the same, next half next year cotton will increase, will be higher than this fiscal quarter and the back half will we start to benefit obviously from the lower cost cotton and the second half of next year will be lower than the second half of this fiscal year. As far as our pricing is concerned, in retail we have never increased prices based on cotton and as well as based on all the inflationary factors that are out there. We are very competitively priced. We are priced where we think we can make very good returns. At the same time there will be zero impact as far as we are concerned in terms of our pricing at retail based on cotton. I think we are very comfortable with that and our positioning as well as our pricing and our position within the market.

Great, thanks. Is it fair to assume at this point you are hedged through the end of your second quarter next year or at least into summer of next year? How should we be looking about where you are currently hedged through on cotton?

I would rather not say to be honest with you. I think what we will commit to is that in the second half of next year we will have lower cotton than we did in this fiscal year.

Fair enough. And just switching very quickly, Laurence, you highlighted 700 basis points of gross margin compression in your Branded Apparel. Could you break out or provide some sort of bridge as to how much of that was the unexpected repackaging for key new account wins versus the expected pressures in the branded segment?

We said that the total EPS impact of manufacturing inefficiencies in the third quarter was $0.17 per share and the number that we were projecting on our Q2 call was about $0.15. So the difference is the impact of these repackaging and rework costs actually they were slightly higher than that but slightly offset by more favorable manufacturing efficencies from our capital investments.

Thanks. I will leave it there.

Our next question is from Taposh Bari from Goldman Sachs. Please go ahead.

Good morning. It is Chad on for Taposh. My first question is actually on acquisition. Obviously you got the Doris deal done. You said in the prepared remarks that you are looking at other deals with the possibility of taking on leverage. When you guys think about leverage relative to acquisition, can you give us some pramters around how much you are willing to take on, and/or as a follow up what are thinking for the timing of acquisitions? Do you need to get this deal completely integrated or how do you think about that?

Right now, look, as far as we are concerned our focus is obviously to continue driving our organic strategy. We have huge momentum in every part of our business. Our printwear business is continuing to grow with new products, our international business is growing and our retail business obviously has got a huge momentum in all the categories which were selling into retail. So we are very happy with our organic strategy. The idea for us in terms of acquisition is to really look at how we are going to complement. Our first phase is how are we complement our organic strategy. And Doris is a good example of that where we purchase Doris to get a new product category which Gildan was not providing before. It gave us a new geographical expansion into Canada and infrastructure to support that market, it gives us access to the food and drug market which we think is a big market for not just here but underwear and socks as well. So the idea is that we are going to be a little tactical about how we go around our acquisition strategy and make sure that we can complement our organic strategy and that is really the key focus for us as we go forward.

As far as the levers concerned I think we have indicated is that we are not planing to lever up our balance sheet. We want to maintain a conservative balance sheet but we agree we can put some lever in our balance sheet, but at this time we are really focusing on complementary acquisitions that will drive our organic strategy and they can even be brands as well as some thing we are looking to acquire. So I think that is really our focus let's say for example. Now as far as Doris is concerned this acquisition will be pretty well integrated in a couple more months. It is an operation basically of small manufacture facility in Canada which we are leaving intact as we see, so the integration of it will be behind us as we go into early 2015. It is not going to be a question of timing for us. It is a question of what the right fit is going to be.

That is helpful. Thank you. And then just a quick follow up question on the Gildan brand internationally. As you guys go to market both in Europe and in Asia in the Branded product what do you see as the unique challenges to those different markets relative to the U.S. where you guys have had some great success so far? Thanks.

The markets are relatively similar. I mean some of the products are a little bit different in fit and styling, but we have already adapted to that. We have had huge growth in all these markets. Our Europe business has been strong every year for the last 5, 6, 7 years, and out Asian business is really what's fueling a lot of our success. That business was up significantly, I think over 70% this quarter over last year. So we have very good success. What we are doing is just levering the same success we have had in the U.S. And that is really the whole key with our international business is that we are selling the same products to another geographical market. They might be tweaked a little bit. But we are leveraging all of our manufacturing strength and all of our core competency and even levering our brand strength basically to support these markets. Our main volumes in these markets today are currently wholesale, but we opened up a retail division in Europe, in Germany where we have a full distribution center to add value services. And we have begun to -- it is early days for us there but we are making traction. We are shipping our products in Latin America in retail. So it's happening, and we think that over time this is going to be a growth driver for the Company basically. But we are just levering our success from the U.S. market right and growing those markets.

Great, thank you.

Our next question is from Stephen MacLeod from BMO Capital Markets. Please go ahead.

Thank you. Good morning.

Good morning.

Just wanted to inquire a little bit about what you saw in the quarter from global lifestyle brands and national accounts which you have highlighted in the past as good growth opportunities.

Sure. Well, what we did this quarter we had another strong quarter actually in both of those categories. In the global lifestyle brands our focus right now is to continue developing our Anvil facility where put in all the new equipment which is fully installed. And what we are doing right now is we are focusing on all the new products and fabrications that we need to provide that division. And we are going to grow significantly in Q4, but we will have further big growth in fiscal 2015. We also began to sell socks in the global lifestyle brands as well. So we are levering not just the activewear and underwear but we are also levering the other product categories and classes that we can provide. And our national accounts business we are working in a soft retail environment but it showed about a 6% increase in the quarter.

Okay. Great, thank you. Just as we look forward between now and bridging the capacity gap to Rio Nance 6 coming online, is there any way to quantify what sales opportunity you are missing out on?

The thing about missing the sales from our perspective right now is that in retail and underwear and socks when you are not in stock fully, those sales opportunity basically just go away, right. So basically because it is POS driven. So we definitely lost sales in Q3 because of our lack of in stocks let's say for example, so probably it was around $15 million to $20 million that we figure in Q3. Part of what has happened to us in terms of being able to drive the volume in which we are in stock. I'm just going to maybe separate those into two categories. Our socks basically were out of stock this fiscal year and we have now installed 600 knitting machines in our Rio Nance facility we have made a major investment and our socks in stock are where they need to be. And underwear will be in stock probably by the end of this month in August the latest as we complete all the palates in our back to school push we will be back in stock. And our capacity it will be in line to support our future needs. So the answer is to your question is that in Q3 we lost about $15 million to $20 million and those sales won't come back until next year.

And just finally as a follow up on that, does that impact your goodwill with some of your retail customers?

Well, the thing is that our out of stocks is a function of the tremendous success we had. I think we have exceeded our own expectations. We exceed I think our customers' expectations. One thing I can tell you is that what we have been able to do in terms of building our underwear capacity and it is not just -- people say, double your capacity. Well, you need to get the yarns, you need to get the knitting equipment, you need to build all that labor and infrastructure. So there is probably no other company in the world that can do what we did in three months actually to -- we have trained 5,000 employees. So if you look at what we have been able to do as a supply chain partner to all of our customers basically I think that Gildan has proven that it can lever it its supply chain muscle basically and react quickly to servicing the customer needs, and that is really our strength.

And it is not just -- a lot of things that we do in terms of the quality of the products we are making and the yarns that we use are not readily available in the market because that is our whole competitive advantage is we are using better quality fabrics and better quality products than that of our competitors. It is a combination of building all that together has really given us I think the secret sauce really in our supply chain that allows us to grow. We are very comfortable, we are adding a lot of capacity, we are spending $350 million this year. We are planning to have a larger CapEx in 2015 than we did in 2014. What we said in 2015 our CapEx is going to generate about $100 million of savings over 2016, 2017 and 2018, and next year will be a larger CapEx year than 2015. So there is a lot more cost reductions that are going to come along, make us more effect supply chain and more importantly to support our customers' needs and continue to grow our Company, but also to make sure that we are a partner for all of our customers. So we hope they understand that. It is not great to sometimes be out of stock but being successful sometimes is a good problem too.

Right, great. Thank you very much.

Our next question is from David Hartley from Credit Suisse. Please go ahead.

Thanks. Good morning. Just wondering the inefficiencies you cited the $0.17, as you continue to grow I suspect there will always be inefficiencies in the business until you merger out a bit, so that could be some time. But what would you expect would be omni present as a measure of inefficiency in terms of impact of your financial as we look forward into quarters near?

I'm not sure if we heard you properly there, David. If you could just maybe repeat your question to make sure we understand it properly.

Sure. I am just trying to get an understanding of what is the innate inefficiency in your production process as you continue to grow that we should expect in the coming quarters and years.

Well, the answer to that is that I think Laurence quantified what the inefficiencies in terms of what was our inefficiencies in Q3. We will have some negative efficiencies in Q4 but they are already going to be offset by some of the positive investments we made during the fourth quarter. I think as we grow, obviously there is inefficiencies and positive ones negative ones, but we have a lot of positive efficiencies like I just mentioned in terms of all the capital investments that we are building today and how they flow through our cost of goods sold over the next three year. So there is always learning and any time you are adding capacity or starting a new facility but that has always been the factor for Gildan ever since we have been building capacity every single year (Inaudible). I think this is a little bit out of the norm in terms of what we had to do to make that we serviced our customers and met our commitments and repacked and trained very heavily in a very short period of time, but that is really because of the success we had and that's something that is a little bit unusual.

I can tell you one thing though even though we doubled our capacity, we actually making the investments to increase it significantly from that doubled I'd say for example right now so we don't have to scramble for equipment as fast as we did this year. Some people fly inventory in, we flew machines in to get our production up. So that is the type of Company and the type of committment we made to our customers to make sure that we met their commitment. So what we are in the process of doing because we can't just measure our success in underwear, we are actually going to be in the position where we doubled from where we were last year and we are going to add a significant amount of production capacity above and beyond that as we go forward into 2015 just because we don't know how much we can sell. If sales are stronger, we will be able to take advantage of that. And the cost of capital isn't significant to us so we think it is a good calculated risk, and that will mitigate I think a lot of the things that happened to us this year.

Okay. That was kind of what I was getting at. Thank you. Sorry about the disjointed question. Second question I have is just I would expect as your products become more complex potentially, zippers, hooks, Velcro what have you, I just wonder about the supply chain in Central America as it stands today and as you perhaps move down the road towards more complex products, how well equipped is the supply chain in general in Central America to service your needs? And is Costa Rica part of the answer to that?

The answer to your question is that the complexity even though we are adding more fashion and more product categories to our lineup we are actually reducing our complexity as we go forward because we are streamlining our manufacturing. So for example as we build Rio Nance 6, we make polos, we make fleece, we make underwear, we make a whole variety of different products, but then we can now specialize, because some of these products that we are producing today in which we have we are making performance today, we are making polos today for example they are made in various factories. As we consolidate those products into other -- like into our new Rio Nance 6 facility our Rio Nance 2 and Rio Nance 5 and (Inaudible) we are going much more efficiently than they are currently running today. So we actually are going to benefit not only from adding capacity but we are also going to benefit from an efficient perspective. So that's really to awnser to your question.

So as we continue to add Costa Rica and so forth we continue to streamline our manufacturing and become more efficient and gives us the ability to still allow us to have more complexity in our products. And the other thing I think is the big differential between our business between, between let's say what we retail and wholesale is really the product in the finishing area. Retail basically it is packed in bags. It's got different finishing features, stickers when it's folded. Whereas when we ship wholesale it is printed six dozens in a solid case. We have actually separated those activities into separate plants that just perform retail activities and we are plants that just perform wholesale activities so we can better capture all of our costs basically and make sure that we manage those two things separately. We have a very good effect supply chain, there is no limitations to what we can do.

And as far as Central America is concerned, the reason why we are investing in the Rio Nance 6 facility which will allow us to have technology also technology that is not available there, because a lot of the product categories in which for example performance, printed fabrics a lot of those fabrics actually are sourced in Asia today. And this is allowing us to do what Gildan does best to is bring these product categories to this hemisphere, manufacture them in a very short cycle time basically and provide the best value, quality, relationship to our customers. We think we are very comfortable with our supply chain. We are very excited about Costa Rica. It is going to be a huge hub for us. And in Costa Rica we are not just going to have the ability to build textiles, but we have enough space and land there to put additional sock factories if we need it. So we can expand our capacity outside of what we are doing today just with the investment we just made. If sales continue to grow, we don't have the limitation in capacity with all the geographical distribution we have in our manufacturing right now.

Okay. And if I may just on depreciation, I guess we would have expected to be a little bit higher. How is that going to trend as we move forward here particularly as your CapEx budget gets larger?

It is going to continue to grow obviously as a function of how we spending. I think that when you look at our spending, we are going to have two big years of spending in 2014, 2015 and probably pretty significant still in 2016 and then our depreciation will grow, but at the same time we are growing our sales, so hopefully, not hopefully but it should be a constant percentage of our sales (Inaudible).

That's helpful. Thank you.

Thank you. Our next question is from Derek Dley from Canaccord. Please go ahead.

Thanks. Good morning. In relation to you guys doubling your underwear capacity next year is that going to come from new retail wins or market share gains at existing retailers or a combination of both? Can you just give us some more color on that.

A lot of the capacity in which we have increased our underwears even to service the programs we have today. In this fiscal year we basically were able to obtain new programs and new wins. That's why our fourth quarter basically we are having a double in underwear sales and 30% increase in our branded business. So a lot of new programs are coming in now. We still anticipate a lot of new opportunity into next year. The one thing we haven't quantified is really how much opportunity that is going to be, and that is the reason why we are pretty bullish, and we feel comfortable with the capacity we have now in terms of doubling that rate. That is pretty well going to be committed to as we go forward. And then the big question for us is going to be how much more can we bring on for next year, and that is why we are position even to add additional capacity as we go into 2015 because we haven't solidified all of those programs past the double. So whatever we put in capacity in place that is pretty well spoken through, through the new wins and the new programs we currently have communicated with our retail partners and the question is how much more can we do after that. That is the question that we still haven't answered yet.

Okay, that is great. Moving on to the margins on the branded side. The inefficiencies this quarter were about 700 basis points. Going forward are we going to see that? I mean there is still going to be some inefficiencies over the next couple of quarters. But are we going to see that decelerate or we shouldn't be using that 700 basis points going forward?

Yes, I would say, look, definitely we are going to have some inefficiencies but we are going to have like I said we are going have cost reductions flowing through too. But basically a large share of the training, the rework and those type of one-offs basically they won't happened as we go forward. But we always have a certain level of building as we go forward because of the newel facilities new facilities and so forth, but those were really I would say one-off.

You should definitely expect to see an improvement in Branded Apparel margins in Q4.

Okay. That is great. Thank you very much.

Our next question is from David Glick from Buckingham Research. Please go ahead.

Yes, good morning. Thank you. A question on gross margins, Laurence, it looks like implied in your guidance is roughly a gross margin in the 30% range which you did achieve one quarter last year. Obviously you had manufacture efficiencies and changes in cotton that impacted this year. Based on your comments on r FY 2015 it sounds like cotton is going to be relatively neutral if not positive. How do we think about the run rate of your gross margin? Is Q4 a representative quarter for you? So that is really question number one. And then number two we have a pretty good line of sight on your capacity expansion through FY 2017 obviously 2016 and 2017 are big ramp-up years, but how do we think about the capacity in FY 2015 versus 2014? Thank you.

I will answer the capacity question first. We're still significantly increasing our capacity with the existing footprint. Rio Nance 1 is going to be fully ramped up by the end of this fiscal year. And it didn't run at a very high rate during the course of this year, so all of 2015 will be supported by the capacity build of Rio Nance 1, and then as we begin 2016 Rio Nance 6 will come online and support really our build up for 2016, and then we will be supported through Costa Rica as we get into 2017. So we have a good plan in terms of managing our capacity growth. We think we have enough capacity to support next year, and we are also sitting with enough inventory basically we think to also support the year. So part of our inventory build a little bit is to support additional sales as we go into next year as well.

Is it fair to say you have a double digit increase in capacity for FY 2015 versus 2014?

Look, we are going to give our guidance December I would say. That is the first point. And the second thing is that, look, we have significant capacity in 2015 to support our demand and I think that is where we are at. But it is a significant increase over 2014.

Okay, great. And, Laurence, on the gross margin.

So on the gross margin our gross margins in Q4 will be a little under 30%. Going into next year we will provide our guidance in December, but there will be positive factors impacting margins as we go forward which will be the benefit of the cost reductions from the capital expenditures, nonrecurring stuff, transitional inefficiencies we have experience this year, improved mix, but how all the factors will come together in margins for next year I think we will leave that until we have done our budgets and we provide our guidance for next year.

Great. Thank you. One last quick follow up, on Costa Rica is that FY 2017 is that plan changed from when it was originally supposed to come online or that was the original game plan?

We are going to try to bring it on as quick as possible. The reason why we are pushing forward first with Rio Nance 6 is that it is a new hub. We need to get permits, we need to get certain things let's say for example that we just don't total comfortable we can rely on it coming on like we originally planned in case there is some slippage. So we are working to bring it on as quick as possible, so that is why we are 2017. It may come quicker if we can work quicker. We are not stopping to build the plant. We are going full speed ahead like we originally planned, but the fact is that our business is so strong right now, our momentum in underwear is so strong we just can't take the risk of it not coming in on time.

And it is a new hub, so it is not like what we do in Rio Nance. It is copy paste basically. We have the staff, we have the trained people. We can start hiring people and run them in the factory next door and then as the factory comes online just drop them in and we already have the personnel, the staffing, et cetera, the management. So we don't have that obviously in Costa Rica, because when you start the plant you have to hire new people. So we just want to mitigate exposure. Our business is very strong, and we just feel that it is prudent for us to put something incremental before it comes on. And if it comes on like we planned great, but we are saying 2017 now to be honest with you.

Great. Thank you very much. Good luck.

Thanks.

Our next question is from Mark Petrie from CIBC. Please go ahead.

Good morning. Just first on the Doris acquisition is there any change required in terms of the sales infrastructure or administrative infrastructure for you to be able to achieve the sales synergies that you expect for the Gildan and Gold Toe brands?

No. That is the whole reason why we acquired the company is because they have what we think is one of the best sales forces in Canada. So what we are going to do is we are going to lever their success, their relationship and basically allow them to sell our products obviously. They are already calling on all the customers. They sales every single channel of distribution from mass, to clubs, to department stores. So really for us it is just a quick way for us to build on their relationship and their infrastructure to support our brand strategy in Canada. At the same time to lever what they have and their brands in the food and drug area in the U.S. there is areas for us to expand their product categories in our existing brands as well in to mass and department stores. So it is a win-win. We are not just going to lever the Canadian opportunity, but we are also going to lever some of their products in the U.S. as well.

Okay. Thanks. And then just in terms of the retail market in the U.S., obviously the market share gains have been very strong. Can you just comment on the level of competitive activity and competitive response to your market share wins particularly coming in to back to school, which appears like it is going to be pretty competitive.

Look, right now we feel very comfortable with our positioning. We have been very competitively priced. We have a lot of promotional products and pallets and so forth, which will be hitting the market in the back to school period. I'm not sure today what our competitive response is. Typically there is a lot of promotional activity in back to school, but we feel very comfortable obviously with our forecast and our sell-through is very strong because we can't keep the product in stock. So I am not sure and I don't want to comment on my competitors, but at the same time we are very bullish and excited about our own sell-through. We can't keep the stuff in stock.

Great. Thanks.

Thanks.

Our next question is from Jim Duffy from Stifel. Please go ahead.

Thank you. Good morning. A couple of questions. First, related to a previous question about increasing complexity. Glenn, can you speak to any systems investments that you are making that might be necessary to better forecast demand and manage inventory flow in support of the scaling retail channel programs?

Well, we are consistently investing in our IT systems and infrastructure that is an ongoing process for the Company. But we have all the systems in place from I think an IT perspective to support all of our product categories. So systems is really not a hindrance in terms of what we are doing. We are always investing under heavily, so even though our systems today are more than adequate, but we are constantly looking and spending heavily on capital to improve them as we go along in the future to make sure we keep up to the realities of the future. So there is really nothing that is hindering us to produce these products. A lot of the products we are actually making today that we are going to be running in what we call complexity in Rio Nance 6, we are already running them. We are just making them in various factories and that is the real benefit we are going to have by managing the complexity in one place rather than putting in Rio Nance 5 where we are making performance, making polo shirts in Rio Nance 2 for example. As we take these products and streamline them, all the other plants will run more effectively and efficiently. So we feel very comfortable in terms of our ability to continue to add new products. It is going very well for us and we are excited about continuing to add new products as we go forward.

Very good. The Branded margins started to show some nice progress in 2013, but you have had these inefficiencies here in 2014 so it has been a little bit of fits and starts with branded margins. Laurence, when would you expect that Branded margins could begin to close that gap with printwear, and what's a reasonable near term objective for the branded margins?

Well, look, at the end of the day our objective like we said in the longer term our branded margins and printwear margins should be very close to the same margin at the end of the day. Even objectively longer, longer-term we want to get the same type of returns. So we feel comfortable with our strategy in retail. Definitely this quarter we had some obviously negative efficiencies. As we go into Q3 we will see those margins start to pick up again and as we go into next year we are going to continue to see margin expansion in that area.

The other thing is in addition to gross margin expansion we will also continue to get volume leverage from SG&A as a percentage of sales. We put in place the whole divisional infrastructure to support our growth in Branded Apparel and as we achieve more volume SG&A will continue to come down as a percentage of sales.

Okay. Thank you.

Thank you.

Our next question is from Andrew Burns from D.A. Davidson. Please go ahead.

Thanks. Good morning. Just a quick follow up on Doris. It sounds like educating and ramping the sales force on the Gildan and Gold Toe product is a pretty quick timeline, just wondering about capacity and the availability to feed that growth initiative in FY 2015.

It is obviously -- first of all, when we are going to be selling into retail into Canada I don't think anything will transpire before the end of the back half of 2015 as retailers work nine months in an advance, and we just purchased the company the last couple of weeks. So really what our focus is right now Canada is to start selling for the fall season which is really typically back to school, so we have ample time to adjust for any type of capacity requirments we would need to support sales in Canada.

Great. Your pricing strategy sets you apart at retail but certainly the product quality is a differentiating aspect. How are your efforts going to educate the consumers at the point of sale with regards to the unique product quality attributes?

We have done a combination of some extensive advertising programs to continue our awareness in all of our brands, which is both the Gold Toe and the Gildan brand. First of all what we are doing is we are advertising the consumer and the consumer awareness, and we have seen a huge growth in our awareness numbers basically on both those brands. Gold Toe is basically number one department store sock brand again which we accomplished this year through our advertiseing efforts. Gildan is now our largest brand in our portfolio and we are expecting to grow that by about 70% next year. So we will continue to spend more capital and advertising to support it.

As far as the in-store presentation, if you walk into any type of retail store you will look at our packaging, our product displays you'll see that not only do we have a better quality in the bag, but our packaging looks pretty good too. We think we have the best packaging in the industry, our display cases. So we are spending a lot of time in sign stores, store (Inaudible) in a lot of our retailers. So we are spending so the consumers can see our product visually, and if it is visually appearing to them, obviously it is proven it to be successful because of the success rate we had in our sell-through. So I think the combination of those two things making sure that the product quality is fantastic when they bring it home, that the packaging looks great so they want to buy our products in the store and we are spending money on advertising to support the brand, which we will continue to spend and we will increase that obviously next year as we continue to grow our brand and our sales we are going to continue to proportionally support that with advertising.

Thank you.

Thank you. Our final question is from Sabahat Khan from RBC Capital Markets. Please go ahead.

All right. Thank you. Just a quick question on the retail side. When do you think we will see some of the more innovative and new products that are coming out of the new yarn investment that you guys are making, a little more higher end stuff that you guys have been referring to?

We already have some of our better quality products already in our Gold Toe, in our Platinum brand if you walk into the national chains you will find our product there. It is in our activewear category there. So it is already in the stores. Part of our whole big push in terms of retail is to make sure that what we provide to retailers is significantly better than what is available today in the marketplace. We also have a lot of these products now going into Anvil our performance area where we are selling to the global lifestyle brand so we can support that piece of business. So it is already a big part entrench in terms of what Gildan is doing. And the big benefit is going to be as we continue to look at driving our printwear sales basically as we go forward. Part of our whole growth in the U.S. in printwear is basically to continue looking to add better quality fabrics than we had been in the past. And we are in the process of looking at ways to upgrade our existing product lines and use our technology basically to drive sales in printwear as well. It is pretty well everywhere in the organization, and we are bringing on these plants as fast as we can to support our business and we are pretty excited about it.

Thank you. Just on a CapEx side with the Honduras facility announced today I think you eluded to this earlier, but how does that change your CapEx plans for next year?

What I said is we haven't given guidance for next year, but our CapEx next year will be a little higher than it was this year.

All right. Thank you.

Thank you.

We have no further questions at this time.

Okay. Well, thank you, everyone. This concludes our call today, and we thank you for having joined us this morning. And we look forward to speaking with you soon. So have a great day.

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