漢佰 (HBI) 2007 Q3 法說會逐字稿

My name is [Lue Ann] and I'll be your conference operator today. At this time, I would like to welcome everyone to Hanesbrands Incorporated Third Quarter Fiscal 2007 Investor Conference Call. All lines have been placed on mute to prevent any background noise. (OPERATOR INSTRUCTIONS). Thank you. I will now turn the call over to Mr. Brian Lantz, Vice President of Investor Relations for Hanesbrands Incorporated. Sir, you may begin your conference.

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

Thank you Brian and thank all of you for joining us today. We have now successfully completed the third quarter of our first full year which is the foundation for achieving our long-term growth goals for sales, operating profits, and earnings per share. We delivered solid performance in the quarter with increased sales in a mixed retail environment. We executed well against strategic initiatives of investing in our brands, reducing cost, and generating cash. Our cash generation also allowed us to pre-pay long-long debt and repurchase shares. Let me touch in more detail on sales, margins, restructuring progress, and then cash flow.

Our sales for the third quarter in the first nine months were positive compare to last year. For both the quarter and year-to-date we saw a strong sales growth in the outerwear segment and sales declines in the innerwear segment. Outerwear sales increases for the first nine months were driven by the strong sales of Hanesbrands casualwear and Champion brand activewear. The Hanesbrands sales were fueled by a return to basics this year by mass retailers as well as new program placements. The Champion business has been strong -- have seen strong performance for both Champion and C9 by Champion in the first three quarters of this year. In fact, our Champion business has seen eight straight quarters of double-digit growth.

It is also meaningful to note that our international segment sales are higher year-to-date on the strength of our European casualwear business with the Stedman and Hanesbrands that are sold in the [spring print] channel. We have experienced double-digit volume gains for nine consecutive quarters in our European business by expanding distribution while focusing on core products. Innerwear sales for the first nine months were down slightly, primarily as a result of softness in kids' underwear as well as softness in licensed male underwear in the department store channel. While intimate apparel and socks remained strong which has partially offset the decline. We continue to work with our large retail partners to most effectively utilize our brands to drive additional consumer traffic and purchases in their stores. While we have experienced softness in the male underwear bottoms arena, we have seen increases for male underwear tops especially since our new Hanes men's advertising began in July.

Turning to intimate apparel. The Bali brand sell through momentum continues due in part to our advertising campaign supporting Bali's passion for comfort bra. Bali has seen strong sales in both bras and panties this year. Bali will build on the success with its largest launch to date, Bali Concealers. Following on the heels of our success with Bali, we are now focusing our attention on the Playtex brand. On September 3rd, Playtex launched the new advertising and marketing campaign and Playtex advertising addresses women's everyday bra fitting challenges. A video of outtakes from the filming of the Playtex television commercial was watched by more than 4.1 million visitors on YouTube, and it was one of the highest 24-hour view rate ever recorded for a roadblock ad on the video website.

Our focus on investing our brands is beginning to work as a evidenced by our overall sales increases for the third quarter and year-to-date. However, it is important to note that we are operating in a challenging consumer environment. Many retailers have posted soft same store sales figures for September due to unusually warm weather affecting traffic and impacting demand for colder weather apparel items such as fleece. The short-term impacts to these various macro circumstances on our business remains unclear. We will continue to invest in our largest strongest brands in core categories to achieve our long-term growth goals.

Turning to profit, we are pleased with our 10% operating margin excluding actions for the first nine months of the year which is up slightly to last year. So far in 2007, our ability to control cost has allowed us to slightly exceed our goal of offsetting the increase investment in our strategic initiatives and the incremental standalone costs.

In the third quarter, we further consolidated our organization by completing the elimination of over 400 staff positions primarily in the United States. These decisions are never easy but are critical for us to complete in a rapidly changing environment. Now I would again like to acknowledge the many hardworking employees who continue to diligently perform their duties in the many areas affected by our restructuring initiatives.

In the third quarter, we also continue to reach milestones in our global supply chain strategy to expand our manufacturing in lower labor cost countries to more efficiently align our supply chain flows and to consolidate into fewer and bigger facilities. In August, we acquired our second offshore textile plant, the 1300 employee Duraflex textile manufacturing operations in El Salvador. The Duraflex operations had operated independently under a supply agreement for the past three years. This is an extremely strong operation with an outstanding management team and an outstanding workforce who already are very familiar with our products and our way of doing business. This acquisition provides a textile base in Central America from which to expand and leverage our large scale as well as to feed our sowing network throughout Central America.

Separately, we have selected Nanjing, China as the site to build a textile production plant which will be our first Company-owned textile production facility in Asia. The Nanjing textile facility will be central to our Asian textile and sowing network and will enable us to expand and leverage our production scale in Asia as we balance our supply chain across hemispheres. Lastly, our cash flow from operations in the quarter allowed us to prepay $75 million of debt and repurchase an additional $29 million worth of Company stock to offset dilution.

In closing, we have had a very good start in our first full year of independence. We have increased sales, expanded our margins, and strengthened our balance sheet. We have continued our sharp focus on executing our key strategies to increase investment in our strongest brands, to reduce costs, and to generate cash. This focus and our execution have positioned us to begin delivering on our long-term growth goals and to continue to create value for our investors. Now I would 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 third quarter increased $35 million or 3% over the same quarter in 2006 to $1.15 billion. For the nine months, total sales increased $43 million or 1.3% to $3.32 billion. The sales increase over the prior year quarter was driven by gains in the outerwear, hosiery, and international segments. As mentioned earlier, softness in the innerwear segment was mainly in the kid's underwear as well as softness in licensed male underwear in the department store channel and was partially offset by strong intimate apparel and socks sales. Year-to-date, for our major reporting segments, outerwear sales are up 4.7% and international sales are up 2.6% while innerwear and hosiery sales are each down less than 1% compared to last year.

To review operating profit for the third quarter, I will begin with GAAP operating profit which includes the impact of restructuring and spin-off related charges. Next I will discuss these restructuring charges, then to better understand operating performance I will review operating profit excluding actions as calculated on table 4A of the earnings release. GAAP operating profit increased by 13% in the quarter to $106 million or 9.2% of sales up $12 million from the same period last year. The increase was mainly the result of lower spin-off in the related charges and income generated from the separation of pension plan assets and liabilities from our former parent.

To reconcile GAAP operating profit to operating profit excluding actions for the third quarter, we must consider the following items. We incurred charges of $17 million primarily for plant closures and staff reductions. These charges were partially offset by $7 million gain related to this final separation of pension assets and liabilities and changes to our benefit plans. $13 million of the charges were plant closures in the third quarter were non-cash. Non-cash charges are accelerated deprecation and 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. Since the spin-off, we've announced $120 million in restructuring and related charges and recognized $109 million. Now, I'll review operating profit excluding actions for the third quarter as calculated in Table 4A of the earnings release which was $115 million or 10% of sales versus 11.4% for the same period last year. We must review last year to better understand the quarterly comparison. Many initial standalone costs were not incurred into the fourth quarter last year, even though the spin-off occurred on September 6 in the third quarter. Also for the two months prior to the spin-off, we received no cost allocations from our parent Company. As a result, in the third quarter last year, our operating profit excluding actions was 11.4% of sales higher than it otherwise would have been.

Year-to-date operating profit margin, excluding actions, was 10% of sales compared to 9.9% in the same period last year. Benefits from our cost controls have more than offset incremental standalone cost of $11 million and $17 million of investment in our strategic initiatives. I mentioned in our last call that we had clear visibility to the cost of cotton in our operating profit through the remainder of 2007. More specifically, I indicated that the average cost of cotton for the remainder of 2007 would be $0.57 per pound. We now have further clarity on the impact of the cost of cotton on our operating profit through May of 2008. The cost of cotton reflected in our operating profit for the first five months of 2008 will average approximately $0.58 per pound, with the first quarter being lower and the second quarter being higher.

Now I would like to turn to earnings per share. GAAP fully diluted earnings per share were lower in the quarter, $0.40 compared to $0.52 for the same period last year. Earnings per share, excluding actions, were $0.48 versus $0.75 a year ago. Earnings per share reflect higher operating profit, increased interest expense, and a lower effective income tax rate when compared to the same quarter last year. Interest expense increased in the quarter to $49 million from $18 million a year ago, as a result of debt incurred as part of the spin-off. Remember, last year's third quarter reflected only one month of spin-off interest expense. But the fourth quarter of 2006 included a full quarter interest expense. The effective tax rate for the third quarter was 30% which is lower than the 34% rate a year ago and a same for year-to-date 2007.

Now let me review the balance sheet and cash flow. The September 29th 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 were in compliance with all debt agreement covenants. Long-term debt at September 29th was $2.37 billion and reflects a pre-payment of $75 million in the third quarter. Year-to-date, we paid down $128 million of long-term debt and over 70% of our debt remains at a fixed or capped rate.

We repurchased just over 1 million shares of our stock at an average price of $28.35 during the third quarter or approximately $29 million, as we continue to repurchase shares to offset share dilution. Year-to-date, we've repurchased $44 million of our Company stock at an average price of $27.55, which is the maximum that we are able to repurchase for our covenants for 2007.

Also during the third quarter, we substantially completed the separation of our pension plan assets and liabilities from our former parent. The assets were higher than our original estimates and as a result we are now 97% funded across all of our pension plans. Our under funded pension liabilities now reduced to an estimated $24 million which should result in minimal pension funding in the future.

Our cash flow statement reflects $236 million net cash provided from operations on a year-to-date basis, which is $35 million higher than the same period last year. Capital expenditures year-to-date in 2007 at $45 million were partially offset by proceeds of property sales of $13 million and for spin-off we have closed on the sale of 14 properties and received nearly $26 million in total proceeds.

As Rich mentioned, we acquired the Duraflex textile manufacturing operations in El Salvador in August. The net cash paid for the facility was $17 million in the third quarter with $27 million in notes payable over the next two quarters. In summary, three quarters into 2007, sales have increased 1.3% and our operating profit excluding actions continues to benefit from cost reduction initiatives which are offsetting increased investment in our strategic initiatives and incremental standalone cost. We are also seeing a more consistent pattern in our quarterly operating margins as we established this baseline performance in 2007. From a financial perspective, since the spin-off, we paid down $235 million of long-term debt, our pension is now 97% funded which reflects $96 million in contributions. We have also repurchased $44 million in stock and have $176 million in cash on the balance sheet. We have continued to generate strong cash flow in the year since the spin-off. I will now turn the call back to Brian.

Thanks Lee. That concludes the recap of our financial performance for the most recent quarter. Before we begin taking 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 it is our intent 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 we will continue as time allows. Since there may be a number of you who would like to ask a question, I will ask that you limit your questions to two to three at a time, so as many of you as possible can get an opportunity to pose those questions. I will now turn the call back over to the operator to begin the question and answer session. Operator?

(OPERATOR INSTRUCTIONS) Your first question comes from Brian McGough with Morgan Stanley.

Yeah, thanks a lot.

Brian, how are you doing?

Good, thanks guys. Just a couple of questions for you Brian, I will try to stick with some of your guidelines here. One is on the topline, specifically overall it was a lot better than what I thought, the innerwear portion which was down you had noted, Rich, that a lot of that softness is still really coming from your department store customers. And if I do the math and assume to those guys are down on say mid single digit, it implies that your mass business is probably closer-to-flat which is a better rate of change than we have seen from a lot of the other basics business who have put out earnings over the past week or two. So, I guess one, am I in the ballpark there? And then two, could you just elaborate more in that mass business especially as it relates to any competition that you are seeing from private label, you hit on a point about weakness in male bottoms and also if you have any color on units versus [ASP]? Thanks.

Sure, overall we are very pleased with our sales results on a year-to-date basis and we believe it validates the strategies that we are executing against and I think your math Brian is actually pretty close on. We are very pleased with our mass business on a year-to-date basis even if you take out C9 by Champion which is an exclusive arrangement we have we with Target which is actually seeing extremely fast growth. We are still flat to slightly up across all those channels and you are spot on that a number of our customers who were actually seeing declines on a year-to-date basis versus last year are in the higher end department stores, a couple of selected specialty channels and other accounts. So we are feeling pretty good about our initiatives.

Is there any reason to think that more recently things have eroded at a more material rate?

Yeah, let me just talk a little bit about the overall macro environment because I think that's sort of at the heart of your question, I think we are hearing, you know, people talk about a potential weak holiday and things like that. And as I said our sales results year-to-date validate our strategies but for holiday we may see some weakness given the macro environment, but also let me comment on sort of our mid-term 2008 outlook in terms of trends because our outlook there remains unchanged. Let me go into little bit more depth first on a holiday and then I will talk about 2008.

At holiday right now we are seeing lots of pluses and minuses out in the world at large and let me touch first on the minuses and then the pluses. There is clearly a weak retail environment that's out there that started in September and is continuing through early October and we may have some spillover effects of that into holiday. The weather has been extremely warm and that actually impacts our fleece business to a certain degree especially in retail and we are also seeing a focus by retailers on inventory. They always focus on inventories generally after Christmas in that January timeframe, but we are seeing a broad based focus on that where a lot of retailers want to come out of Christmas with the right inventory levels and that's a little earlier than normal.

On the plus side however, we have got an extremely strong promotional offering across against all of our retailers for holiday. We've added some new January promotions to take advantage of the gift card traffic that retailers are now consistently seeing after Christmas and we have also got the Bali's Concealers launch that should ship in late December. So when you take all that together we see a little bit more downside risk than upside in the fourth quarter, but for us it is really too early to tell. For mid-term 2008 though, when you look out another six months or so, we are getting no sense whatsoever that there will be any carryover impact. In fact if anything retailers want to get more aggressive to try and overcome any potential problems they have at holiday and are doing that with return to apparel essential categories and wanting to drive strong national brands so our outlook remains solid.

Great. That's great color Rich. Just one last question on and I think this does tie in there to a certain extent is on the gross margin. In the quarter it was down a little bit and I don't think cotton is impacting you yet and it doesn't sound like it will a whole lot of at least through the first half of '08. I think that fact should probably be mild benefit on the margin, should we be seeing your costs save start to flow through on the gross margin line or are there any other costs that you are incurring as you are moving out of the US and North America that would someway mask the overall benefits we've would have seen or we are seeing from the restructuring?

Yeah, Brian, you know, our gross margin in the third quarter declined from 32.7% last year to 31.3%. There is really three items that are driving that, it isn't -- it is not cotton and it is not FX. First of all we have higher accelerated depreciation from the restructuring which is included in our gross margin. Secondly, we have a higher mix of outerwear in the third quarter than innerwear this year which drives our, the mix drives down the margin a little bit. And then in the quarter we had higher obsolescence cost on inventory that's not alarming, it's more timing than anything because we are returning to kind of normal obsolescence cost this year so it's not a trend that we are concerned about, it's just really more of a timing issue for the third quarter.

Okay. Okay, I'll pass it along. Thank you guys.

Thanks Brian.

Your next question comes from Omar Saad with Credit Suisse.

Hi, Omar.

Hi guys how you are doing?

Great.

I wanted to follow-up on the sales, the revenue line, you know, by my calculations and I know you look at it probably a little bit more year-to-date, but this quarter was probably your best revenue quarter I think in almost three years. So wanted to get, dive in a little bit more, I wanted to get the licensed male underwear in department store channel, what exactly that is? And also have you talked a little bit more about the hosiery business which was actually pretty surprising to me given a lot of the trends we are seeing, I don't if that's the tights that women seems to be picking up a little bit more recently and if that's what driving the upside there. Any more color you can give behind few of those items would be great.

Sure, and I will start by saying we are focused generally on year-to-date, I do want to state that we do have volatility on the sales line from a quarter-to-quarter basis. So it's always best to look at us with a couple of quarters together for a longer term trend, and you will hear me say that when its up 3%, you also hear me say it when it's down, so I want to be consistent there. But let me hit those two items that you talked about in detail, first on the men's licensed business, that's really our Polo license and we sell -- we have that license for fairly long period of time and it's really being impacted by about three things. That's department store retail trends especially given the consolidation and door closures and things that were happening in that channel impacted that Polo men's underwear business. We also had a Chaps license with that business which we exited last year and that's the second factor. And then the third factor was when we came into 2007, and we renewed the contract Polo put slightly more restrictions on the channels of the retailers in which we could sell, and that's impacting that business. So it's really a bunch of tactical issues that's impacting that.

And it's having a substantial impact for the size of the business. It is less than a $100 million of our total sales and it's down probably, it's probably impacting us around $10 million or so on a year-to-date basis. In terms of hosiery we are beginning to reassess what are our long term outlook is for that business. Historically that industry has declined at double-digit rates; we have seen that for well over a decade. We are seeing that declines start to slow and moderate, and we think that it may be closer to low single-digits to at most mid single-digit declines. So we still see a declining and therefore we will manage that business for cash, but we think actually the trend may start to slow down a little bit.

Okay. Can you explain what you think is happening in the category, why the trend might be changing a little bit?

Well, I think, you know, that business long time ago was huge. It has been in a long, long term decline, and the big factor was that women used to wear, 15-years ago the biggest segment of the population was five day a week hosiery wear because they wore it to work. Today, I think the market is now the size where it's more of a special occasion and it is starting to hit that sort of overall special use run rate. I still do think that it has some declines in front of it for a couple of years, but I think that's the major trend. You are seeing a few fashion trends change a little bit, but I think most of it is that the markets now are getting to a more sort of stable size of repeat purchase for special occasion use.

Okay, great. And I wanted to ask you about -- your year inventories were -- looked extremely clean coming out of the quarter. I wanted to ask you what your sense is given that you know, September - trends in retail and kind of month to-date October inventory levels in the channel, how you would expect that to play out over the next few months, based on weather, based on holiday, based on macro weakness. What happens to the inventory levels at retailers if are really are building up in the channel?

Right, okay, so you are asking about retail inventory levels. Not our inventory levels?

Yes, that's right.

You know, as I was saying when I was answering Brian, retailers always focus on bringing their inventories down post Christmas especially in that January timeframe, a lot of it -- for a lot of them it's year-end. They want to make sure their existing the season as clean as possible. We are seeing a focus on inventories earlier than we normally do and I think it's a reaction by retailers on saying, let's not try and manage it with a sledge hammer at the end, let's try and be more thoughtful and graceful about it going into the holiday season. So I think they are just trying to get outside in front of it. The impacts on our business really depends upon -- which segment your talking about? Outerwear its very different than innerwear. Outerwear they will do a buy, they figure out how much they are going to buy, it might shift a little bit, if they are little bit nervous they will reduce the amount of that buy and that's that. On the innerwear side which is replenishment business while they are going to manage inventory a little bit more tightly they still manage it to a week supply basis, if the sales are there they reorder and our shipments will be there to support the business. So it's a little harder to predict exactly what that's going to mean, but I do think that they are going to have their inventories down a little bit earlier this season than last.

And do you have the ability to kind of slow down production kind of push back a little bit on the supply chain to manage that or how flexible can you be there?

You know, that's one of things that we are constantly doing, is always making sure that our supply chain is sort of matched to our overall demand level. We don't make to order though, we make to inventory and so we will try and smooth some of the impacts of production through the inventory through billing inventories or taking them down, but that's a small effect around our total inventory levels, it's not going to -- you are not going to see huge swings in that on a percentage basis with the inventory levels.

Okay. And last quick question, cycling, the cost of it being a standalone company is spun off September last year, should those costs be fully cycled for the fourth quarter?

Yeah, I think by the time we walk through the fourth quarter we will be fully annualized and it will be at full run rate.

Okay, but not as of the third quarter but as of the end of the fourth quarter?

Correct, fourth quarter.

Okay. Thank you.

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

Hi Eric.

Hi guys, how are you?

Great.

Good, following a little bit on the top-line in terms of the outlook both for holiday and as we look into '08 and if you could go be just a bit more specific in terms of the mass retailers specifically in Wal-Mart we've seen some commentary out of them in terms of slowing in unit growth. Can you just maybe talk to again how that impacts your business if there is any impact at all given we are looking for relatively low single digit growth here. And then also they've got a new merchandising team in place, understanding they are getting back to more basics which I would assume that benefits you all, but there have just been some sort of speculation out there that hopefully maybe you could provide some color too, Rich?

Yeah, I think everybody is a little concerned about the overall macro consumer environment, there is no question about it, but we also see some trends to try and mitigate that and you mentioned a number of them, and its not just Wal-Mart but it's a number of retailers when they feel that consumers are going to be a little more conservative with their spending, they -- the retailers want to focus on more of the essential items and make sure they're offering value to those retailers, then the more high-end luxury items. And I think you correctly point out that if we got the right programs in place which we believe we do, that can actually benefit us.

At the same time, you know, we are also traffic dependent and if the consumer is a little bit more conservative and they shop a little bit less, it's going to ultimately impact the traffic and can impact our sales. So that's why it's a little hard for us to know exactly what the impact is going to be.

Okay. And in terms of your visibility though to the kind of the programs as we look 12 months out, assuming that you are planning very much with those mass retailers and I am getting to more of just their positioning both from a branded and private label perspective, any sense on your part that given the weaker environment they may try to push a little bit more on the private label side?

You know, in our categories, especially in innerwear the price differential between private label and brands is relatively small, for example on a 6 packet socks you might see private label around 4 bucks and the brands may be anywhere from $0.25 to at most $0.75 more, so it's fairly small on both the percentage and the dollar basis. So that's not necessarily the -- as in some other categories where private label has a huge differential, that's really not the focus of the retailers or even that consumers to say, okay, I've got to save an extra quarter here and it's critical. So we don't expect any major shifts from that perspective. And in fact what we see is a lot of retailers saying now what's important is providing value on strong national brands, and so I think that may actually counter some of that trend.

Okay. Maybe turning to supply chain real quick, announced the building of a textile facility in China, can you kind of remind us a sort of the plans in terms of either just outright acquiring or either selling a textile facility versus building and sort of the plan as we go forward with the restructuring?

Yeah, the -- our stated strategy for our supply chain globalization is to be balanced across hemispheres equally between the western hemisphere and Asia. And so selecting the Nanjing facility for our first textile plant just is right in line with that long-term strategy. Last year we started -- we actually purchased the sowing facility in Thailand which is part of that strategy and the idea would be to have a balanced network of textiles and sowing throughout Southeast Asia and in China to help us to achieve that goal. I will state that this is a very long term strategy; we've just selected the site, we will start the building process and so the Nanjing facility won't have any material impact on our P&L for a number of years yet to come, it's really our long-term strategy that we are focused on with that initiative.

Okay fair enough. And then maybe Lee, just real quickly on tax, do we expect that be 30% as well in Q4?

Well, 30 -- we had a 30% rate in the first three quarters and we pegged our rate for the year between 30 and 35, so it will be in that range, yes.

Okay, fair enough. Thanks guys.

Once again, ladies and gentlemen, if you would like to ask a question, please press star then the number one on your telephone keypad. Your next question comes from Steve Riccio with Landmark Capital.

Hey, guys, great quarter. Couple of things here; obviously you guys did really well on the topline and in your margins and the first question I had was I wanted to know what -- I am assuming it's sustainable going forward.

You know, we've stated that our first full year of independence calendar year 2007 is our baseline performance and we've published long-term growth goals of 1% to 3% revenue growth. We believe with the cost reduction opportunities we have we can magnify that into 6% to 8% operating profit growth excluding our restructuring actions and with our strong cash flow and ability to pay down debt and repurchase shares we can further magnify that into double-digit EPS growth, and we believe that is sustainable for three to five years in the future.

Excellent. Now another question regarding cotton prices. I was recently at a Gildan presentation; they seem to I guess be leaning towards pushing through some pricing increases because of the rise in cotton prices. Obviously you guys have locked in the cotton prices through May, but I just wanted to get a sense as to what your thoughts are in terms of -- if we did see increased pressure -- upside pressure in cotton prices, would that be something you guys would contemplate and how likely do you think that you'll be able to push something through?

Let me segment the market into the T-shirts and fleece sold through the imagewear channel which is sold to wholesalers and then ultimately screenprinters, separate from the traditional retail environment where the bulk of our sales are, the dynamics in each of those are very, very different. Our sales of casualwear to the imagewear segment are less than 10% of our overall sales, and the dynamics in that environment are, pricing actually happens in that environment on a weekly basis.

In the retail environment it's much more of a consumer goods business where prices don't change very often especially in the innerwear category the retailers will buy programs and you will tend to see a lot of stickiness at the -- on the overall retail price, and similarly even with the casualwear sold at retail those programs aren't put up for bid very often, so you don't have a whole lot of dynamics of price change going on.

When it comes to cotton pretty much the industry on the retail side, their long term average of prices has been about $0.55, when it dips a little bit below that we pick up a little extra margin, when it dips up a little bit above that they can constrain our margins a little bit. So you are not going to see retail prices change and fluctuate up and down with the price of cotton. Now if there was as systemic change that was large like if cotton went over a $1 and it looked like it was going to stay there for a long period of time clearly that would work its way through price even on the retail side, but you don't see a lot of price movements like you would on that -- in that imagewear channel both up and down.

Right. Thanks guys.

Your next question comes from Reade Kem with Merrill Lynch.

Hi, good morning. Thanks.

Hi Reade, how are you doing?

Okay, how are you? I just wanted to follow up on the question about China, I was just curious if you could tell us a little bit more about what you plan to produce there, and may be how much it will cost and it sounds like it's going to not be actually up and running for quite sometime, maybe a little bit more specifics on that?

You know, as I've said this is one major step in our long-term strategy of balancing our supply chain across hemisphere so it is a long term strategy. These plants will cost anywhere from $75 million to $100 million. It is a textile facility so it will make actually knit fabrics which go into a whole host of our products from underwear bottoms to fleece tops, so it's really a fabric plant not really a full package complete plant that makes the finished product. That would go to the sowing networks that would either be in Southeast Asia or in some cases elsewhere in the world. And in terms of time as I said it maybe, it takes awhile to build these facilities then start to ramp them up until they hit full production. You could be three years out.

Okay, that's helpful. The only other question I have was just on the integration front just if you could update us on what you're doing in terms of IT and how that's going, and whether there are any milestones you passed on that front?

Yeah, on -- from a systems perspective, you know, we have a long term process of really moving towards more of an SAP centralized approach. Now we don't have time constrains to rush through that, and we clearly will never put the business at risk in a large ERP conversion but we have started the order to cash process and we basically one month ago completed the first step of that. So we are feeling good, but it's very early and again our pace will be measured and we will not put the business at risk as we go through that.

Thanks.

(OPERATOR INSTRUCTIONS) Your next question comes from [Art Rulac] with [Wybro Capital].

Hi guys.

How do you doing?

Doing well, thank you. A question, I think Rich had been giving and interview in one of the local papers in early September and he had mentioned expanded distribution perhaps in Asia as a sort of focus international growth. Can you comment on that a little bit more?

Yes, from long term perspective, we believe that Asia holds a lot of growth potential for us as we build our supply chain there and there is no reason we shouldn't have a strong commercial business there. Today we already have about a $100 million business in Asia, it's mainly in Japan, we have been selling the Hanes and Champion brands in Japan for two decades and we are doing quite well. We started selling Hanes and shortly thereafter Champion in China, and while that business is still fairly small, it's growing rapidly and we also launched Hanes in India, couple of years ago and again while it's small it's growing rapidly. So we feel from a very long term perspective very bullish on Asia, and I think overtime it will play a much more important role in our total portfolio.

Is there sort of any timing in terms of ramping up the expanded distribution in those areas or is that something that you are continually working on?

Well we are actually seeing very strong growth from that arena, now it's on a $100 million base, so even strong growth from there it still needs to build for quite a while for it to have a fairly substantial impact on our total sales growth. So we have been aggressively expanding distribution in growing that business for a couple of years so we feel quite good at we it is at. In terms of very long term, can it much bigger, that could be an area as we continue to strengthen our balance sheet over the next couple of years and begin to look at potential acquisitions, acquisitions and commercial acquisitions in Asia could possibly make sense. The demographics especially in China and India are very well suited for strong growth in our categories. Income, household incomes there are very low and as they rise our types of products become a larger share of people's expenditures and we can have not only the population growth driving our sales but also the income growth.

Great, and touching on one other point in that article. I believe you guys were terminating or cutting backs some of the retiring medical benefits at the end of the year, and I was wondering if there was any sort of quantity what costing that might derive in 2008?

From the standpoint of the changes in 2007 in the fourth quarter which said we'll have roughly about a $30 million one time gain from that program. So we'll see what that looks like in the fourth quarter and on the ongoing run-rate, not material but changes, it's basically included in our 6% to 8% operating margin growth goals.

Great. Thank you.

Your next question comes from Kevin Zeats with Goldman Sachs.

Hi, good morning.

Hi Kevin.

I just wanted to ask about your confidence in the first half next year and whether that's an indication that you either have channel gains or some program gains with existing retailers?

You know, overall and let me jut talk about the -- when I talk about our outlook for the first half of next year remains unchanged and I want to be specific that we are not seeing any indication of people's concern about the macro consumer environment that they do have concerns about for holiday spilling into next year and that's why it remains unchanged. We do believe we've got the right brand investments going on, the right action plans in place to begin achieving our growth goals off of our 2007 base.

So I guess more of -- you are saying then it's more just sort of a weather related -- it's more of a weather related issues then the macro issues?

Well, I think that the fourth quarter the concerned the people have out there is a little broader than weather, I think there are also -- and this is not just us I think the overall retail environments are concerned that consumers are just feeling a little bit more conservative with their spending, but nobody really knows how that's going to translate into actual sales at holidays, it really just remains to be seen.

Okay. So it's reasonable to assume that if does happen that it could spill over into the first half, is that right?

As I said right -- what may happen, I can't really predict right now, it doesn't look like it is spilling over, I think we just need to get through Christmas and everybody will have a much better insight into what the future holds.

Sure. Also I want to talk about the international number, is there any currency impact that's meaningful on your top-line?

Yeah, minimal, a little bit of positive but it's really minimal to our overall results.

Okay. And then the -- in terms of cotton and you sort of mentioned that, prices kind of sticky at least at retail. Is there any reason why you wouldn't want to, I guess hedge around that to offset the volatility that could happen in your numbers?

Approach on cotton has been very consistent, our core strategy isn't hedging cotton, now we always buy it a little ahead 3 to 5 months ahead at any given point, but right now we don't think that that's something we are going to change that policy, we are going to be consistent in what we do.

Okay. And then, lastly if you could just comment on the decision to sort of consolidate the El Salvador plant, what you get I guess out of having them in-house as opposed to as a third party supplier?

Our facility in El Salvador we believe will provide a great base from which we can expand our operations in Central America and as a third party relationship our ability to do that would have been somewhat limited and so it just fits in our overall strategy and it allows us to also better control our entire supply chain. We believe that when it comes to owning versus sourcing that where we can gain a large-scale advantage in our basic core categories and control that supply chain and ensure the integrity of that supply chain we are better off where we can't gain that scale advantage like for niche products for example for Champion or C9 by Champion we will actually source.

Okay, and were they an exclusive supplier?

The arrangement originally was not to be an exclusive supplier as we got closer and closer working together we became predominantly their sole customer and that's when it started to look like it made a lot of sense, the operation is doing great, outstanding workforce and management team that it would perform a great base from which we could further build and expand.

Your next question comes from [Kendrick Tychey] with CIBC World Markets.

Hi.

Good morning Rich.

Good morning.

One question from your gross margins, kind of bit more color and just by segment on that, just circling back on that to see if there is any more color you could provide?

Yeah, we don't really give color on gross margin on a segment by segment basis or actually a category by category basis, and I think as we move forward in the future we will be able to talk more about that next year but this year, first year out of the spin, it's just not something we talk on about.

Fair enough. Thank you.

Your next question comes from Jay Soul with Morgan Stanley.

Hey, Jay.

Hi guys. Just wanted to ask another gross margin question; it looks like we're about halfway through the $250 million of restructuring cost that we initially talked about around the spin, and since we're already halfway through that, I want to know when we might see some impact to the gross margin line, so if you kind of talk about, relative to how gross margin was be down a little bit this quarter what we might see going forward; that would be great.

The restructuring, we've announced $120 million of the $250 as you cited, so we are about halfway there and it's our goal to continue to accelerate that as quickly as possible. But a lot of those investments and those charges in the supply chain really take time as we build factories, as we move production offshore. So there is a little bit more of a time lag on those kind of benefits as to when they hit gross margin. And we are seeing some positives here, we are seeing some purchasing, consolidation, savings, things of that nature. So some of that is starting to get in, but generally the supply chain piece really is something that takes a little more time to come to fruition.

Okay. Thanks a lot.

Ladies and gentlemen, we have reached our allotted time for questions. I would now like to turn the call over to Brian Lantz for any closing remarks.

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

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