漢佰 (HBI) 2007 Q4 法說會逐字稿

Good morning. My name is Amanda and I will be your conference operator today. At this time, I would like to welcome everyone to the Hanesbrands Inc. fourth-quarter fiscal 2007 investor conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (OPERATOR INSTRUCTIONS). Mr. Lantz, 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 our fourth and final quarters of 2007, our first full year as an independent company. Hopefully, everyone has had a chance to review the news release we issued earlier today. The news release and the audio replay of the webcast of this call can be found in the Investor section of our Hanesbrands.com website.

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 news 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 fourth quarter and will share his perspective on our first full year of independence. Lee will then provide detail on various aspects of our financial performance for the quarter and full year. Following our prepared remarks, we have allowed ample time to address any questions that you may have.

Before I turn the call over to Rich, I want to take a moment to invite everyone on the call to attend our Investor Day on Tuesday, February 19 in New York. We are excited to introduce our extended management team to equity and debt investors and allow you to review our achievements, strategies and opportunities in more detail. The event will be webcasted, but we are looking forward to seeing you all there.

As a reminder, registration is required for all attendees, so make certain to RSVP to our offices as soon as possible to ensure your participation. If you haven't received an invitation, please contact me and I will ensure that you do. 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 accomplished much in our first year and I am very pleased with our performance. We had a good quarter and a good year, growing both sales and profits in a very challenging consumer environment. We reversed years of sales declines, growing sales in each quarter of 2007. We continued to improve our operating margin even after absorbing increased costs and investments and we significantly strengthened our balance sheet.

Let me now provide more detail on our business. We grew sales $71 million for the year, an increase of 1.6%. Sales in the second half of the year were particularly strong as we grew sales, total sales, 3.1% in the third quarter and 2.4% in the fourth quarter. Our strategy of investing in our largest and strongest brands is generating growth. In fact, sales for three of our four largest brands -- Hanes, Champion and Bali -- all increased during 2007.

Sales for the Hanes brands were up mid single digits for the year. Sales for the brand increased in most categories. Casual wear was fueled by a return to basics by mass retailers, as well as new program placements. Socks were higher, primarily due to new programs at mass. And men's underwear benefited from an increased focus on our core product and better overall performance during the year and holiday season. We did experience continued softness in kid's underwear, much of which was earlier in the year and declines in Hanes women's intimate apparel.

The Champion brand delivered double-digit sales gains for the year and in fact, this is the third year in a row that Champion sales have increased double digits. In 2007, we expanded the depth of distribution in sporting goods with our Champion Double Dry performance products. C9 by Champion continues to perform well at Target and Champion recently launched its first large consumer advertising campaign in several years and we continue to be enthusiastic about the potential of this very important brand.

Sales for Bali, one of our large intimate apparel brands, increased mid single digits for the year with growth in both bras and panties. This performance was the direct result of our turnaround efforts that began over a year ago. We launched our Passion for Comfort advertising campaign earlier last March and in December, Bali shipped the largest product launch to date, Bali Concealers, with very good preliminary retail results. Bali Concealers TV advertising breaks February 11.

Our third largest brand, Playtex, experienced weak sales in 2007, ending the year down high single digits due to the soft department store and midtier sales in the first three quarters. However, in September, we launched our Playtex turnaround plan with a new advertising and marketing campaign. The new campaign began to positively impact sales in the fourth quarter as sales for the quarter finished down only 1%.

Our investment in our brands is working and retailers have taken notice. Sales for the year to our top three customers -- Wal-Mart, Target and Kohl's -- all increased. The success that we had with our retail partners in 2007 will strengthen our already strong retailer relationships and position our brands for long-term success.

Turning to international, our sales were higher there as well. Our China and India businesses, while small, saw strong double-digit increases driven by significant retail distribution gains. And the strength of our European casual wear business in the spring print channel continues. We have now experienced double-digit volume gains for 10 consecutive quarters in our European business.

Turning to profit, our operating profit, excluding actions, was up nearly 7% to $102 million in the fourth quarter and up more than 3% to $432 million for the year. Our full-year operating profit margin, excluding actions, was 9.7%, up 20 basis points.

In 2007, our ability to reduce costs and execute on our consolidation and globalization strategy allow us to expand margins. We exceeded our goal of offsetting $36 million of increased standalone costs and investments in our strategic initiatives. These included a $16 million increase in media, a $13 million increase for process changes and IT to support consolidation and incremental standalone costs of $7 million. This level of investment in standalone costs are now at sustainable run rates.

We achieved a number of key milestones in our global supply chain strategy in 2007. These milestones included the further consolidation into fewer larger facilities in lower-cost countries. We approved the closure of 20 operations and we closed 15 operations in 2007.

We also achieved significant milestones to balancing our supply chain across hemispheres. We added offshore textile capacity as we continue to build out our network in Central America and the Caribbean and we broke ground in China on our first textile facility in Asia, which will be central to our Asian network.

Lastly, one of the most fundamental elements of our performance has been our strong, consistent cash flows. This continued in 2007. We generated $359 million in cash flow from operations for the year, up nearly 30%. Our intent is always to use our strong cash flow to efficiently drive shareholder value. In the first year and a half after spin, we plan to primarily use our cash to reduce leverage. Since spin, we have reduced our debt to EBITDA ratio from 5.2 to 4.6.

Many of you have expressed interest in our ultimate capital structure and we will discuss that topic in more detail at our February investor meeting in New York.

In closing, I am very pleased with our performance in our first full year of independence. Our scorecard shows several successes. We generated growth, improved operating profit performance and used strong cash flow to pay down debt, increase pension funding and repurchase shares. We are in a strong position coming out of our first year as we strive to achieve our long-term growth goals for sales, operating profit and earnings per share. This would not have been possible without the significant efforts of our worldwide workforce to manage change, embrace our improvement strategies and focus on our competitiveness. I appreciate all of their efforts and commitment to our success. Now I'd like to turn the call over to Lee Wyatt who will review our financial performance.

Thank you, Rich. With the completion of 2007, we now have a quarterly and an annual baseline from which to measure our future performance against both past results and our long-term growth goals. So let me review the full-year financial results for 2007 and the most recent quarter, beginning with sales.

Sales for the fourth quarter of $1.16 billion increased $28 million or 2.4% over the same quarter last year. For the full year, total sales of $4.47 billion increased $71 million or 1.6%. We achieved our goal of reversing the prior year's sales decline.

The quarterly and annual sales increase was driven by gains in the outerwear segment that grew 9% in the fourth quarter and 6% for the full year and the innerwear segment -- the international segment, that grew 13% in the fourth quarter and 5% for the full year. The innerwear segment declined less than 1% in both the fourth quarter and the full year.

The hosiery segment, which is showing signs of slower sales declines, decreased by 12% in the fourth quarter, but only 4% for the full year.

Now I'd like to turn to earnings per share. It is important to note that the fourth quarter of 2007 is the first reporting period in which the current quarter and the prior year quarter both included the post-spinoff capital structure. GAAP earnings per share more than doubled in the fourth quarter to $0.52 compared to $0.25 for the same period last year.

Earnings per share, excluding actions, which we feel is a better indicator of our performance, increased 31% in the fourth quarter to $0.38 compared to $0.29 a year ago. Earnings per share, excluding actions, is calculated on Table 4B of the earnings release.

Total year GAAP fully diluted earnings per share were $1.30 compared to $2.16 last year. Earnings per share, excluding actions for the year, were $1.65 versus $2.62 last year. The full-year earnings per share figures reflect higher operating profit, but increased interest expense and a higher effective tax rate when compared to last year. You should recall that the spinoff occurred in September of 2006, so full-year 2006 only includes four months of the interest expense on the spinoff capital structure.

GAAP operating profit increased by 31% in the fourth quarter to $126 million or 10.9% of sales, up $30 million from the same period last year. The increase was mainly the result of lower restructuring charges and lower spinoff and related charges. GAAP operating profit for the total year increased by 6% to $389 million or 8.7% of sales, up $22 million from 2006. Approximately half of the increase is a result of improved business performance. The other half of the increases is mainly the result of lower spinoff and related charges.

Restructuring and related charges were $7 million in the fourth quarter and $83 million for the total year. These charges are primarily for plant closures and staff reductions. 47% of the 2007 restructuring charges were non-cash. Non-cash charges are primarily accelerated depreciation 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 of structuring and related charges over the three-year period following the spinoff. Since the spinoff, we have recognized $116 million in restructuring and related charges. The Company also realized a curtailment gain of $32 million in the fourth quarter of 2007 as a result of benefit plans changes that were announced in 2006. A similar gain of $28 million was recognized in the fourth quarter of 2006. Since the curtailment gain is an unusual item, it is not included in operating profit, excluding actions.

Now I will review operating profit, excluding actions for the fourth quarter, which increased $6 million to $102 million or 8.8% of sales versus 8.4% for the same period last year. The increase was the result of lower SG&A expenses.

Full-year 2007 operating profit, excluding actions, increased $14 million to $432 million, up 3% compared to 2006. Operating profit margin, excluding actions, was 9.7% of sales compared to 9.5% for the total year 2006. Benefits from our cost controls have more than offset the $36 million incremental spend that Rich mentioned and also $21 million in higher cotton costs.

Our average cost of cotton in 2007 was $0.56 per pound. Based on the price of cotton already in inventory and hedges on future purchases, we have visibility to our cotton costs for the first eight months of 2008. Our operating profit through August of 2008 should reflect an average price of $0.62 with the first quarter being lower and the third quarter being higher.

Interest expense decreased in the quarter to $47 million from $53 million a year ago as a result of reduced long-term debt and lower interest rates on our debt. For 2007, full-year interest expense increased to $199 million from $80 million in the prior year. Again, note that 2006 reflected only four months of interest expense as a result of the September 2006 spinoff.

The effective tax rate was 33.7% in the fourth quarter, higher than prior quarters due to the $32 million curtailment gain in the quarter. The full-year tax rate was 31.5% compared to 25.5% for the full year 2006. Our effective tax rate is heavily influenced by the amount of permanent capital investment we make offshore to fund supply chain projects. I will talk in more detail about our future tax rate and timing of capital spending during our investor call meeting on February 19.

Now let me review the balance sheet and cash flow. The December 29 balance sheet reflects strong liquidity as we ended the period with $174 million of cash and our $500 million revolving credit facility remained undrawn. We were in compliance with all debt agreement covenants. Our focus on working capital yielded results as evidenced by a $99 million reduction in inventories in 2007.

Long-term debt at December 29 was $2.3 billion and reflects a pre-payment of $50 million in the fourth quarter. In 2007, we paid down $178 million of long-term debt. Approximately 67% of our debt remains at a fixed or capped rate.

In the fourth quarter, we also completed a $250 million accounts receivable securitization that replaced a portion of our term loan debt and reduced interest rates for that portion to LIBOR plus 50 basis points.

We did not repurchase shares in the fourth quarter, but for the total year, we repurchased $44 million of our company stock at an average price of $27.55. These repurchases substantially offset share dilution.

Our cash flow statement reflects $359 million net cash provided from operations for the year, which is $79 million higher than 2006. Capital expenditures of $92 million for 2007 were partially offset from proceeds from property sales of $17 million. Net capital expenditures were significantly lower than depreciation for 2007 due to the timing of spending for supply chain projects.

In summary, in 2007, we saw sales increase and our operating profit, excluding actions, continue to benefit from cost reduction initiatives, which are offsetting increased investment in our strategic initiatives and incremental standalone costs. We have established quarterly and annual baseline performance in 2007 from which investors can compare future performance.

From a balance sheet perspective, since the spinoff, we've paid down $285 million of long-term debt. Our pension is now 97% funded due to $96 million of voluntary contributions. We have repurchased $44 million in stock to offset share dilution and have $174 million in cash on the balance sheet. We have reduced our leverage ratio and have over $690 million in liquidity. We are well-positioned as we now focus on achieving our long-term growth goals. I will now turn the call back to Brian.

Thanks, Lee. That concludes our recap of our financial performance for the most recent quarter and full year 2007. 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, our intent is to continue to use these quarterly conference calls to communicate our performance and help investors develop a better 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'll ask that you limit your questions to two or three at a time so that as many of you as possible can get the opportunity to pose questions. I will now turn the call back over to the operator to begin the question-and-answer session. Operator?

(OPERATOR INSTRUCTIONS). Eric Tracy, BB&T Capital Markets.

Good afternoon and congrats on a very solid year.

Thanks a lot, Eric. How are you doing?

All right. If we could, just wanted to, Rich, get your thoughts obviously in this very difficult environment. One, just sort of how you view the Hanesbrands' product offering, the visibility that you have within some of your top accounts with respect to the top line. And then secondly, just as we get into sort of the manufacturing efficiencies that should be realized as we get to '08 and beyond, sort of your thoughts there as they should manifest on the P&L and then potential sort of drags, be it from again potential lower pricing and/or kind of higher raw material costs. Sort of a long-winded question, but maybe address it, that would be great.

All right. So it was Hanesbrands, it was the visibility of top line, manufacturing improvement and sort of puts and takes on the business? I think one of the -- let me hit first the sort of consumer environment because I am sure that is at the top of a number of people's minds. It has been very challenging out there for the last four to six months and we continue to expect it will be challenging. And what is working is sticking to our strategy of driving our brands. As we started to see the issue about a potentially soft holiday, we made a conscious decision that it was time to actually step up and help our retailers navigate this difficult environment, support our business with the right trade spend and you can see the results that we had in both the third and the fourth quarter.

In terms of going forward, I think it is going to be a challenging environment. We are seeing traffic since Christmas continue to be a little soft in retail and we are seeing retailers be a little bit cautious in the very short term.

What they are focused on, what they want across the board do is look at big programs, big ideas, big brands in big categories to help them turn around their businesses. And this is an environment where having our strong brands and the investment in our brands is going to pay -- continue to pay real big dividends, because it is the strong brands that they are looking for to help bring traffic back into their stores.

I think over the next six to nine months what you are really going to find is an environment where the strong gets stronger and the weak actually get marginalized.

In terms of visibility of the top line, I think it is going to be a little bit challenging. It is going to be a little bit less visibility than normal. We are not seeing any major puts or takes in terms of space changes out there at retail and you can see those fairly far in advance because retailers only generally reset their space about once a year on a major basis and maybe a minor reset around back-to-school or holiday. So I don't see any major things there. It is really all about traffic and making sure that we are providing our retail partners the right programs to help bring traffic back into their stores.

In terms of other -- the drags on our overall business, let me just talk about it this way. Over time, we have gotten numerous puts and takes that have a big impact on our net income and EPS. For example, cotton can be going against us in the short term as it has been in the past year and is right now. Sometimes we have unexpected supply-chain disruptions. We have also got other things that, like interest rates, that can move for or against you. Another example might be changes in duties. A good example right now is Costa Rica is in the process of passing CAFTA and once that happens, we will probably be able to get a refund in 2008 to offset some of the other issues. And there is always puts and takes on our business and a lot of times, they never go all against you nor all for you, so a lot of them tend to cancel out. And we don't see any of these short-term puts and takes having any impact on our ability to hit our long-term growth goals.

Okay, so just to kind of maybe summarize there then, all the supply chain initiatives that you have undertaken with the restructuring, believe fully more than offset and should continue to be huge drivers behind the bottom line relative to some of these kind of takes, be it higher cotton, just sort of the weaker environment, none of which will derail you from sort of the 1% to 3% top line, 6% to 8% EBIT growth, which translates to double-digit earnings growth. Is that still accurate?

Those are absolutely our long-term growth goals. We are committed to achieving those long-term growth goals and there is always short-term aberrations that work in your favor or against you. There is nothing out there that says that our long-term model or our long-term strategies are at risk. In fact, everything that we have been doing in the environment today is actually reinforcing that we are on the right track and we believe in our ability to achieve those growth goals over time.

Okay, fair enough. And then maybe just lastly again, trying to dig a little bit as to the restructuring and sort of the supply chain moves. Any way to provide a little bit of clarity, and maybe you do this on the 19th, but just in terms of the cadence of some of the manufacturing moves this year that could potentially, again, either offset or manifest on the P&L this year?

Yes, I think the best place to do that -- Gerald Evans, who is in charge of our global supply chain, will be presenting at the conference on the 19th and we will be putting a lot of that in perspective for you. And I think seeing that big picture will be the right way to get that information.

Okay. Fair enough. Thanks, guys.

Omar Saad, Credit Suisse.

How is everybody doing?

Good.

A couple of quick questions. First, I just want to follow up really quickly and this maybe counts as only a half question. On the environment, it what sounds like it has been tough out there for the last four to six months, you mentioned, Rich. But if I look at kind of the quarterly cadence here, you guys have now done 2.5% revenue growth this quarter, 3% revenue growth last quarter. Those are the two biggest numbers going back in time you have done revenue-wise since '04. So clearly, it seems like you're being able to weather this environment pretty well, but do you have any additional thoughts to help reconcile?

We have been focused on executing our strategy of driving our biggest brands in core categories for a couple of years and now, you are seeing it pay dividends. There is no question about it. Omar, I think you had a similar question at the end of -- in the call last quarter where we only had one quarter of that and I am always cautious to say -- you do see fluctuations in our business on a quarter basis. But when you add up the couple of quarters in a row, we are very pleased with that top-line performance and I think it speaks to our strategies working and taking hold.

Perfect, perfect. Just wanted to confirm that. And then another question. I know you don't probably want me to ask this and get into the details and the components of operating margin, but it looked like the gross margin number was a little bit soft this quarter relative to the recent quarters and last year, it kind of looked like the December quarter had a softer number. Is there a seasonality issue there or is it just the result of the mix shift from hosiery or can you answer that at all?

Yes, this is Lee. Let me speak to that. Our operating margin of 8.8% in the quarter was above the 8.4% last year and we are pleased with that. I will tell you we are establishing our patterns on a quarterly basis in 2007 to understand actually how our business performs quarterly.

On a specific kind of comment on the fourth quarter this year, we did spend a little bit more, about $6 million, on trade spend, promotion spend to drive the business and we got great results out of that for the quarter in terms of our sales growth of 2.4%. Definitely the right call.

We also, from a gross margin perspective, we traded down the margin a little bit because our outerwear segment sales were so strong, up 9% in the quarter and those carry a lower margin than, say, our innerwear segment. So we did trade down, but we are very pleased with the sales growth we had there.

Excellent, excellent. And one last question, sources and uses of cash, it looks like you are driving a lot of cash out of inventory. Your turns still look a little bit low relative to the competitors out there. Can you give me any insight into how you are focusing on that and how you think of that as an opportunity to generate cash going forward?

Sure. As we talked about it, spin, one of our key focuses was reducing invested capital. We knew there were a couple of places we could go at very quickly, like accounts payable and we have been very successful there and we actually created about $67 million in cash. Inventory was a focus as well and we are attacking inventory. But you always -- with inventory, we feel very good above the $99 million that came out of inventory in the year -- but our primary focus is servicing our large customers efficiently and we will do that first and foremost. To the extent we can take dollars out of inventory, which we think we can, we will do that, but we will be thoughtful about that and again, inventory with us is a process that includes the entire business. There is many subprocesses there. As we improve efficiencies, we can attack inventory, but again, we want to maintain the high service levels with our key customers. It is really critical to us.

Of course. Thank you.

Brian McGough, Morgan Stanley.

Hi, everyone, thanks. A question for you guys on 2008 specifically. The quarter looked great. Sales looked really, really good. SG&A looked solid. The gross margin obviously didn't look as good and I was wondering just what can you tell us just to get us more comfortable that at the time we anniversary the SG&A savings from the cost cuts that you implemented in the third quarter of this year, so we are talking, what, like October-ish of 2008, that is at the point where the year-over-year SG&A saves start to get a little tougher and we will need you to put out some better gross margin improvement. What is your level of confidence that we will start to see that flowing through the model?

Overall, as I talked about with Eric, there is going to be lots of puts and takes in the business and as I look at our total net income and our ability to drive EPS double digits, I think there is a lot of things that are going to go into that. In any given quarter, overlapping some initiatives is always going to be a little bit more challenging. We have got a huge number of supply chain initiatives in the pipeline that have actually been building and we continue to pay dividends. We have got some other advantages working in our favor.

In terms of exactly how it is going to play out quarter by quarter remains to be seen, but we are very confident in our ability to hit our long-term growth goals, not in any particular year or quarter, but over time.

Okay, that's fair. And then on the SG&A side, is that it or if you had to, could you find more room to optimize the organization over the next one or two years if you have got to find more cost saves?

Very broadly, our major initiatives are globalization and consolidation. From a consolidation standpoint, we are very well along in that process and we are probably closer to 80% done. But that is not the only component of SG&A savings. When we talk about supply chain consolidation and fewer and bigger, that also includes for example distribution facilities. So there are still a number of areas that we have yet to attack.

When you look at our long-term growth goals of improving operating profit at a faster rate than sales giving us the operating margin expansion, you are going to see continual improvement from both areas and it will show up in both gross margin and improvements in SG&A from a long-term perspective.

Got it. And then I guess lastly, Rich, with the announcement out of Wal-Mart yesterday -- well, I think it was yesterday -- just about how they are changing up their overall apparel organization again, can you just talk a little bit about how that strategy impacts you? It sounds like, if anything, they are backing off and starting to say, okay, we have got to rely more on brands. They have got a new office, which is opening up over in New York, not that they are going to be designing underwear out of there, but I know you guys are intimately involved with them and what they are doing, could you just talk a little bit about what is going on with your relationship there?

They had an investor call -- I think it was back in September -- where they talked about their entire business, what their plans were to attack holiday and they talked about apparel specifically. In that call, they talked about national brands being an extremely important part of their mix and in particular, in apparel, they talked about big brands and items under $10 being a major portion of the things they needed to focus on to be successful. That is a lot about what we are -- big strong brands, things that people buy on a replenishment basis and with big programs, that will drive traffic into their store. So I actually do think their model for fixing their business is well-aligned with our overall strategies and we can help each other.

You are going to find that is also true at our other major accounts such as the Targets and Kohl's and so on. They want and need strong national brands to bring people back into their stores and that is going to benefit us from a long-term perspective.

In terms of the organizational changes that were announced, I think it is a little bit of back-to-the-future if you will. They are going back to some of the structure that they had before and putting the buying organization much more in charge. From what we are understanding is that sourcing organization that they are talking about eliminating was actually put up there to try and focus on driving some private-label suppliers and building those relationships and taking some of the power away from the buyers who also drive the national brands and that is going away. And I think overall that is going to be good for our business and our relationships as well.

Great. Okay, guys, thanks and best of luck.

Thank you.

Clark Orsky, KDP Investment Advisors.

Hi. Any more details on the AR securitization that you guys put in place?

Yes, we executed that in the fourth quarter and basically what we did is it is a $250 million facility. Basically, we use those funds to take out some of the term loan A and B notes. It is a great way to use our great receivables from our solid large customers. We basically trade down on our rates from somewhere around LIBOR plus 175 to around LIBOR plus 50 basis points. So we constantly manage our debt. We constantly think about our debt. We constantly try to drive it down and that is just a good example.

Okay and I guess a follow-up was I am trying to remember if you guys have a cash flow sweep and if you do, what gets swept to the term loans this year?

We do have a cash flow sweep. I'm sorry, what was the last part of that question?

Whether you know what you have got to sweep to the term loans yet. What that amount is?

Well, through the year-end, we have paid down $178 million of debt for this year and the bulk of that came there, came from term loan A and B.

Okay. And on the cotton, you gave the kind of number you have visibility on in '08. Can you tell us what the '07 number was for the year?

Sure, we can. And I think to do that though, we ought to put cotton in perspective from an HBI perspective and from kind of this historic price perspective. It is important to understand that cotton is only 6% of our cost of goods sold. We are a large, diverse business. Cotton is only one element that really impacts our profitability. Cotton costs will impact it, our results, but it is very manageable. In 2007, cotton costs actually increased about $21 million for us in the year, but we still grew profits and we managed it well. Again, there are just many factors in our business that influence profitability given our scale and our size.

Putting cotton in perspective from a historical perspective, it is important to note that over the last 10 years, the average price of cotton has been $0.55 a pound. Now within that average of $0.55, swings have been fairly significant. We have seen swings as low as the mid $0.30 range to as high as around $0.80. So this current price, which I think today is around $0.67, $0.68, is well within that range. So we understand that and has not impacted our goals of growing operating profits 6% to 8% a year on an ongoing basis.

Okay, thank you.

Howard Flinker, Flinker & Co.

Hi. I have two questions. Is your new Chinese textile plant for the Chinese domestic market?

No, that is part of our global supply chain and the bulk of that production would ultimately come back to the United States.

And do you need a quota for that or are there know more? I don't remember.

No, quotas are now eliminated for anybody in the WTO.

And the second question relates to the cash flow statement where you paid some -- was it $250 million to related parties? Are there any more payments to Sara Lee?

No more payments to Sara Lee. We should be in good shape.

And that was to Sara Lee, was it, that $250 million I think it was?

In this year, we made no payments to Sara Lee. Those are basically -- one was the AR securitization based on (multiple speakers).

Oh, I see.

Paying down the $250 million and the other is just puts and takes and paying down debt on the shelf.

Okay, I confused the terminology. Okay, thank you.

(OPERATOR INSTRUCTIONS). [Arthur Rulach], [Dry Book Capital].

I have a few questions. First was what do you expect to be your interest cost savings now that LIBOR has been cut so much and I think you've got about $2 billion of floating-rate debt?

Well, when you look at our capital structure, we have $2.3 billion of debt right now. There is about $1.7 billion -- it is floating-rate -- that will benefit from the rate reductions. So we set triggers on LIBOR at different times. For example, our bonds are set every six months and other elements -- the term loans -- are set at shorter durations. So those rates will start -- those rate reductions will start flowing through our P&L this year.

All right. And my second question is the pension contributions you made this year, I guess it looks like in that press release were roughly $48 million and I assume -- were those running through the SG&A line on the income statement?

No, those pension contributions do not directly affect the P&L. What happens is they go into your asset base and they impact the P&L -- the pension expense overall, but they are not dollar for dollar at all. Our pension expense is very low. We basically have frozen our pension plans in 2006.

And will you be making any more contributions at all in 2008 to that?

We are about 97% funded right now, so we have eliminated really the need to make mandatory contributions in the near term.

And then with these healthcare benefits, I guess in the last two fourth quarters, I guess those have been reversals of prior year accruals. Will you have that same phenomenon going on in 2008?

No, that decision on those plans were made in 2006. We had a gain in the fourth quarter of '06. We had a gain in the fourth quarter of '07. It is done now.

Okay, great. Thank you.

Paul Moomaw, Hester Capital.

Paul Moomaw. Good morning. On hosiery, what levers do you have in that business and what seasonality is in that business and have you pulled back at all on that business?

The hosiery industry has been in long-term decline, declining double digits for well over a decade, actually closer to 15 years. And it has impacted our business as well since we are the dominant share leader. Our expectation is that that business will continue to decline. However, we are seeing the growth rate or the decline rate slow substantially and instead of double-digit declines going forward, we actually are expecting single-digit declines. This year in 2007, it only declined 4%. That is the slowest decline rate in over 15 years. So we are still managing that business. It is very profitable. We manage it for cash. We are now starting to think through if it will actually start to stabilize and level off and so we are going to keep working on that business and investing in it, making sure that we are making the right investments and managing it for cash and managing it on a quarter-to-quarter basis. From a seasonality perspective, it is mainly a -- it is strongest in the fall and the winter.

And would that have been -- am I remembering right that Q3 had a more modest decline in sales than Q4 in hosiery?

Yes, it was actually close to flat and that goes to the fact that, on a quarterly basis, our business can be somewhat volatile just because of inventory drawdowns or pull forwards by retailers and so on and so forth. And I think the best number to look at with hosiery isn't any one quarter, but the full-year decline of only 4%, which we are very, very pleased with.

Okay. And you mentioned that you might talk in February about capital structure. Can you remind me what you have said about that in the past and when you do talk about it, would it be in terms of say a target level of debt in dollars or how do you think about it?

Yes, we have always talked about the fact that our business has strong cash flow generation capabilities and we want to utilize those strong cash flows to create value for both our debt and equity investors. We believe that there is no reason for us given the types of categories we are in. We are very replenishment in nature to be investment grade. We also believe that we should have less leverage than we came out with as we spun off from Sara Lee being a debt to EBITDA ratio of about 5.2. So one of the things we will talk about is what our thoughts are with how we utilize that cash flow going forward and sort of what that overall target range may be for a debt to EBITDA basis.

Okay. And last on pension, am I remembering right that at the time of the spin, you had expected that you would be making meaningful cash payments toward that each year for several years, but now you are saying that that may not be necessary?

That's correct. I think we had significant underfunding coming out of the spin. We have now eliminated that. The pension plans have now been totally separated from our parent and at 97% funded level, we shouldn't really have any payments, significant payments going forward.

That's a nice development. Thank you.

At this time, there are no further questions. I would now like to turn the call over to Mr. Brian Lantz for closing remarks.

Thank you. We would like to thank everyone for attending our quarterly call today. We appreciate your support and look forward to speaking with many of you at our investor meeting on February 19.

This concludes today's Hanesbrands Inc. fourth-quarter fiscal 2007 investor conference call. You may now disconnect.