漢佰 (HBI) 2007 Q2 法說會逐字稿

Good morning. My name is Luann and I'll be your conference operator today. At this time I'd like to welcome everyone to the Hanesbrands Incorporated second quarter fiscal 2007 investor conference call. (OPERATOR INSTRUCTIONS)

Thank you. I'll now turn the call over to Mr. Brian Lantz, Vice President of Investor Relations. Sir, you may begin your conference.

Thank you. Good morning everyone, and welcome to the Hanesbrands Inc., quarterly investor conference call and webcast. We are pleased to be here today to provide an update on our progress after the second quarter of 2007.

Hopefully, everyone has had a chance to review the news release we issued earlier today. The release and the replay of the webcast of this call can be found in the investor section of our Hanesbrands.com website.

Before we begin, I want to remind everyone that we may make forward-looking statements on the call today, either in our prepared remarks or in the associated question-and-answer session. These statements are based on current expectations and are subject to certain risks and uncertainties that may cause actual results to differ materially. These risks are detailed in our various filings with the SEC such as our most recent Forms 10-K and 10-Q as well as our press releases and other communications. The company does not undertake to update or revise any forward-looking statements, which speak only to the time at which they are made.

With me on the call today are Rich Noll, our Chief Executive Officer and Lee Wyatt, our Chief Financial Officer. Rich will give a summary of our business performance and trends for the second quarter. Lee will then provide further detail on the period and various aspects of our financial performance. Following our prepared remarks, we have allowed ample time to address any questions that you may have. So now, I'd like to turn the call over to Rich.

Thanks Brian, and thank all of you for joining us today.

We've now successfully completed the second quarter of our baseline year, which is the foundation for achieving our long-term growth goals for sales, operating profit, and earnings per share. We continue to execute our key strategies in the quarter. Our sales were flat and our strong cost controls helped expand margins.

Our globalization and consolidation initiatives are progressing well, and we are now slightly ahead of schedule. We used our strong cashflow generated in the quarter to prepay long-term debt and repurchase shares.

Let me touch in more detail on sales, margins, restructuring progress and then cashflow. Our sales for the second quarter were relatively equal to last year in a tough consumer environment. Innerwear sales increased slightly on the strength of the Hanes and Bali brands. Our outerwear segments saw continued growth in Champion activewear sales and an improving product mix that enhanced margins.

Our goal has been to solidify our sales base in 2007 and invest in our brands for growth in the future. Specifically, to build our largest and strongest brands in core categories through innovation and key items.

Our large retail partners are increasing their understanding that large national brands, especially in innerwear, drive traffic to their stores. Also, we are seeing a desire by retailers to capitalize on national media campaigns, introducing innovative innerwear products.

We are experiencing good results with our multi-year focus on the Hanes ComfortSoft platform. For example, we have seen double-digit sales gains for the Hanes ComfortSoft panties in the first half of 2007 as a result of the advertising that began last fall. Similarly, raw advertising began in March, helping make the All-Over Comfort bra an extremely successful launch. And this month we rolled out our latest Hanes ComfortSoft advertising for men's underwear, featuring Cuba Gooding, Jr. and Michael Jordan.

Turning to Bali, in April we launched an advertising campaign to support Bali's Passion for Comfort launch, which has experienced strong retail sell-through. We believe our momentum for the brand will make our Bali Concealers launch in December the largest launch in Bali's history.

This selective and continued investment behind our big brands is fundamental to our ability to achieve our long-term growth goals.

Turning to profit, we are pleased with our operating profit margin, excluding actions, for the first six months of the year, which was 10% as compared to 9.1% last year. Our ability to exert cost controls and execute on our globalization and consolidation strategy is delivering results. We are now seeing the benefits of our past cost-reduction efforts. Our strategy of reducing costs through globalization and consolidation is the foundation for our long-term goal to grow operating profit at a greater rate than sales.

This quarter we announced the closing of an additional 12 facilities in order to expand manufacturing lower labor-cost countries, more efficiently align a supply chain flows, particularly between offshore textiles and sewing operations, as well as to consolidate into fewer and bigger facilities.

We also announced further consolidation of our organization by eliminating approximately 350 staff positions, primarily in the United States. These decisions are never easy but are critical to compete in our rapidly changing environment. And I would, again, like to acknowledge the many hard-working employees who continue to diligently perform their duties in the many areas affected by our restructuring initiatives.

We have been successfully executing against our plan and, in fact, with these latest announcements, we are now roughly one-quarter ahead of schedule.

Lastly, our cashflow from operations in this quarter allowed us to prepay $50 million of debt. Since our spin-off, our ability to generate cash has enabled us to prepay $150 million of debt and voluntarily contribute $90 million towards our pension liability while simultaneously investing in our business. Additionally, we repurchased $16 million worth of stock this quarter, as part of our plan to offset dilution.

In closing, halfway through 2007, we are sharply focused on executing our key strategies, which are to reduce cost, increase investment behind our strongest brands, and to generate cash. This focus sets the foundation for achievement of our long-term growth goals for sales, operating profit, and earnings per share.

Now, I'd like to turn the call over to Lee Wyatt, who will review our financial performance.

Thank you Rich.

Let me begin with sales. Sales for the second quarter were $1.12 billion, an increase of $2 million over the same quarter in 2006. For the first six months, total sales were $2.16 billion, an increase of $9 million. Quarterly and year-to-date, we are seeing sales generally equal to last year, rather than the declines experienced in prior periods. This observation applies not only to total sales, but also to our largest operating segments. Year-to-date, sales in both the innerwear and outerwear segments are slightly ahead of last year. The only exception is sheer hosiery, which continues its long-term decline of 8 to 12% annually.

To review operating profit for the second quarter, we will begin with GAAP operating profit, which includes the impact of restructuring and spin-off related charges. Next, to better understand business performance, we will review the operating profit, excluding actions, which adds back $38 million in restructuring, spin-off, and other items as calculated on Table 4A of the earnings release.

GAAP operating profit increased by 10% in the quarter to $88 million or 7.9% of sales, up $8 million from the same period last year. The increase was the result of lower SG&A expenses, partially offset by restructuring charges.

Restructuring, spin-off, and other items netted to a $38 million charge in the second quarter, primarily for plant closures and staff reductions. $12 million of these charges in the second quarter were non-cash. Non-cash charges or accelerated depreciation are included in cost of sales, which causes volatility in our gross margin. Cash charges are primarily for severance and lease buyouts and are reported on a separate restructuring line on the income statement.

As stated during previous calls, we expect to incur approximately $250 million in restructuring and related charges over the three-year period following the spin-off. While a large portion of the restructuring charges for the second quarter were cash charges, we continue to anticipate that over the three-year period, approximately half the charges will be non-cash. Since the spin-off, we've announced $120 million in restructuring charges and recognized $95 million.

Now operating profit, excluding actions, for the second quarter, as calculated in Table 4A of the earnings release, which is a better indicator of operating performance, was $126 million, up $32 million from the same period last year. The increase was reflected in both lower SG&A expenses and higher gross profit. The primary drivers of the improved operating profit were (inaudible) from cost controls, favorable timing of marketing spend, $5 million in refunds of duties paid in prior years, offsetting $8 million in higher cotton cost. The resulting operating profit margin, excluding actions, was 11.2% of sales in the second quarter. Year-to-date, operating profit margin, excluding actions, was 10% of sales, compared to 9.1% in the same period last year.

Cotton prices, which averaged $0.45 per pound in the first half of 2006, returned to the historic average of around $0.55 per pound in the second half of last year. Our costs have remained around that level through this year's second quarter. Since cotton cost is capitalized into inventory, price changes take four to six months to be reflected in our operating profit. Therefore, we currently know the cotton costs that will be reflected in our operating profit for the balance of 2007. Further out, the impact on our business in 2008 of the recent price increases in cotton futures remains to be seen.

As we move through 2007, it's important to remember that operating profit margin, excluding actions, can vary meaningfully from quarter to quarter. For example, in calendar year 2006, our full year operating profit margin, excluding actions, was 9.5%, but varied by quarter from as low as 8.4% to as high as 11.4%. Year-to-date in 2007, our rate's 10%, with the first quarter being 8.6% and the second quarter 11.2%. So, quarterly comparisons between years reflect significant variability.

Now, I'd like to turn to earnings per share. GAAP fully diluted earnings per share were lower in the quarter. $0.26 compared to $0.62 for the same period last year. Earnings per share, excluding actions, were $0.54 versus $0.73 a year ago. Earnings per share reflects higher operating profit, offset by increased interest expense and a higher effective tax rate, when compared to the same quarter last year. The higher interest expense will continue to affect our comparisons to last year until we pass the anniversary of the September 2006 spin-off.

Interest expense increased in the quarter to $51 million, from $6 million a year ago, as a result of debt incurred as part of the spin-off. The effective tax rate for the second quarter was 30%, which was the same as our first quarter of 2007 and higher than the 20% rate a year ago. This increase over prior year reflects our structure as an independent company.

Now let me review the balance sheet and cashflows. The June 30 balance sheet reflects strong liquidity as we ended the period with $176 million of cash and our $500 million revolving credit facility remained undrawn. We are in compliance with all debt agreement covenants.

Long-term debt at June 30 was $2.44 billion dollars and reflects a prepayment of $50 million in the second quarter. Approximately 70% of our debt remains at a fixed or capped rate.

We repurchased 605,000 shares of our stock at an average price of $26.21 during the second quarter, or approximately $16 million, as we being to offset share dilution.

Our cashflow statement reflects $102 million net cash provided from operations year-to-date. Capital expenditures year-to-date in 2007 of $18 million were partially offset by proceeds from property sales of $8 million.

We continue to anticipate that over the longer term, average annual capital expenditures will be equal to annual depreciation of approximately $110 million. Due to timing of capital outlays this year, capital spending will be below depreciation. To the extent that we spend less than depreciation this year, we may spend above depreciation in future years.

In summary, at the midpoint of 2007, sales are relatively flat compared to last year and our operating profit, excluding actions, has begun to benefit from cost reduction initiatives. Since the spin-off, we've prepaid $150 million of debt, we've contributed $90 million to reduce pension underfunding, and we've repurchased $16 million in stock. I'll now turn the call back over to Brian.

Thanks Lee.

That concludes our recap of our financial performance for the most recent quarter. Before we take questions, I want to take this opportunity to reiterate that Hanesbrands will continue to follow a policy of not providing quarterly or annual guidance. However, our intent is to continue to use these quarterly conference calls to communicate our performance and help investors develop an understanding of our company.

Now, we will begin taking your questions and will continue as time allows. Since there may be a number of you who would like to ask a question, I'll ask that you limit your questions to two or three at a time, so that as many of you can get an opportunity to pose those questions as possible. I will now turn the call back over to the Operator to begin the question-and-answer session.

(OPERATOR INSTRUCTIONS)

Your first question comes from Omar Saad with Credit Suisse.

Thanks. Good Morning

Morning, Omar.

Rich, I was hoping you could elaborate on your comment in your prepared remarks around the large national retailers really kind of increasing their understanding of the importance of large national brands in some of these key traffic driving categories.

Sure, let me talk a little bit about that. Both brands and private label have always existed in our markets, but they play very different roles. The strong national brands are what retailers use to drive their share, as well as to bring traffic into their stores or actually bring traffic to their apparel pad.

I'll be honest some of that understanding sort of waxes and wanes over the years and there's sort of a resurgence, especially after the weak holiday period last year, an understanding by these large retailers that they need strong national brands to drive share and build traffic.

So we're seeing a lot more interest along that dimension. And one of the ways that we're seeing is they're getting much more interested in the innovation that we've got out there, the strong advertising campaigns. They're seeing some of these products really take off and build at retail, and so they want to start making these a much bigger deal at retail, much more in line with the launch times. And we're working with them jointly to try and capitalize that in the upcoming quarters and years.

Thank you, thank you, that's helpful. And Lee, if I could ask you a question. On the SG&A spend, if we look at it kind of year-over-year the dollar number versus prior quarters, can you elaborate a little bit more in terms of, you mentioned the timing of marketing spend and some of the other issues that might be moving that SG&A number relative to the sales number. And also, hoping that you can provide an update on working capital management and where you stand on that front.

Yes, let me speak to the SG&A question first. If you compare SG&A this year to last year, SG&A has declined $37 million to about 23.7% of sales in the quarter. Of that $37 million, $21 million were reductions related really to last year's spin-off, year-end adjustments for Sara Lee, remembering that the second quarter last year was Sara Lee's fiscal year-end. That remains to have $16 million of that $37 million really apply to this year, and that that $16 million, where we see improvements in cost controls, benefits from our supply chain initiatives.

There is some beneficial timing on marketing spend in the quarter. As we go through 2007, we're really establishing that trend by quarter on marketing.

Is the timing being pulled in from previous quarter or getting pushed into next quarter?

Some of that will get pushed into next quarter.

Okay.

And on working capital question, we continue to be very focused on improving our working capital as well as invested capital in general. We've, for example, in the quarter year-to-date accounts payable, we've taken our accounts payable days up from 23 days to 32 days, generated $30 million of cash. So, we are very focused. We've taken trade LCs down from $100 million to around 50. So we are going to be very focused there.

And on inventory turns, are you happy with where you are?

Inventory turns are remaining around, on a single-point calculation, around 2.4 times. That's consistent with the past. We'll stay focused on inventory, but inventory reductions are a process that we go through. We want to always be able to service our customers properly. So, we'll work through that, but we're pleased with where we are in general right now.

Omar, this is Rich, I just want to make a comment a little bit on things like media timing and how that can vary from year-to-year. Last year in the Spring, so probably in March/April timeframe, we were actually heavily advertising the men's category with Kevin Bacon and Michael Jordan.

This year we actually didn't launch our new efforts in men's with Cuba Gooding, Jr. and Michael Jordan until July. So, you're going to see a natural shifting of some of these things. And that happens each and every year depending upon some of the timings of different launches.

Excellent. That's very helpful. Congratulations, nice work, stay focused.

We will, thanks Omar.

Your next question comes from Brian McGough with Morgan Stanley.

Yes, thanks. This is Brian McGough.

Hey, Brian, how you doing?

Hey, good guys, thank you. I have a couple questions. Wanted to follow up really to the question about mass channels, in that I was just hoping you could give us a little bit of an update here really as to how the landscape is playing out, particularly at Wal-Mart, and I know you can't hit on a specific customer, but they are pretty big.

When I looked at your total innerwear sales this quarter, they were positive, and I think it was one of the first times that they were actually up like over the past five years. So, things are clearly headed in the right direction there. But you look at what's been going on the past month or so at Wal-Mart. They've had a major change in their apparel merchandising organization. Obviously, that was more because of misses at the higher end on the fashion side, but this also comes on the heels of them, in effect, reducing their square footage growth from 8% down to about 4.

I was hoping you could spend just a minute on the inefficiencies that you've had in the past in dealing with them from a productivity standpoint and even in light of any upcoming challenges, what you can do to still get better sell-through, maybe better shelf space and still continue to grow even if they might not be growing as fast.

Well, let me talk about, and I'm going to start with what you're discussing in terms of innerwear. We're very pleased with our overall innerwear sales in a fairly tough consumer environment. And one of the things I would like to highlight is I think we're working on the right action plans and we have the right strategy by driving innovation in core categories and driving our big national brands. And that's a pretty dramatic change than where we were maybe three or four or five years ago. And I think that's one of the major drivers that is delivering these types of results.

But it is a tough consumer environment out there and not just driven by Wal-Mart. We're actually seeing that we saw some softness in the overall market at holiday. It actually started to turn around in the first few months of 2007, where we've actually seen that shift in our NPD share data, or not share data, but our overall market data suggests innerwear's actually contracted on a rolling three-month basis ending May.

And we're seeing a pullback or price conscious consumers be much more judicious in their spending. We've seen these types of things come and go before. It can last a few quarters. And I think that's really the major backdrop that's got me a little concerned about our overall ability to continue generating growth.

But we are working on the right things. These things ebb and flow, driving our innovation in our big brands is interest to the retailers to help them drive traffic to their apparel pad. And I think some of these other short-term things that you're seeing, which is sort of changing at different retail accounts, it comes and goes and it's not going to have a major impact on our overall business. What really counts is the strength of our brands, and I think we're doing the right things.

Okay, thanks. And I guess just to tie that into the SG&A leverage point. I mean it was math at this quarter. Though there's a lot of other companies out there in the space, and I won't name any of them here, but they're grossly underinvesting in their businesses and as such, they're having a hard time growing and a lot of them are missing.

And given the sheer cost cuts that you guys have at your disposal, how do you balance what you actually print on the P&L that we see in quarterly earnings versus plow back into the model in actual marketing and product in order to drive sales and offset the challenges that you just commented on?

Well, I think we balance that with facts and data. And I think one of the things that we're really doing is instilling a lot of more consumer goods processes into our organization. It was about a year ago that Kevin Hall, our Chief Marketing Officer, joined us. He had 16 years at P&G, and we're bringing those types of disciplines in a very quantitative way, looking at how our innovation and our advertising is doing in the marketplace.

And so, it's almost like any capital expenditure, you're going to make an investment when you can see a return. Now it's not quite as scientific as that, but we're looking at metrics to see what's driving our results on a day in and day out basis and we'll focus more of our efforts on those and we'll pull back when they're not driving our results. I think that's really the thing that helps us understand how much investments to make and when to pull back.

In terms of how we fund all this, our story's been the same from day one. We need to make selective investments behind our strategic initiatives in our brands. And one of the ways that we're doing that, especially this year, is through all of the cost-reduction opportunities that we have in place that are now paying dividends.

Okay, thanks. And then I guess just lastly, it's been what about three quarters or so since the spin, and I'm sure there's been just a huge range of emotions there. I mean on one hand, you guys spun out, you're now in control of your own capital plan. You can do essentially anything you want in order to drive value, which is exciting.

But on the flipside, you've had to make a couple of really tough calls, some which we saw over the past month. And I can't imagine that that's a big morale builder at least over the short-term. Can you talk about how you're keeping the team energized and still really focused on a big light at the end of the tunnel as opposed to dwelling on a few of the calls you've had to make over the past month or so?

Well, I think it's all about making sure everyone has a deep understanding of what's required for us to be a successful, growing company in the future. And also making sure that everybody has an understanding of what the competitive landscape looks like out there and how it's rapidly changing, both from a globalization standpoint, as well as from an efficiency standpoint.

And by laying out that long-term strategy, making sure that we have people understanding what the implications are if we don't change, then there gets to be a lot of energy around the change. And I think the fact that we're about one quarter ahead or so on the execution of our plan makes us feel pretty good about our organization's ability to manage change while keeping service high and continuing to run our business. So, we feel pretty good about our ability to manage all this.

Good. Well, I appreciate your answers. It certainly seems like you're headed in the right direction, so thank you all.

Thanks, Brian.

Your next question comes from Reade Kem with Merrill Lynch.

Yes, good morning.

Hi Reade.

This is actually Kira Sheehan for Reade. Morning. I just wanted to know just a housekeeping question. Could you please breakout the components of your debt?

Yes, we can. We have $2.44 billion of long-term debt right now. It's broken down between a term loan A of around $190 million, term loan B $1.3 billion, a second lien of around $450,000 million, and we have our bonds at about $500 million, that's at 2.44.

Okay, great, thank you very much. I was just wondering a few questions on your cotton exposure. I know you mentioned the $0.55 per pound, but was that your average cost of cotton during the quarter?

It's in that range, and actually as we said in our comments, because cotton costs are capitalized in inventory and with our inventory turns, it takes four to six months to actually roll through and be reflected on the operating profit line. We actually know what the cotton cost is going to be for the year and that's around $0.56 for the year, and it's been fairly consistent.

And are any of your needs for the next six months hedged?

Yes, what we do, again, our policy is not to speculate on cotton, but we will hedge during the current buying season, and so a portion of it is hedged just naturally through our policy right now.

Could you tell us how much, like what percentage?

Yes, I think if you looked out over the next 12 months beginning in the third quarter, we're probably a third hedged at this point.

Okay, great. And then just looking at your current cotton position as it stands, would you say that this puts you at either an advantage or a disadvantage to the competition out there?

A lot of speculation around cotton right now. We're very consistent. We don't speculate. We drive our business in other ways. I think that's yet to be seen. We don't know the impact on -- the last 60 days we have seen increases in future prices in cotton, but who knows what that'll be in the long-term. So, don't know.

Okay and then moving onto a last question on integration. During the quarter did you complete any meaningful milestones in terms of integrating your IT systems?

When it comes to IT systems, we've -- because we're a very decentralized organization, we've had eight to nine different independent operating systems that we won the organization on.

We've currently got a number of projects underway to consolidate that over time. For us it's much more of a slow, evolutionary consolidation than it is a big initiative that we plan to accomplish over the next year or two. We feel it's better to minimize the business risk by doing it in a slow, evolutionary manner. And nothing was completed in terms of major consolidations in this quarter.

Okay and then, perhaps you're not prepared to answer this, but in terms of just your goals for the rest of '07, what are the specific goals that you might want to accomplish this year in terms of that integration?

Yes, we've always said that our goals for this fiscal year 2007, is to provide a baseline performance from which we can achieve our long-term operating financial goals, which are 1 to 3% on sales, 6 to 8% on operating profit growth, and double-digit EPS that we think's sustainable in three to five years into the future.

Okay, great. Thank you very much.

Your next question comes from Clark Orsky from KDP Investment Advisors.

Yes, Hi. Just had a question on the commentary. You mentioned a $5 million refund of some sort that benefited the quarter. I just wondered if you could, if I heard that right and just expand on what that was?

Yes, you did hear that right. During the quarter we received refunds of duties, previously paid duties, that go back as far as the year 2000. It's normal for us to get duty refunds on an annual basis. This time it just tweaked up a little bit more, but it was $5 million.

Okay and that partially offset, I think you said, what 8 million in higher cotton?

Exactly.

Okay, so we shouldn't look for any sort of duty refunds of the same magnitude in the coming, let's say next two quarters?

No, no I would not.

Okay. And I guess the, it sounds like the prepayment you made this quarter in debt, that went to the term loan A, is that right?

That's correct.

Okay, appreciate it. Thank you.

Your next question comes from Phil Fisher with [Tres Filet].

Hi there. Just a follow up question on the SG&A line. I'm not sure if I caught it. But of the $37 million decline, $21 million was from excess costs last year that you didn't experience this year and then $16 million was from cost controls? Can you go over that and then talk about the advertising changes and did that fall in the SG&A or the cost of goods?

Sure, yes, again, SG&A second quarter versus last year declined $37 million. $21 million of that decline related specifically to things that happened last year. For example, we had spin-off cost and we had some other adjustments that related to last year that were really unrelated to this year.

That leaves $16 million improvement in SG&A, related more to our activities this year. And the drivers of that $16 million was really cost -- the benefits of cost control, the supply chain initiatives that are now starting to pay dividends, as well as favorable timing on the marketing spend.

And how much was that marketing? How much out of that $16 million was due to the change in marketing's timing?

We really don't disclose marketing media kind of spend items. We always want to push you back and talk about operating profit, the operating profit line and where we are there and we --

Okay, and I'm sorry, I interrupted you, you were about to make another statement about the $16 million, I think.

No, I think I described the two drivers of that $16 million.

Okay, thank you very much.

Your next question comes from Eric Tracy with BB&T Capital Markets.

Good morning, hey guys. If we could just follow a little bit more, just in terms of where you are relative to your plan on the restructuring. Obviously, a quarter ahead. Does that in any way, I guess without getting too specific on the guidance, flatus top-line and sort of 9.5 even margin for the year. Should we now be kind of thinking ahead of that plan in terms of setting that '07 base? Maybe just provide a little bit more color on that.

Think of that as an indicator on how we're doing on execution, rather that it's going to have a material impact on our financials. You know it's only a quarter, we've got a long multi-year plan to execute against. But I do think it is an indication of our organization's ability to manage a tremendous amount of change with both consolidation and globalization, and therefore, it is a good indicator. But it's not going to have any huge, substantial impact on our baseline year or our ability to meet our long-term growth goals.

Okay, okay, fair enough. And then Rich, maybe just following along on that in terms of the top-line. Hate to be the one sort of picking out some of the negatives, but maybe give some color around outerwear. Obviously, Champion continues to perform well, but maybe where some of the Delta's year-over-year and the declines that we're seeing there, and then secondly, just on hosiery. Obviously, just the secular trends in that segment continue to decline, but maybe give a little bit more information on that as well.

Yes, first I'll talk about hosiery and then I'll go into outerwear.

Hosiery is a segment that's been in long-term decline from 8 to 12% a year. The industry's been declining and we've experienced a similar decline. We are starting to see the decline rate maybe slow down a little bit but it's still high single digits at least. Therefore, we manage that segment for cash. You can see from the split-out financials, it's a very profitable segment. Generates a lot of cashflow. And we think we've got the right strategy there, but we do expect those declines to continue.

On outerwear, we're very pleased with the results year-to-date being relatively flat or actually up slightly. Driven by the growth of C9 and Champion, mother brand, both of them combined are growing double-digits for many quarters in a row.

We've also focused on improving the quality of mix in outerwear, deemphasizing lower margin segments, such as some of the ones that are in the wholesale printables channel and focusing on those stronger brands and higher margin segments.

I will say that there is a bit of variability on a quarter-to-quarter basis in outerwear. In a lot of cases you get certain racks assigned to you, and the timing of shipments from year-in to year-out can change a little bit. So, it's better to look at those run rates on a more than one quarter basis.

Okay, fair enough. And then maybe just a little bit bigger picture, you touched on this earlier, but talk to again, just the mass merchants and as you see it for maybe the next 12 months in terms of planning, their planning their strategy around brands, obviously driving of traffic is key with the branded offerings. But maybe we just, we constantly hear, I guess, the threat of a Wal-Mart or a Target potentially trying to increase their private label business, given some of the declines they've seen in some other apparel categories.

Can you kind of talk through that, again, recognizing that brands are very important to their business but is there any, as we look over the next 12 months, how much visibility do you have to your branded offerings, I guess, within those key retailers?

Let me talk a little bit about that. Both brands and private label, as I've said, they always have existed in our marketplace. They play different roles and with brands being share and traffic and private label price and margin, and there's a lot of ebbs and flows over the years. There are some specific things going on in the marketplace which I think you elude to, and we're seeing some tactical placement or expansion of some private label offerings, especially in male underwear.

We've seen these types of things before, but we're seeing this right now happen. It looks like it's Asia sources of supply that are going to provide this private label. Our space has not been impacted in any way. However, and we're also starting to see it begin to show up at retail. And in terms of retail price and margin for the retailer, it looks like they can either get slightly lower retail prices with similar margin structure or similar retail prices with slightly, with equal margin. So they're not getting both lower price and better margins with these types of offerings.

The short-term impacts are unclear. From a long-term perspective, though, the role of brands and strong national brands is clear to the retailer. They need them to build share and to drive traffic. But there is a little bit of mixed environment out there right now.

Okay, fair enough. Congrats again and best of luck.

Thanks.

Your next question comes from [Jay Soul] with Morgan Stanley.

Hi, thanks for taking my call.

Hi Jay.

I just wanted to ask you guys a quick question about the international side of your business. We've mentioned some of the mass merchants cutting square footage growth but internationally they still seem to be on-plan to increase that. What's the opportunity there? Can you talk about that a little bit for us please?

Yes, international is about 10% of our overall sales. Right now you're seeing sort of a flat performance from a sales perspective, I think, for over the first couple of quarters of this fiscal year. But it's really a lot of different things going on in different areas of the world.

We have both innerwear and outerwear business in Mexico, Canada, Asia, primarily Japan, and a little bit in Europe. Really we're seeing some real strong growth in both Asia, as well as actually our European business with Hanes. And a big area of focus for us is to really invest heavily in Asia. We've been selling Hanes and Champion brands in Japan for over two decades. We're seeing some great strong growth in Hanes in that market.

We started selling in both India and China about two years ago, and while those businesses are fairly small they're starting to build at a fairly good clip. And so that's an area of the world that we'll continue to concentrate on. As we build out our supply chain there, there's no reason we shouldn't have a much larger commercial business.

So, long-term I think you're going to see a good strong growth coming from our international operations. But it'll take a couple of years to get all of the building blocks in place.

Okay, sounds great. Thanks so much.

Your next question comes from Kevin Zeats] with Goldman Sachs.

Hey guys.

Hey.

Question on -- a follow up question on the SG&A. Would you expect, I guess, full year-over-year to spend more than you did last year? I mean specifically on the advertising campaigns you were talking about, but just generally with SG&A, or I'm sorry, generally with --?

I'm sorry, we missed the last, but I think I -- you were asking about media. We have said that we're making selected investments behind our brands, and one of the increases that we're going to incur in 2007 is increased media expenditures in total, because that is part of our strategy.

Our goal in 2007 was to offset our standalone costs, as well as our selective investments behind our initiatives with our cost reduction actions, and that remains our goal for 2007.

Okay, great, and then just to follow up on the last question about -- you were saying that your space was not impacted by the private label, is it -- then is it coming from competitors or is it in a different -- or are we talking about non-related categories?

Well, I'll talk about a couple of different ways that we're seeing it because it's not just one program. There's -- and as I said, there's ebbs and flows all the time. Sometimes we'll see some of our retail partners shift a little bit more to private label in say intimate apparel. If they take it too far they start to pull it back the other way. We've seen this pattern before in men's or boy's underwear, and we see it happen differently across different retailers at different times.

Some of the things that are happening now, it's really coming in two ways. One is the space is coming from some other competition that some of their programs weren't working as well. And in another arena, it's actually coming because, based on some sustainability initiatives, we've all been able to drive the size of our package down, and that's allowing some of the retailers across their entire line to densify their overall space, keep the same number of pegs for their current suppliers, but get a couple more feet of space for an expanded offering. So, it depends upon the program that you're talking about and the retailer that you're talking about.

Okay, thanks. That's helpful. I guess, just generally in the quarter, can you talk about, sort, of, volume trends versus pricing trends, given the consumer environment, you said, that's so tough right now?

Yes, long-term in our industry, there's a little bit of price deflation, and actually that's built into our long-term plan and it's one of the reasons that we need a tremendous -- more cost reduction initiatives going on than profit improvement that we can deliver.

And we're not seeing any different environment in terms of pricing today than we have historically over the past number of years. It's always a competitive environment. All of our retail partners are always looking for ways to drive traffic and using price for a weapon there and looking for the right promotional offering. But I'm not seeing any systemic change in pricing that's in the retail environment today.

Okay. And when's the next, sort of big reset date with the mass merchants in terms of your product space and when will you know sort of how you're fairing on that?

There's really -- the major time that resets happen are going to be in that February to March timeframe, and we're actually holding discussions with retailers to solidify those plans now. So, we really won't have clarity on that for probably another couple of months.

The other time that you see some minor adjustments by a number of retailers is sort of in actually in this timeframe, it's sort of their Fall set, but they're generally a smaller plan-a-gram changes than they are the ones for the Spring. Now that's coming, I'm really talking there about the innerwear categories.

On outerwear categories such as T's and fleece, there tends to be two major times of the year that they do a total reset, obviously Spring and Fall, and then with some minor rack adjustments continually throughout the process. But pretty much we're now focused on Spring of '08 in our discussions with retailers in terms of space.

And your Fall sets compared to last year?

Overall we're not seeing any major dramatic shifts in space at all. And some of the private label programs that we're talking about, those are actually hitting retail now in these minor changes, and we're not seeing any dramatic changes. I mean we have a lot of space across all of our retailers, so it would take something pretty dramatic to actually impact our total amount of space. You will see, on a category-by-category basis and retailer-by-retailer basis, we might have a big win in a small area or a big loss, but overall it doesn't have a huge impact on our business.

Does, I guess what's going on with private label or just as general consumer environment, limit your ability, if these cotton prices stick into next year to use that as a means to extract higher prices?

I believe that the industry sort of is used to that long-term average of cotton prices of around that mid-50's range. If we saw systemic change from that, I think you would see it work its way through the entire industry. Whether it's price increases or actually mitigating that deflation that we experience, would remain to be seen.

On a short-term basis, if you have swings to either below that, like we did the year before down to $0.45 or slightly above that, you're not going to actually see that really work it's way through the industry in terms, I think, of pricing changes. But if it's long-term changes you will see it work through.

Okay, great. Last question on the supply chain. Can you talk about sort of your own versus buy, where you're balancing the moves now and where you see it going, and sort of how your competitors are positioned, whether they're owning their facilities overseas or not?

In our arena you see two extremes, some companies have a strategy to 100% self-manufacturer and we've got other competitors that have strategies to be 100% sourced, and we believe neither extreme is the right one. We have a much more balanced approach.

We've got about a third of our value of our product is provided by other suppliers and about two-thirds is self-manufactured, and we believe that's the right balance from a long-term perspective. So, you're not going to see any major changes there.

We use strict financial criteria to make those decisions. Where we can earn a return on our investor capital that we believe is sufficient, we'll invest. Those are generally in areas where they're high volume products where we can have a scale advantage and therefore, a cost advantage in self-manufacturing.

Thanks very much. Nice quarter.

Thanks.

Your next question comes from Clark Orsky with KDP Investment Advisors.

Yes, I just had a follow up on commentary about pension. I think you said you've contributed $90 million. I thought it was about 40 in the first quarter, and I thought that was kind of it for a while. Just wondering what your plans are there.

Yes, let me summarize what we've done on pension. In the year ended December of '06, we contributed $48 million. In the quarter this year then we contributed $42 in the first quarter. So, that's $90 million total funding since spend. That leaves us about 84% funded in our plans right now, and from a mandatory contribution perspective, we really have no significant mandatory contributions until 2010, at this point. So, we think we're in good shape on pension funding.

So, there's no additional in 2Q then?

No, nothing significant.

Okay, I misunderstood you. Thank you.

(OPERATOR INSTRUCTIONS) Your next question is a follow up from Brian McGough with Morgan Stanley.

Hey guys, and thanks for letting me jump back in. Just a quick question on the full year, and I know you don't give guidance, and I completely respect that. But I think you had indicated that you were comfortable with an operating margin, ex-charges, somewhere around the 9.5 range, and with what you put up in the second quarter, I mean it gets you pretty darn close without making any huge assumptions in the back half of the year.

So, I guess I'm wondering, do you still think that full year target is what we should be looking for or do you have an upward bias, or is there anything in the back half of the year that might make things move the other way?

Brian, I think what we had stated was that 2007 is our baseline year, and then if we're able to achieve our goal of offsetting our increased costs, as a standalone company, and our selected investments behind our business, that would imply an operating margin, ex-a, of around 9.5% which was our run rate when we had talked about that. And we still believe that we still have that goal in place to try and make sure we're offsetting those increased costs.

I want to focus, though, on a comment that Lee Wyatt made during his prepared remarks, which was about variability of our business on a quarter-by-quarter basis. You see a wide range of operating margins, excluding actions, from last year from about 8.5% to a little bit over 11% and you're seeing a very similar range this year. The pattern, however, is very different. And so you shouldn't extrapolate each and every quarter of what happened last year to what's going to happen this year. Think of it more in terms of a, I think you'd be better off thinking of it more in terms of a rolling four-quarter average or a rolling couple of quarter average, than doing a quarter-to-quarter comparison.

Yes, I think that's about on. Okay, thanks a lot guys.

All right, thank you Brian.

And now I would like to turn the call back over to Mr. Brian Lantz.

Thank you. We'd like to thank everyone for attending our quarterly call today and certainly appreciate your support and look forward to speaking with you after the close of our next quarter. Thank you everyone.

Thank you for participating in today's conference call. You may now disconnect.