漢佰 (HBI) 2006 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Hanesbrands Incorporated First Quarter Investor Call. My name is Onika, and I will be the operator for today. At this time, all participants are in listen-only mode.

[OPERATOR INSTRUCTIONS]

I would now like to turn the presentation over to your host for today's call, Mr. Brian Lantz, Vice President of Investor Relations. Please proceed, sir.

Thank you, Onika. Good morning, everyone, and welcome to Hanesbrands Inc.'s inaugural investor call and webcast. With the recently completed spin-off from Sara Lee, the filing of our 10-K for fiscal year 2006, and the closing of our first quarter just three and a half weeks after becoming independent, we are excited to be speaking with everyone today about our business. By now, everyone hopefully has had a chance to review our news release issued earlier today. The release can be found in the investors section of our hanesbrands.com website, as can the webcast of this call and the accompanying slide presentation.

Before we begin, I want to remind everyone that participants on the call today may be making forward-looking statements, either in our prepared remarks or in the associated question and answer session. These statements are based on current expectations an are subject to certain risks and uncertainties that may cause actual results to differ materially. These risks are detailed in our Form 10-K filed with the SEC, and we encourage everyone to read this, along with all of our other filings.

The company does not undertake to update any forward-looking statements, which speak only as of the time at which they are made. As I mentioned earlier, this is a very exciting time for us here at Hanesbrands, and we are glad to take this opportunity to speak with all of you. On the call today are Rich Noll, Chief Executive Officer, Lee Wyatt, Chief Financial Officer and myself, Brian Lantz, Vice President of Investor Relations.

At the close of the quarter, we were only three and a half weeks into our independence, so this will not be a typical earnings call. More specifically, we would like to accomplish three objectives on our call today. First, we want to ensure that everyone has a healthy understanding of our business model and our strategies for thriving as an independent company.

Second, we will provide you with the longer-term growth goals for our sales, operating profit and EPS. And, finally, while Hanesbrands will follow a policy of not providing quarterly or annual EPS guidance, we will offer perspective today on both our historical financial trends and our most recent financial performance that will allow investors to begin to build a baseline, or a starting point, for understanding our company.

With those objectives in line, Rich will speak about ten minutes, providing an overview of the company's business, as well as an outline of Hanesbrands' strategies for the future. Lee will then take another ten minutes to review our financials, including comments on the most recent quarter and key assumptions for Hanesbrands' financial profile as we move forward.

Following our prepared remarks, we have allowed ample time to address any questions that you may have, so, with that backdrop, I'll now turn the call over to Rich.

Thank you, everyone, for joining us today. We are excited to now be independent. As Brian mentioned earlier, our three objectives on the call today are to help you build an understanding for our business and our long-term strategies, to share our long-term growth goals, and to help investors establish a baseline of our company.

Before I talk about our long-term strategies, let me first give you some background about us as a company. We have strong brands with leading market share positions. We focus in high-volume, core essential categories where we can have a significant scale of operations, and an important part of our business model is that we have strong, significant cash flow generation capabilities.

We have four major reportable segments, innerwear, outerwear, hosiery and international. Innerwear is comprised mainly of men's underwear, women's intimate apparel, kids' underwear and socks. Innerwear are sold mainly in packages that consumers replenish with a high frequency of purchase. For example, men's underwear is purchased three and a half times per year, women's panties over four times per year. Our second largest segment, outerwear, is comprised mainly of T-shirts, fleece and other activewear-related products.

Sheer hosiery is an industry segment that has been in long-term decline, shrinking between 8 and 12% per year for well over a decade. We expect this decline to continue and therefore we manage this segment for cash, as evidenced by the high return on sales. International is comprised of both innerwear and outerwear, mainly in Canada, Mexico and Japan. We have strong market share positions, having the number one or number two dollar share positions in all of our core categories.

On a units basis, we have the number one position across all of our core categories. We are also diversified across channels, and while 44% of our sales are to mass merchandisers in the United States, we also have strong positions in department stores, national chains and in our own direct-to-consumer business. That's a thumbnail sketch of our company. Let me now shift my commentary to our strategies.

We have three major strategies that will drive sales growth, operating margin expansion and EPS growth. We will build our largest, strongest brands in core categories by driving innovation in key items. We will continually reduce our cost by consolidation our organization and globalizing our supply chain, and we will use our strong, consistent cash flows to pay down debt and drive EPS growth.

Let's discuss our sales growth strategy for a few moments. As I said, our strategy is to grow our largest, strongest brands in core categories by driving innovation on key items. Let me give you a recent example of this strategy. Not long ago, Hanes launched the Tagless T. We brought that innovation to a core category, men's underwear, into a key item, men's underwear T-shirts, and we used all of the disciplines of a consumer products company, from PR to advertising to coordinated point-of-sale materials as well as promotions, to cement the concept of Hanes Tagless T forever in consumers' minds.

That innovation worked. It took the underwear T-shirt category that was declining 2% a year and driven by our growth turned it into growing 8% per year. Our current initiative for the Hanes brand and innerwear segment is ComfortSoft. We wrap elastic in 100% cotton so there's no elastic touching your skin. We have identified a segment of the population that is very attracted to this comfort benefit. In women's panties, we are able to charge substantially more for this product feature, and you will see many of these types of innovations introduced over the next few years.

The second major initiative for Hanes is to own the T. While we have the number one share of this market, it is extremely fragmented, and our number one share is just around 5%. We can help our large retail partners to grain share in this highly fragmented market in the US. To do that, they are looking for, and we have, strong national brands with a point of difference.

For example, over the next six to 12 months you will start to see the Hanes Beefy T brought to retail. It will allow our retail partners to be able to charge about 20 to 25% more at retail than the national-branded basic opening price point. That will allow our retail partners to increase their average ring, us to increase our average sales price and both of us to gain share in this very lucrative market.

Hanes, our largest brand, is over $4.5 billion at retail and is in over 85% of US households. And therefore it is a clear priority for us. But we also have a number of other large brands -- Champion, Playtex and Bali are each approximately $500 million at retail. Champion is a great franchise, doing extremely well, driven by the growth of C9 by Champion, which is an exclusive arrangement at Target. We have opportunities to continue to expand our product line of C9, as well as to continue to drive distribution gains through both the mid-tier and sporting goods channels with the traditional Champion brand.

Playtex has a very strong core franchise. Consumers are extremely loyal to the product base and we will continue to innovate for that loyal consumer. We've just had the largest launch in the history of Playtex this past year when we introduced a front-close bra under the 18 Hour line. And Bali is an intimate apparel brand that is sold in department stores that we believe has the opportunity to become a larger mega brand in intimate apparel, to give the department stores an alternative to Victoria's Secret for that much sought after Victoria's Secret graduate.

Our second strategy is to reduce costs, primarily in two ways. The first is through organizational consolidation. Historically, Sara Lee Corporation was a very decentralized organization and apparel was no different. We were comprised of over nine different operating units. For Hanesbrands to be successful, we decided that we needed to be one fully integrated operating company. We undertook this challenge about 18 months ago. Since then, we have downsized headquarters approximately 400 positions. We are about halfway through this consolidation process, with the top two levels of all the organization being totally consolidated, and many of the functional areas being consolidated all the way down through the organization.

But we still have a number of functional areas that are yet to be consolidated, but this will happen in a slow, evolutionary manner, as we standardize processes and then eventually consolidate IT systems. The second area of opportunity we have is to reduce costs by globalizing our supply chain. The bar on the left shows the mix where the people in our supply chain are located. This is a look through including our contracting, self-owned manufacturing and distribution.

You can see that we still have about 20% of our people in the United States, a substantial portion of our people in the Caribbean Basin and a limited presence in Asia. This will change dramatically over time. Let's look at the bar on the right, which depicts labor costs. The 20% of the people in the United States account for 70% of our total labor dollars, so clearly we have an opportunity to continue to globalize our supply chain and reduce our presence in the United States.

The other major change is to balance our supply chain across both the Western Hemisphere and the Eastern Hemisphere. Therefore, you will see the mix between Asia and the Caribbean Basin equalize over the longer term. In terms of self manufacturing versus outsourcing, we currently outsource approximately 30% of the value of our cost of goods sold. We do not anticipate this ratio to change substantially over time. We make outsourcing decisions based on rigorous financial return criteria. Whenever we can invest and earn a return well above our weighted average cost of capital, we will self manufacture. We are fully engaged in pursuing this strategy of creating a [longer] supply chain. Let me give you some examples.

While selling has been offshore for a very long period of time, 18 months ago we initiated moving some of our textile operations to the Caribbean Basin. We've begun production in two offshore textile facilities, one in El Salvador and one in the Dominican Republic. In September, we announced plans to close three manufacturing facilities and relocate work to lower-cost facilities. Two weeks ago, we announced plans to consolidate three distribution centers in the United States in order to generate increased efficiency, and just last week we announced that we have entered into a definitive agreement to purchase a sewing operation in Thailand, our first owned sewing operation in Asia. So, as you can see, we are making good progress and are well on our way.

Our third strategy is to use our consistent cash flows to create shareholder value. Our first priority will be to invest in our business to drive growth and reduce costs. Our next priority is to pay down debt, which will be a natural catalyst for EPS growth. Long term, we believe our business characteristics can support above-industry average leverage. This leverage will allow us to maintain a low cost of capital and provide future flexibility to maximize shareholder value.

Allow me to recap our strategies and outline our long-term growth goals. We will build our largest, strongest brands in core categories by driving innovation in key items. We will continually reduce our cost by consolidating our organization and globalizing our supply chain. We will use our strong, consistent cash flows to pay down debt and drive EPS growth. After establishing baseline performance in 2007, we have the following long-term annual growth goals.

By building our brands, we can generate organic revenue growth of 1 to 3%. With our substantial cost savings opportunities, we can magnify that growth into 6 to 8% operating profit growth. And with our substantial cash flows and ability to pay down debt, we can in turn magnify that growth into double-digit EPS growth. We believe that these long-term growth goals should be sustainable for at least three to five years.

Now I'll turn it over to Lee Wyatt, who will provide you with a more detailed financial perspective.

Thank you, Rich. As Rich said, we have a focused sales growth strategy, as well as significant cost reduction opportunities from both organization consolidation and the globalization of our supply chain. When combined with strong cash flow, these cost reduction opportunities make us positive about the future.

Now that you have a sense of the company, our strategies and the long-term growth goals, I would like to provide financial detail with regard to certain aspects of Rich's commentary. I will also give an overview of our historical business trends, the results for the first quarter, ended September 30, as well as discuss our financial profile to help you establish a baseline for the company.

The consolidated sales trend for 2004 to 2006 generally reflects 1% growth in our core business, offsetting the declining sales in our sheer hosiery segment. The hosiery segment declines have been roughly 8 to 12% annually, and this creates a 1% decline in our overall consolidated net sales.

In addition to this overall sales trend, 2006 sales declined approximately 3%, due to our decision to exit certain low-margin product lines. The slight down-trend in sales continued in the first quarter ended September 30, based on the same factors. The gross profit rate in the first quarter was up 20 basis points to 32.7%. This rate includes restructuring-related charges of approximately $4 million. Excluding these charges, gross margin would have increased 60 basis points.

The SG&A rate in the first quarter was up 20 basis points to 23.5%. This rate reflects higher standalone expenses and spin-off costs, partially offset by lower Sara Lee allocations and favorable timing of expenses. Operating profit decreased by 9.6% in the first quarter. The decline was primarily from restructuring charges for plant closures, as slight changes in the gross profit rate and SG&A rate were offsetting.

The first quarter operating profit is above the prior-year quarter when restructuring and spin-off costs are excluded. Interest expense increased in the first quarter to $17.6 million, which reflects the increased debt incurred three and a half weeks before the end of the quarter, as a result of the spin-off from Sara Lee. The first quarter tax rate was 34%, and reflects Hanesbrands' independent tax structure.

Diluted EPS for the first quarter was $0.52 on 96 million shares outstanding. The calculation of prior-year diluted EPS of $0.86 was based upon total shares outstanding on September 5th, 2006, the day of our spin-off. As per accounting guidelines, this will be the share count used for historical comparisons. For the next four quarters, both interest expense of over $200 million, and a higher tax rate will significantly decrease net income and EPS when compared with historical financial results as reported under ownership of Sara Lee.

The ending balance sheet for the first quarter is our first balance sheet as a standalone company and is a good baseline. Historically, balance sheet trends reflect consistent inventory turns of approximately 2.5 times, receivables of 44 days and payables of 24 days.

We ended the first quarter with $209 million of cash. This balance will be reduced as we remit approximately $25 million to Sara Lee to settle intercompany accounts as of the spin-off date. September 30 balance sheet reflects 2.6 billion of debt as a result of the spin-off. Our unfunded pension liability has declined to $225 million as of September 30 quarter end. Our $500 million revolving credit facility was undrawn at the end of the quarter, and we're in compliance with all debt covenants.

Cash flow from operations has consistently been around $500 million, annually. The first quarter cash flow from operations of $55 million reflects our post-spin interest costs, higher tax rate, restructuring cost and cost related to the spin-off itself. The prior-year quarter cash flow from operations of $176 million was unusually high due to the timing of working capital reductions. Our EBIT in the first quarter reflects consistent performance at 11% of sales, which is the same as the prior year. Capital expenditures were $20 million for the quarter. This was 72% of depreciation.

Let me now turn our attention for the future. Today, we are announcing the change in our fiscal year end from June to December. We believe that a December year end is better aligned with our business cycle. The quarters ended September 30 and December 30, 2006, will constitute stub periods, with fiscal 2007 being a full year ending December 29th, 2007. In fiscal 2007, we have a goal of establishing a solid base on which to achieve long-term growth.

The company will have overlapped the net sales effect of exiting low-margin product lines by December 2006, and therefore the current annual sales run rate of approximately $4.5 billion reflects a good baseline from which to build. While Hanesbrands will incur increased cost as a standalone company and plans to increase investments behind its strategy, the company has a goal to substantially offset these increases with cost reductions, as well as the elimination of corporate allocations associated with previous Sara Lee ownership.

Hanesbrands believes that achieving this goal could allow its operating profit margin, excluding restructuring in the next fiscal year, to approach 9.5%, similar to the operating margin its most recently completed fiscal year. We believe that the ending balance sheet for the first quarter is a reasonable baseline for the business. We will focus on the opportunity to improve the balance sheet by $100 million between now and the end of fiscal 2007 by improving payables, receivables, inventory and cash balance.

Additionally, during the year, we will use excess cash flow to pay down debt. In summary, we feel that the base for financial performance can be established during fiscal 2007 and that we will be positioned to achieve our long-term growth goals thereafter. Let me now review the key elements of our financial profile. Our business model allows us to fund all business growth and execute our supply chain strategy by averaging capital expenditures at a rate equal to depreciation. Our annual depreciation is approximately $110 million.

Our excess cash low will be primarily used for debt reduction for the next couple of years. We do not anticipate making significant commercial acquisitions, but we will make smaller tactical acquisitions of plants where we can accelerate the shift to low-cost locations. There are no plans currently to declare a dividend. Over time, we may repurchase some shares to avoid dilution.

We've demonstrated consistent cash flow from operations historically and we expect to use it in the future to both service our interest requirements and pay down debt. Our weighted average interest rate was approximately 8.25% based on the current LIBOR rate and we will comply with the requirements at at least 50% of our debt, be it a fixed rate.

Our effective tax rate may fluctuate, but it is expected to average 30 to 35%. As I stated earlier, these last two factors, having interest expense of over 200 million and a higher tax rate will significantly decrease net income and EPS when compared with historical financial results as reported under the ownership of Sara Lee.

We expect to incur approximately $250 million in restructuring and related charges over the next three years to implement cost savings plans. These charges will be generated as we execute our supply chain strategy of shifting production to low-cost locations and consolidate our operation. About half of these charges are expected to be non-cash. The timing of the recognition of the charges will evolve as the supply chain strategy plans are finalized.

Our goal is to execute these plans as quickly as possible. Restructuring charges will generally be recorded on the income statement in two locations, the non-cash charges for accelerated deprecation of planned assets will be reflected in cost of sales. Other related charges, such as severance and lease buyouts, will be recorded on a separate restructuring line.

I'll now take a moment to review our debt structure. We have a $500 million undrawn revolver. Our total long-term debt is 2.6 billion and is comprised of 2.1 billion of senior debt, and 500 million in a bridge facility. The tenure of the revolver is five years, and the senior debt ranges from six to 7.5 years. The bridge loan will be taken out by a high-yield bond offering at some point.

So, in conclusion, we are well on our way to taking the company into this exciting new era in its history. We secured the capital structure to complete the spin-off and drive a low cost of capital. We have adequate liquidity and consistent cash flow to invest back in the business, service the interest and reduce the debt.

We have built on existing financial controls and recruited experienced financial staff to ensure strong regulatory compliance and accounting accuracy and we will continue to adhere to the highest ethical standards. And now I'll turn the call back over to Rich.

While we have much to do, our strategy is clear and we are focused on realizing the opportunities that we have as an independent company. We have a very focused strategy for growing our brands and increasing our cost competitiveness. In fact, we have already made significant progress in consolidating our organization and we are building momentum and executing our supply chain strategy to be balanced across hemispheres.

As Lee stressed, we now have the opportunity in fiscal 2007 to establish a base, and from that base we can look towards achieving our long-term growth goals. So, in closing, I'll reiterate those long-term goals. They are to have modest sales growth of 1 to 3%, which can be magnified via our cost savings opportunities to grow operating profit 6 to 8%, and with our ability to pay down debt we can grow EPS double digits for at least three to five years into the future.

Thank you, Rich. That concludes our prepared remarks and presentation. So, at this time, we will begin taking your questions and we'll continue as time allows. Since there may be a number of you who would like to ask a question to Rich or Lee, I'll ask that you limit your questions to two per turn so that as many of you can get the opportunity to pose questions as possible.

Thank you, and I will now turn the call back over to the operator to begin the question and answer session. Operator?

Thank you. [OPERATOR INSTRUCTIONS]

Your first question comes from the line of Omar Saad with Credit Suisse. Please proceed.

Good morning, thank you. I wanted to -- Lee, before I ask Rich a question, I wanted to ask you about the operating margins in the quarter year-over-year. It looked like if you back out some of the special item sand the restructuring, it looks like you had some nice operating margin expansion. And I guess what I'm trying to do is understand what the trends we're seeing are today and how to think about the investments you're going to make going forward and how that translates into your -- how to relate that back to your initial guidance for calendar '07 for an operating margin that approaches 9.5%.

Thank you. What we saw in the first quarter was starting to see the benefits of some of the cost savings initiatives we've implemented in the past and that's coming through nicely. We did during the quarter have one-time spin-off cost and we do have incurred standalone cost during this time, but generally we have seen reasonable trends. Some of this is timing in the first quarter versus the second quarter, but generally favorable first quarter results.

Yes, and Omar -- this is Rich. I'll just comment on it. I look at the first quarter as actually reconfirming pretty much what you saw through all of fiscal 2006 when you exclude the exit of the low-margin sales that we have undertaken. You've got sheer hosiery declines being offset by some modest growth in the core business and, because of our initiatives, some margin expansion. You saw that again in the first quarter.

Right, right. And how do we think about -- it seems like there's a little bit of disconnect between what you're seeing in the business today versus kind of how you're looking at it from calendar '07 from a profitability standpoint and I just want to get some insights into some of the investments you're going to be making that you kind of said at a high level will be offset by some of the cost savings opportunities. I just want to get a better understanding of the disconnect between what we're seeing today and the fact that you're looking for flattish margins.

Let me give you -- I think we've got the same type of momentum. We are taking on additional costs as a standalone, independent entity, as well as selectively investing behind our strategies. So you're seeing some of the continuation of our initiatives offset by these increased costs that we'll have through most of fiscal 2007.

Lee, would you like to talk a little bit more explicitly about some of those things?

Yes, as you think about standalone cost as a division of a larger corporation, we didn't have cost associated with financial functions, such as controller groups, treasury, external reporting, internal audit. We didn't have other costs like Board of Directors, D&O insurance, investor relations, equity compensation structures. Those type of things are adding additional cost to us. In addition, we'll see some incremental cost associated with investing behind our strategies.

Now, we'll hope to offset those during that period with continuation of all the cost-savings initiatives that we've outlined, and we will have lower allocations from Sara Lee, but our goal would be to offset those incremental costs primarily with those cost savings initiatives for '07.

Okay, great, and then it sounds like once you cycle those, you would probably be a little bit more comfortable looking for margin expansion as some of those cost opportunities continue to unfold.

Yes, in terms of the -- this is Rich. In terms of the long-term growth goals, we believe fiscal 2007 is the year for us to establish our base and those long-term growth goals we believe are applicable off of that baseline performance.

Okay, great, and then one top-line question on the outerwear segment. The growth there was probably a little bit better thane expected. Can you point to specific channels or specific brands or product areas that were outperforming?

I will say, in our business, you can easily have a lot of fluctuations quarter to quarter within a particular segment. It can end up with the timing of shipments of fleece this year versus last and sometimes it can call over one quarter or next, so I'd be cautious not to read too much into any individual quarter, but, Lee, do you want to comment more specifically about the quarter results?

Yes, I think what we saw in general, and, again, we will not focus as much on individual segments -- we will report segment sales, as well as segment profitability, in our SEC filings for the quarter, but generally we look at our business, I think as Rich pointed out earlier -- it's a continuation of the other trends that we've had in prior year.

Okay, thank you. I'll let somebody else ask questions.

Your next question comes from the line of Jeffrey Edelman with UBS. Please proceed, sir.

Thank you. Good morning. My first question is, as you are beginning to source in Asia, why did you take the route of buying a plant instead of outsourcing completely?

We've been outsourcing in Asia for a long period of time. Our strategy in the long term is to balance our supply chain equally across hemispheres, both the Western Hemisphere and Eastern Hemisphere. And, as I talked about before, we believe our outsourcing mix of about 30% is the right mix that we'll see long term. We used rigorous financial criteria to evaluate every decision on whether we'll self manufacture or outsource, and we believe that 70-30 mix makes sense not only in the Western Hemisphere, but also in Asia. Therefore, our strategy is to own facilities in Asia where we see a very viable financial return for doing that.

And in terms of making the acquisition in Asia, it really helps us jumpstart the strategy of self-owned manufacturing by giving us a strong management base from which to build.

And this is a plant you had been using in the past?

Yes, it's actually -- we're purchasing it from a contractor that we actually have a very long-term relationship with and will continue to have a long-term relationship. This plant probably manufactured about -- I think anywhere from 40 to 45% of it sometimes was dedicated to our products, so there's already an experience base with some of our product lines there and we'll continue to do business with these people over time.

Okay, good. And then, secondly, as I think about your longer-term sales goal, and you talk about some product initiatives, the last several years have been relatively flat for your core businesses, and I suspect you've had ongoing product initiatives over the past several years. So what's going to change to give you the lift in sales to a 1 to 3% top-line growth? Will it be price increases, will it be higher average ticket, or are you just looking to gain market share?

There's a big change in how we're focusing our business now, and our strategy now is very clear. It's to build our largest, strongest brands in core categories by driving innovations in key items. And that's always been part of our strategy, but over the past few years we've also had the additional strategy of building new brands in new categories with new products. And what that led to, along with our decentralized philosophy, was really doing more of a peanut butter spread of our efforts across all of our product categories and across many brands and new brands.

We believe by having this focus on our biggest, largest brands and massing our resources behind driving a couple of big things, that that's what's going to be the difference going forward.

Okay, thank you.

Your next question comes from the line of Justin Thomas with Citigroup. Please proceed, sir.

Thank you, and good morning.

Good morning.

I had a question for you on the restructuring charges of $250 million, half of which is cash. Is it -- am I thinking about this correctly, if half of that is cash, that's mostly going toward severance?

Yes, this is Lee. I'll take that question. We are talking about $250 million over three years, half of it being non-cash. The non-cash piece is basically the accelerated appreciation or the writing off of fixed assets, basically, and that's what's going to be included in cost of sales line, so that's generally the non-cash. The cash piece, which is estimated at roughly the other 50%, would be severance, would be lease buyout costs, other related cost, primarily cash.

Okay, so if I think of roughly $125 million, that is the lease buyouts and the labor, roughly 125 over 4.5 billion, we're talking 275 bps of labor savings in the US alone over the next three years. Is my logic correct in that? And then the follow-up to that is are there other areas where you are spending, i.e., marketing, that will be offsetting that to a great degree?

Yes, I believe one of the calculations you were doing was on our total labor costs, and I think your estimation of total labor costs may be fairly accurate. However, you've got to remember that some of those gross savings are offset by transportation, in some case duties, as well as a couple of other items. So you can't just look at those gross savings.

What we believe, if you think of our cost savings opportunities, both in organization and consolidation and globalization of our supply chain is it is the major underpinning that is going to allow that margin expansion and allow us to grow profits at a faster rate than sales.

It will be offset by the inflation that we'll normally see. This is apparel and we do see modest deflation on an occasional basis that we've got to manage, as well as selectively increasing investment behind our brands. So that's all put together an what leads us to our long-term growth goal of that 6 to 8%.

Okay, thank you.

Your next question comes from the line of [Art Roulette] with AG Capital. Please proceed, sir.

Hey, good morning. Thank you for taking my call. The first question I had was on the underfunded pension you'd mentioned. I think you'd said it was roughly 225 million. Are there any costs, cash costs, associated with sort of catching that up in the next few years?

This is Lee. I'll take that call. You are correct, 225 million is the unfunded portion of that. There are no significant mandatory payment requirements over the next year or so. Under the new pension law that has just passed. It would appear that beginning around 2008 we will have to accelerate the funding over a seven-year period and really make up generally that funding deficiency over that seven-year period.

So is it sort of safe to say taking the 225 and just sort of dividing by seven is a sort of crude way to estimate it?

I think as we stand today that's a reasonable approach for cash flow.

Great, and my second question is, any thoughts about when you may be taking the bridge facility out and putting in permanent financing?

yes, we have a couple of thoughts on when to replace it. First, we have a year minimum to take the bridge out. We really, as we thought about the timing, wanted to really get our first quarter data out there in the marketplace, file that Q so prospective bondholders would have that data. And then beyond that, and we're basically there shortly, then we'll just evaluate market conditions and we'll go out when it's the most favorable timing for us. We don't really anticipate any issues around taking that bridge out.

So it sounds like it would probably be an early 2000 -- calendar year 2007 event?

Yes, not speculating, we'll go out when the opportunity is there in the marketplace for us.

Great. Thank you, very much.

[OPERATOR INSTRUCTIONS]

Your next question comes from the line of Gary Giblen with Brean Murray. Please proceed, sir.

Yes, good morning. Just to follow up on one of the prior questions, where do you see your ultimate operating margins going to? Because given your guidance, you'd get to about 10.5% operating margins and, well, in June '09, although you're changing your fiscal year. And that's less than other comparable intimate apparel type of companies, so presumably there's more to go, but how far do you think you can get to?

We have our stated growth goals off of our 2007 base of 1 to 3% sales growth magnified into 6 to 8% operating growth. So clearly there's an implication there that we believe there's ample opportunity for operating margin expansion. In terms of the specific target, you can easily calculate what we see as our potential range. And we're not going to state a specific operating margin target that we have. We're very comfortable with the way we've articulated our long-term growth goals. I will say, whoever, one of the major metrics that we look at in terms of our success in running the company is our return on invested capital.

And that's a very important metric for us to look at, especially relative to other apparel companies that are publicly traded. When you look at that, we're clearly today in the top quartile, and with our very low weighted average cost of capital because of our high debt, our ratio of what our returns are today versus our cost of capital are some of the highest in the industry. And as we believe we go towards our long-term growth goals that we expect those returns on invested capital to continue to improve.

Okay, I understand what you said, it's just that if you keep on growing operating income considerably faster than sales, then you'll have exceedingly high operating margins, but there has to be a point at which it levels off, according to industry economics, so I guess that's what I was hoping to get a feel for, even if it's far out in years in time.

Okay, I better now understand your question. So we are committed to these long-term growth goals for three to five years. And if you extrapolate that out, that range within three to five year we're very comfortable with, and it would not get uneconomically unsustainable within that period of time.

Okay, great, that's helpful. And just one different question is, do you have in mind to look at an entry into the super-prestige channel? This is back on intimate apparel and then innerwear for you. In other words, let's say, something to complete with [Walpole] or something like that?

You mean the very high department store and intimate apparel?

Yes, it's just one area that you could be in.

With our Bali brand that I talked about a little bit before, e believe it has potential to be a much stronger brand in intimate apparel in the department store channel. It's currently in department store and in mids here and we just recently launched a Bali Platinum line that is substantially higher priced than the regular Bali line.

Right now, it's exclusive at Macy's and we have plans for further expanding that to move up the price point chain, if you will, in terms of intimate apparel in those channels.

Okay, thank you very much.

[OPERATOR INSTRUCTIONS]

Your next question comes from the line of Jason Young with JCK Partners. Please proceed, sir.

Hi, good morning.

Good morning.

A question for Rich. Rich, I know you're not giving guidance, but as you look through to all he changes that you want to make in the company and get to where you want it to be in terms of supply chain and costs, if you're looking at the company at that stage, what would be the major differences between the company then and most of your competitors now? And would there still be -- do you think there would still be that margin differential that exists now? Is there any structural reason why that needs to be the case once you get the company where you want it to be?

I think we're very unique in the apparel industry. We've got a very broad base of competitors where we've got a very broad base of our sales. We sell from the dollar stores all the way through department stores, so we have a good, diversified base. But we are focused in mainly the apparel essential categories, and I think that gives us a bit of a -- sort of a little bit of the best of both worlds, diversification, but also concentration. So I'm very comfortable about that mix long term.

As we continue to drive our supply chain and consolidate the organization, I think we do have opportunities for margin expansion. And, because of our category consistency, because essentially that innerwear category, we believe that we can maintain above-industry average leverage. And that is also an important part of our business model. That will allow us to maintain a low weighted average cost of capital and with the focus on high return on invested capital, we believe that that's a distinguishing factor for us, versus many of the other apparel companies out there.

Great, thank you very much.

Sure.

Your next question comes from the line of Tom Leritz with Argent Capital Management. Please proceed, sir.

Yes, I have a question about competition and just wondering if you've noticed more formidable competition lately versus a couple of years ago, a lot of your competitors like [Gilden] have already outsourced and they're a little bit ahead of you. I guess they don't focus on differentiation through brand name, but in terms of low-cost producer, have you noticed more competition? Or do you expect more over the next couple of years.

We have a very broad competitive base. We compete with Victoria's Secret in intimate apparel for consumers, with Maidenform, with VS's intimate business, we compete with Fruit of the Loom and Jockey in underwear. We compete with Gilden in the screen print printables market. We compete against a whole host of small competitors in stocks. And then in performance athleticwear we compete against Nike, Under Armour and Russell, so we're got a very broad competitive set.

And, I'll tell you, today it's as competitive as it has been any time in the past 10 or 15 years. So I don't see any real drastic change. Who's making gains in certain markets or certain areas purely changes over time. We believe we've got a good strategy from which we can build and improve our margins long term and we're very comfortable in our ability to do that. And we're very keenly focused on our competition, but we don't see any one or two competitors preventing that type of progress.

Okay, thank you.

Ladies and gentlemen, this concludes the question and answer portion of today's conference call. I would now like to turn the presentation back to Brian Lantz for closing remarks.

Thank you, Onika. So we'd like to thank everyone for attending our inaugural call today. We really appreciate your support and look forward to speaking with all of you next time so we can share our progress with everyone. Thanks again.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.