漢佰 (HBI) 2008 Q1 法說會逐字稿

Good morning. My name is Mindy, and I will be your conference operator today. At this time I would like to welcome everyone to the Hanesbrands Inc. first quarter fiscal 2008 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). Thank you, 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 the first quarter of 2008. Hopefully everyone has had a chance to review the news release we issued earlier today. The news release and the audio replay or 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 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 us a summary of our business performance and trends for the first quarter. Lee will then provide further detail on various aspects of our financial performance for the quarter. Following our prepared remarks we've 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 thank everyone who attended our investor day on February 19 or reviewed the presentation on our website. Our extended management team enjoyed the opportunity to meet with investors in person to discuss our achievements, strategies and opportunities.

Now I will turn the call over to Rich.

Thank you, Brian. And thank all of you for joining us today. I am very pleased with the execution of our strategies in the midst of a very challenging consumer environment. We had strong profit growth in a period of soft sales, reinforcing the fact that we have many levers to create value. We improved our profit primarily through continued cost reduction initiatives and management of our debt structure.

Le me now provide you more detail on our business. Our earnings per share excluding actions rose 56% or $0.15 to $0.42 per share and net income excluding actions similarly rose 54%, over $14 million as a result of reduced long-term debt, lower base rates and operating profit growth.

Let me highlight the three major components of the $14 million increase. One, operating profit excluding actions increased $4 million. Two, debt paydown and lower spreads contributed $6 million. And three, lower LIBOR rates contributed another $6 million. This increase was partially offset by slightly higher tax expense.

So why did we have such a strong profit result? It is the direct result of executing our strategies of sell more, spend less and generate cash. Operating profit increased because of our globalization and consolidation initiatives. Gross margin benefited from savings directly attributable to our offshore textile ramp up, consolidating into fewer larger facilities and our lean process improvement program.

SG&A also benefited from cost reduction and while up in rate, it is flat in dollars. Additionally, the reductions are being offset from a timing shift of expenses into this quarter. Clearly our strategy of spend less is working even in this challenging environment.

Another important strategy for us is to get generate cash and to wisely use our capital structure to create value. Since then we have been consistently paying down debt and have restructured our debt to reduce our interest expense. About one-half of these benefits would have been realized in any rate environment with the other half of the savings due to lower interest rates as a result of the softening economy.

The one set of strategies not working well in this quarter is sell more. Sales declined $52 million or 5%. The sales decline was broad based across most categories and most customers. The pervasiveness of the sales decline is one indication that the decline was more the result of macro trends and not specific tactics on our part. This belief is further supported by recent retailer's same-store sales results. Our sales, while less than expected, were in line with retailer comp performance, soft traffic trends and Easter results.

Our market share for the rolling three months through January confirm our beliefs as we actually saw modest share gains. Importantly, our shipment trends were in line with declining sell-through at retail, and therefore our retail inventories are very much in balance relative to our sales. We are now focused on executing sales and marketing programs for the key promotional periods for the remainder of the year. The back-to-school and holiday selling periods are critical for success in our large categories. Our retail partners continue to focus on driving large national brands by offering customers great values at key promotional periods.

So while the soft consumer environment impacted our first quarter and may impact subsequent quarters, I am confident that we are working on the right programs with our retail partners to drive the very important back-to-school and holiday seasons to help mitigate the current environment.

Let me now turn my attention to the broader macro environment of cost and pricing, particularly as it relates to 2009 and beyond. Much has changed since our February investor day. We are beginning to see systemic rising input costs. This is a different view than we had in mid February. First, cotton has broken out of its historical trading range. And second, we are starting to see some other costs work their way through the value chain. More specifically, cotton has recently moved outside its historical trading range of $0.30 to $0.70 per pound, into the high $0.70 range. And while cotton prices could move back down, there appears to be substantial support at these elevated levels.

More importantly, current prices for the crop grown this summer, which will be used in production in 2009, have been consistently in the mid $0.80s. This leads us to believe that instead of prices close to the historical average in the mid $0.50 per pound range, we need to plan for cotton to be in the mid $0.80s later in 2009. And this leads back to pricing. This rising input cost environment is forcing us to think differently about pricing.

First it is clear that sustained price deflation is over for much of the apparel industry since most of the industry supply chains have already moved to lower cost geographies. And second, over time price increases will need to become a tactical tool in this new environment. The question is, how much and how soon. We are in an industry where most buyers and sellers entire careers have been spent in a deflationary environment and mindsets can shift slowly. However, we are starting to see price increases in some select areas. How much, how fast and how broad the price changes become remains to be seen. But we will continually monitor the environment and act accordingly.

To recap, while most of our 2008 costs are known and manageable, we are beginning to see increases that may impact 2009 and beyond. Therefore we are beginning to think differently about these issues. But let me remind you that inherent in our goal of increasing operating margins 50 to 100 basis points per year, our gross cost savings that could approach or exceed $200 million. We have discussed that these gross cost savings would be offset by both cost inflation and price deflation. So while inflation may be higher than we expect, price deflation will correspondingly decline.

Now coming back to the first quarter of 2008; it is clear that we are in a very tough consumer environment. But remember we have multiple levers to create value. There are opportunities for cost reduction and management of debt as we have discussed before. But we also have further flexibility to adjust our tactics if this environment continues. It is still important that we remain sharply focused on executing our long-term strategies, but we are also keenly attuned to our responsibilities of maintaining value for our stakeholders. So we will appropriately balance our biased for executing against our strategies with the need for near-term performance.

In closing I am very pleased with our profit performance in the first quarter of 2008. I remain confident that we are in a strong position as we strive to achieve our long-term growth goals for sales, operating profit and earnings per share. Now I would like to turn the call over to Lee Wyatt who will review our financial performance.

Thank you, Rich. Let me review the first quarter 2008 financial results beginning with sales. Sales for the first quarter of $988 million decreased $52 million or 5% over the same quarter last year. The quarterly sales decrease was broad with declines in both innerwear and outerwear and was across most categories in customers. On a segment basis innerwear declined 8%, more specifically intimate apparel was down 8%. Socks were off by 10% and men's underwear dropped by 5% compared to last year.

Regarding the other segments, outerwear declined 4%. Hosiery decreased 9% with the international segment growing 15%. In spite of the sales decline GAAP earnings per share more than tripled in the first quarter to $0.38 compared to $0.12 for the same period last year. Earnings per share excluding actions, which we feel is a better indicator of our performance, increased 56% or $0.15 to $0.42 compared to $0.27 a year ago. Earnings per share excluding actions is described on Table 4 of the earnings release.

As Rich said, our net income excluding actions increased by over $14 million on the strength of our cost reduction initiatives and the management of our debt. Let me highlight the drivers. $4 million came from operating profit excluding actions which I will discuss more detail in a moment. $6 million came from debt paydown and lower spreads. And the lower LIBOR rate contributed another $6 million. The increases were partially offset by slightly higher income tax expense.

With regard to operating profit improvement in the first quarter GAAP operating profit increased by 28%. Or $19 million to $88 million. The operating profit margin was 8.9% of sales versus 6.6% for the same period last year. The increase was mainly the result of lower restructuring charges. Restructuring and related charges were $6 million in the first quarter. These charges are primarily for plant closures and staff reductions. Roughly half of the restructuring charges were non-cash. 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 recognized $122 million in charges.

Now back to reviewing the increase in operating profit excluding actions. It increased $4 million to $94 million or 9.5% of sales versus 8.6% for the same period last year. The increase reflects the benefits of supply chain and consolidation savings initiatives partially offset by lower sales volume and the timing of media and IT spend.

Gross margin excluding actions increased 200 basis points to 35.2% in the first quarter compared to 33.2% last year. The increase reflects $11 million of cost savings from our offshore textile expansion and plant consolidation. First quarter gross margin reflects cotton cost of only $0.54 per pound. Based on the cost of cotton already in inventory and hedges on future purchases, we now have visibility to the impact of cotton cost on profit for the full year of 2008. 2008 should reflect an average price of $0.66 per pound for cotton but the second, third and fourth quarters should reflect average cotton cost per pound of $0.62, $0.69 and $0.76 respectively. Therefore the higher cotton cost will put some pressure on gross margin rate in coming quarters.

The SG&A rate excluding actions increased 110 basis points to 25.7% compared to 24.6% last year. The increase in rate was a result of lower sales and a timing shift of some expenses. On a dollar basis SG&A excluding action was actually $2 million lower than last year. This decrease reflects the benefits of cost savings initiatives offset by $19 million in higher planned media and IT expenses in the first quarter. The higher media and IT cost was planned and is only timing, but increased the first quarter SG&A expense.

Interest expense decreased in the quarter by $12 million to $40 million from $52 million a year ago. Debt paydown and lower spreads contributed $6 million of the decrease, as last year we repriced our term loan B to reduce our rate spreads by 50 basis points, and we replaced a portion of our term loan A & B with a $250 million accounts receivable securitization to save 100 to 125 basis points. Lastly, our debt structure using capped allows us to benefit by $6 million from lower LIBOR rates.

Our income tax expense increased less than $2 million on a $16 million increase in pretax income. Normally our tax expense would have increased more, but due to our offshore investments from the globalization of our supply chain we were able to mitigate the increase by reducing the tax rate from 30% to 24%.

Now let me review the balance sheet and cash flow. The March 29 balance sheet reflects $652 million of liquidity as we ended the period with $121 million of cash and our $500 million revolving credit facility remained undrawn. We were in compliance with all debt covenants. Given the current economic environment we may choose to be more conservative in the very near-term by maintaining a higher level of cash than we were ultimately targeting.

Inventories were $30 million below the first quarter of 2007 and below expectations. We are watching inventories closely to best balance current supply and demand with potential future demand that typically surges when consumers can no longer postpone purchases in our product categories.

Long-term debt at March 29 was $2.3 billion, approximately 67% of our debt remains at a fixed or capped rate. We have structured the debt so that $1.7 billion is benefiting from lower interest rates. We repurchased $8 million of our company's stock in the first quarter at an average price of $24.69. Our first quarter cash flow statement reflect $19 million net cash used in operations. Capital expenditures were $28 million, increasing significantly in the quarter as we are now ramping up our supply chain investment actions. The increase was partially offset by proceeds from property sales of $7 million.

In summary, in the first quarter of 2008 we saw sales decrease broadly as a result of a difficult consumer environment. Yet, as we pointed out in our February investor meeting there are many independent levers that will drive our earnings growth. Operating profit excluding actions benefited from cost reduction initiatives and lower interest expense and contributed to strong EPS growth. We have the flexibility in our strategy and capital structure to react to changes in the business environment to create maximum value. I will now turn the call back over to Brian.

That concludes our recap of our financial performance for the first quarter of 2008. 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 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 or three at a time so that as many of you can get an opportunity to post questions as possible. I will now turn the call back over to the operator to begin the question-and-answer session. Operator.

(OPERATOR INSTRUCTIONS) Eric Tracy.

Good morning, and congrats on operating in a very difficult environment. But if we could to kind of start off with the top line, Rich, maybe just if you could provide a little bit more color as to what you're seeing in retail, and if anything has changed relative to that 1% to 3% top line growth that you expect to achieve over the next, call it three years for this year? And if not, there is obviously an expectation that things improve in the back half of the year with back-to-school and holiday and if you can maybe just talk about your expectations there.

All right. You know, there is no question the near-term is tough and a little bit tougher than we were expecting; but I believe we are working on the right things with our retailers to drive those key selling periods. Exactly how much those key selling periods can help overcome the soft start really remains to be seen. We are working on the right things to build our brands and to help our retailers actually bring people back into stores, so we are clearly committed to our long-term growth goals of 1% to 3%.

Fair enough. And maybe either Rich or Lee, in terms of the gross margin up 290 basis points year-over-year despite what is obviously a weak environment, could you talk about what it would be in a more normalized scenario? I'm assuming significant promotional activity was a drag; are you able to sort of quantify that for the quarter?

What we saw in the first quarter on a dollar basis for margin was that net dollars increased about $3 million to $348 million. What we saw in the quarter were benefits from our cost reduction initiatives that actually offset the sales decline in the quarter. So we were very pleased with our cost reduction initiative benefit. We did see cotton, though, in the first quarter only at $0.54 a pound versus $0.56 last year. So as we stated in our cotton comments, we will see that increase in the balance of the year.

Okay, and then maybe just in terms of capital structure and sort of uses of cash, obviously seem a little bit comfortable at least with the levels that you got put in a share repurchase. How should we think about uses of cash going forward?

One thing we like about our capital structure and our business model is that we generate strong, consistent cash, and we have the flexibility to use that in a way that really drives value. I think this year we did purchase 8 million shares of stock in the, from the company, and we are limited about 30 million this year. We will be very prudent with our cash uses this year in this environment. We will keep a little more cash on the balance sheet. We will be very thoughtful about how we use cash, but again we are very comfortable with our cash flow. We have good liquidity, and we think it gives us a lot of flexibility to maximize value.

Maybe lastly just in terms of some of the nonoperational levers that you are able to execute on now certainly not non-recurring and a testament to you guys managing through this, but in terms of the interest expense are you still looking for roughly $40 million kind of improvement year-over-year?

Yes, what we did is, as you think about modeling interest expense for the balance of the year we would go back to what we talked about at the analyst meeting that blended rate of 6.9% times outstanding debt. That was based on a 3.25 LIBOR rate. So we just suggest you make your own assumptions around where LIBOR is going to be relative to that 3.25 and adjust that 6.9% blended rate accordingly.

Okay.

And by the way, had you used that 6.9 in the first quarter you would have had a really good estimate of interest expense for the quarter.

Yes, okay, and then tax still on that 22% to 25% range for the year?

Yes, we see, as we said at the analyst day, 22% to 25%. That seems reasonable. We were at 24% for the first quarter.

Fair enough, thanks, guys.

Clark Orsky.

Just wondering how you see things trending as you went into the second quarter in terms of top line.

You know, we've always cautioned people to be careful to extrapolate trends in our top line from one quarter of sales and we think it is always better to look at at least two quarters or so to get a sense. And so I am going to further qualify that by saying, I do see the sell-through trends at retail in April. And if I am going to take an even smaller snapshot we have to be careful not extrapolating that too far. That said, we have seen retail actually strengthen a little bit, maybe the better term would be it is a little bit less worse the first few weeks in April. In talking to our retail partners they are actually feeling a little bit better that April is starting to come back a little bit. There was a weird holiday shift with Easter so it is unclear exactly what impact that had to play in it. But I think that we may see improving trends through the year; although at this point it is supposition.

And I guess just on the increase in cotton that you see going into '09, I was kind of estimating that that is about maybe $55 million or so hit year-over-year. Is that about right?

First let me just hit on the big picture, and I will let Lee talk a little bit to the specific question you have. First of all, I want to reinforce as you picked up on, the 2008 is set and very manageable. What I was talking about in my comments is that right now we are seeing higher prices that could, for cotton that could roll into 2009 and beyond. It is a little unclear at this point if those prices will start to stick. And I want to make sure that everybody understands we are watching that very closely and we'll take appropriate action if we do start to see them stick. Lee, if you want to talk about some of the specifics.

Yes, again I think it is important to note that the cotton costs for 2009 could vary greatly from where they are today. When you look at future prices as of today, that would suggest that 2009 cotton costs would be a blended cost somewhere between $0.76 and $0.86 with the first half being a little lower and the last half being higher. But those cotton costs can change significantly between now and when we actually buy the cotton. But if the blended rate was in that range of $0.76 to $0.86 yes, the impact could be about what you quantify.

Okay and I guess my last question was can you tell me what the non-cash stock compensation expense was in the first quarter?

Yes, it is around $7 million.

Great. Thank you.

[Reed Kim]

(inaudible)

[Jake Krandlemeir]

Two quick things. Can you give us a sense on the gross margin line, the major puts and takes, why on terms of basis points of that 300, how much came from price mix, manufacturing efficiencies, cotton, etc.?

Yes, again, I think -- let's look at gross margin on an [X A] basis that we outline on Table 4, the earnings release. It was about a 200 basis point improvement to 35.2%. In dollars gross margins increased about $3 million. What we saw was an impact on the sales decline, the $52 million sales decline which probably created a sales margin decline of $17 million to $18 million. That was pretty much offset by benefits of cost savings initiatives. So we were relative -- and we had about a $2 million benefit from cotton. So that gets you to your $3 million increase. So basically offset two offsetting issues there.

Got it. And then can you give us on the cotton costs, what you guys paid in '07? You said $0.56 in Q1. Can you give us a sense what you paid in the back three quarters? I think you said earlier it was like a $0.58, $0.59 for the full year?

Actually cotton costs for 2007 was fairly consistent; it was $0.54 in the first quarter, averaged $0.56 for the year so it moved up a few pennies in the last half, $0.57, $0.58, but was fairly consistent on a quarterly basis last year.

Okay, perfect. Thanks, guys.

Omar Saad.

Rich, hoping you can talk about the category a little bit and how it is holding up in a recession and how, what your expectations are, what you've learned from the past, the innerwear, outerwear, a lot of these businesses. Do customers need them day in and day out? I know you guys like to think of yourselves a little bit like a consumer products company. Do you think the business can hold up in a similar fashion?

Certainly, Omar. Let me start by saying that the trends in Q1 because there are fewer promotional opportunities can really be magnified, either up or down; obviously in this case down. But magnified relative to other segments because it tends to be a lower sales quarter. So we are I think more, sort of being impacted by overall traffic trends. But in our categories they are very replenishment in nature. There is a high frequency of purchase. So while people can put off -- will put off the purchase for a period of time, they won't put them off for a long period of time. And that is why we are confident that focusing on the key periods such as back-to-school and holiday will be the way for us to help navigate this environment.

You might remember that last year around this time we were seeing similar types of trends because it is not like the tough consumer environment just materialized. It was pretty tough through the fourth quarter holiday period as well and we were able to navigate that. So that is really the levers that we've got at our disposal.

Quickly on based on your cotton expectations, if you can talk about any strategies that you have to deal with the input costs, the higher input costs and what strategies you have, if any.

Our strategy is to remain the same strategy of dollar cost averaging for our input costs. We do see blips ups and we see blips down. We don't believe that it is smart for us to try and lock in too long. We are much better off sort of buying on an every couple of weeks buying a little bit of our needs and so that over time we will tend to see the long-term average price reflected. So that prevents us from over reacting, either if cotton pops up or cotton pops down in the short term. We feel pretty good about 2008 and I think that we will be able to appropriately manage the environment in 2009 even if it stays at this level.

We have started to see some select price increases in a few areas; for example wholesale T-shirts has had two price increases recently, one in the fourth quarter of '07 and one just recently. And so we will see how the environment plays out but I am fairly confident we will be able to manage it.

Steve Riccio.

Good quarter. Just I would be interested in your opinion on cotton prices. Obviously they've been going higher. I am just curious as to whether you think it is due to sort of economic supply demand fundamentals or maybe some type of speculative investment element that is driving prices higher.

That's interesting you bring that up. There is clearly a much more of a larger futures open interest and we've seen in the past, which leads us to believe there is some speculation on the part of money managers that prices are not only high, but they will continue to go high. The fact that we've seen them come off recently, let's us believe that maybe they will come down for 2009, especially as we see the softer economy take hold. And that is why we don't want to over react to short-term blip that we've seen over the last two months, but just mindfully watch it and react accordingly.

Just a quick follow-up. I'm not sort of an agricultural guy, but based on the number of acres planted and the available domestic and oversea supplies right now, could you just help me understand better whether or not it is really supply and demand issue, or whether that is playing a larger role in this price run-up?

I can't tell you exactly what's going on but I can give you a few facts. First of all, current inventories of cotton both in the United States and on a world basis are higher than they have been in many, many years. They measure that by I think called the stocks to use ratio, and there is basically about a six-month supply of cotton in inventory even before -- right before we go into the growing season. And that is very high from traditional standards. Normally you'd see that more on the average of 25% to 30%. So that says there is a lot of cotton out there. Clearly, however, though, I think the acreage is coming down which is starting to impact a little bit on the other side. And where it all shakes out remains to be seen but we will manage it closely.

Great. Thanks, guys.

[Reed Kim]

Sorry about that earlier. Just wanted to ask you guys on the market share tick ups that you cited in the quarter, could you tell us which categories and maybe which channel you saw those gains in?

Actually there were lots of small puts and takes. I think the important thing to take away is that in aggregate our innerwear share was up slightly so it tells us we're working on the right things to navigate this environment. So we didn't see us taking it all from one particular area or in one account. It was sort of lots of puts and takes all over the place; on balance positive for us.

Okay, good. And then I hear you when you say your sales declines were broad based but I guess digging into that a little bit further in some of the mass and maybe dollar store channels where you have a consumer that is buying basic necessities maybe more so than department stores. Did you see a little bit better performance there?

For the quarter it was really pretty broad based across all channels, all customers. And that is -- and it was really traffic driven. In the quarter we're just seeing a lot and retailers are seeing a lot fewer people going into stores and that impacted us across the board. I don't think you will see exactly that same type of trend play out for the rest of the year. It probably won't be as broad based across all channels and customers.

And another question on the cost increases that you've gone over this morning, you mentioned T-shirts. Did you participate in that increase?

In the wholesale printables channel, yes, we actually did increase prices.

Okay, and so I take it from your comments that as far as other products go you are kind of setting the stage and discussing the issues with them but you are not going forward with other price increases at this time.

We are going to monitor on a case-by-case basis. There's a couple of areas where especially for example product that we source from Asia where we're seeing higher prices, we are in fact increasing prices to retailers and they will work its way through its chain, but that is a very small segment of our business. We probably wouldn't have any broad based across the board action because, for example, cotton doesn't impact bras very much but it would have a large impact on say fleece. And so whatever we would do it would have to be select and focused on the particular areas that are being hit.

Okay, and then last one, a little bit of a multi part, I was just wondering if you can post this two months after your investor day whether the IT and Chinese plant developments are on track, on budget, and then how and stock performance went for some of the products you've taken offshore. Thanks a lot.

In thinking about in discussing IT we are right on track with our IT projects. Remember we have an evolutionary approach here. We do not want to put our business at risk through systems conversions, but we started converting our order to cash systems across the multiple divisions to SAP in 2007. Actually did our first conversion in the fourth quarter of '07 and that went very well. We are continuing those conversions this year. So it is an evolutionary process.

And in terms of China we are right on track with that. We broke ground, that plant actually won't come online until next year.

Thanks a lot.

Neil Halpert.

Question about the promotional calendar going forward for the rest of the year. Is the Champion program still online for a big promotion, and can you give us some clarity on that, please?

Champion continues to do well, although in this quarter it was also impacted. One of the reasons that we feel that this is a fairly broad based impact. We've got some great plans for Champion, further penetration in selected accounts and so we expect sales growth to continue there. And so we're feeling pretty good about it.

Okay, thank you. Anything special in the gross margin changes sequentially that we should keep in mind as a onetime thing or should -- I know we went over cotton but that is only 6% of the cost of sales anyway. Is there anything else that happened in the gross margin or the gross profit that we need to be thinking about going forward for this year?

No, I think as you think about and model gross profit, I think you think about what's the impact of sales on the margin dollars. And then we are benefiting from our supply chain and cost reduction initiatives and then cotton, I think it is that simple.

Okay. Thank you. Anything else that you can tell us about the restructuring costs from quarter to quarter; it gets to be somewhat lumpy. Can you give us anymore insight of how to perceive the rest of the restructuring costs for the rest of the year?

As we talked about on investor day, we look at that broadly as plus or minus $200 million in gross savings over a three-year period. It can be lumpy but we are making very good progress right now.

It seems like you're about halfway there, from what you were saying, since the -- over the three years after the spin.

Yes, well that is from a restructuring charge perspective, we've said we would take charges of $250 million over the three-year period, half cash half non-cash, and today we've reported $122 million, so we are about halfway there on the charges. The actual benefits are a little bit -- are pushed out a little bit farther than that.

Right. But a lot of them would end up being permanent savings, right?

Yes.

Thank you. Great quarter.

(OPERATOR INSTRUCTIONS) Eric Tracy.

I just really want to follow-up real quick, Lee, maybe if you could remind us what that percentage of COGS for both cotton and then labor is coming out of the quarter.

Yes, cotton has historically been about 6% of cost of goods sold. And now if it jumps up in 2008 to $0.66 per pound, it will be about a $32 million increase, which could take us closer to like 7.5%.

Okay, and then labor?

Labor is around 20%.

Okay, great. Thanks.

(OPERATOR INSTRUCTIONS) At this time there are no more questions.

Thank you, everybody. We appreciate your attendance on this call, and we look forward to speaking with you after the close of our next quarter.