漢佰 (HBI) 2008 Q3 法說會逐字稿

Good afternoon. My name is Kristy and I will be your conference operator today. At this time I would like to welcome everyone to the Hanesbrands Third Quarter Earnings Release Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there'll be a question-and-answer session. (Operator Instructions).

Thank you. Mr. Lantz, you may begin your call.

Good afternoon, 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 2008.

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 is 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 in other communications.

The Company does not undertake to update or revise any forward-looking statements 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, and Lee Wyatt, our Chief Financial Officer. Rich will give a summary of business performance and trends for the third quarter. Lee will then provide further detail on the various aspects of our financial performance. 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 let everyone know that we are planning our Second Annual Investor Day for Tuesday, February 24th in New York. We will again have our extended management team review our achievements, strategies and opportunities in detail, particularly as they relate to 2009.

We will send invitations out in the fourth quarter and look forward to seeing you all there.

Now I will turn the call over to Rich.

Thank you, Brian, and thank all of you for joining us today. I would like to start with our performance in the third quarter. And then I would like to focus on three major topics -- our view of the fourth quarter; our comfort with our debt structure; and our 2009 price increases.

Total sales were unchanged at $1.2 billion. Hanes male underwear, Playtex and Champion Activewear were all up double digits for the quarter. The international businesses, the Bali brand and the socks category also performed well. The soft spots were in sheer hosiery and the smaller, intimate apparel brands.

Even though our categories remain soft, our retail partners continue to focus on national brands like Hanes as they strive to improve their retail performance. This focus is reflected in our market share. In the latest market share data available through August, our rolling 12-month share remains strong in key categories with notable increases for Hanes men's underwear up over 2 share points and Hanes men's and women's socks, also up over 2 share points.

When we focus in on our back to school share, we achieved gains in men's underwear and socks as well as women's intimate apparel and socks. Overall our share gains are coming at the expense of other national brands and private-label.

Excluding the effects of restructuring actions and the Mervyns retail liquidation, Q3 EPS increased $0.08 as we continue to benefit from lower interest expense. However, operating profit was down $8 million as we were unable to fully offset with our cost savings efforts the $19 million of increased cotton and petroleum-related costs.

In terms of the fourth quarter, while sales will be a challenge in this environment and most likely decline, we are optimistic about our operating profit and EPS potential. Versus Q4 last year, we will benefit from increased savings, which has the potential to more than offset higher commodity cost, allowing our gross margins to increase.

SG&A may be $15 million to $20 million lower, due to previously discussed expense timing and other cost reduction effort. And interest expense and taxes will remain favorable.

Given those positives and even with the sales decline of a few percent or more in Q4, exceeding 25% earnings per share growth for the total year still remains a viable goal.

Back in February, we stated that goal. And it is an understatement to say that much has changed since then. We have incurred $52 million of commodity cost increases; multiple retailer bankruptcies and liquidations; the worst consumer spending environment in decades; and the worst financial and credit crisis since the Great Depression. But we still remain focused on achieving that earnings per share goal and it is within our grasp.

Our organization's ability to perform while absorbing these issues is something for which we can all be proud. It demonstrates our people's resilience, fortitude, flexibility and commitment. It is why we will come through these difficult and uncertain times -- stronger.

But we're not done. Turning to the longer-term, we are implementing an average growth gross domestic price increase of 4% effective mid first quarter '09. We were able to solidify this price increase because of our strong brands and the investments that we have made in those brands over the last few years.

The range of price increases will vary by product category. In some categories, our competition appears to be the following with similar increases especially in areas where they also have strong brands. In some categories they appear to be following, but to a lesser degree. And in certain categories, our competition may not take price increases which generally seems correlated to a lack of brand strength.

It is not clear what impact our wholesale price increase will have on retail prices to consumers. Retailers set prices; and there is a growing group of retailers who have their own strategic initiatives to optimize their retail pricing.

In the end, while this price increase may negatively affect unit volume in the short term, in this economic environment volume is likely to be a challenge regardless. More importantly, this price increase provides us substantial flexibility as we continue heading into this tough environment.

Turning to expenses and inventories, we will manage both very conservatively and maintain a strong focus on cash flow. We have identified $40 million to $50 million of discretionary spending, which we will scrutinize for 2009. For example while we will continue to invest in our brands with media, we will invest at lower levels that are more appropriate for this consumer environment.

In terms of inventories, we are on track with our previously stated goal of ending 2008 at $1.35 billion; and we have a goal of reducing inventories $200 million over the next 18 months as we complete our knit supply chain transition. The plant closes announced in September are an important element of our inventory reduction efforts.

Lastly, regarding debt, we have locked in low rates. We are comfortable with meeting all of our debt covenants and we will use our free cash flow to pay down debt with a goal to pay down $75 million to $125 million by year end.

To recap, excluding the unexpected October Mervyns announcement, we had solid third quarter earnings. We are optimistic about our operating profit and EPS potential for the fourth quarter; and we have tailwinds of pricing, potential commodity declines and further cost reduction to help us successfully managed the economic uncertainty of 2009.

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

Thank you, Rich. I will review third quarter results, provide thoughts on modeling the fourth quarter, and discuss cash flow and long-term debt.

With regards to the third quarter, sales of $1.2 billion were equal to last year. Sales in the Innerwear segment increased [to] $15 million or 2% while Outerwear segments sales declined $1 million. The Hosiery segment declined $14 million or 22%, substantially more than the long-term trend. And the International segment grew 13%. Excluding the benefit of currency gains, the growth was 6%. The Other segment declined $9 million due to lower sales and excess yarn.

Plant restructuring charges were $44 million in the third quarter compared to $15 million last year. These charges were incurred primarily as a result of the nine plant closures that we announced in September. Total restructuring charges announced since the spinoff is now $206 million, compared to the $250 million projected over time and approximately half of the charges have been non-cash.

The majority of my remaining comments will focus on our results excluding restructuring actions, but including the $0.04 impact of the Mervyns liquidation announced on October 17, which we treated as a material subsequent event for our third quarter.

Gross margin decreased 110 basis points to 31.2% in the third quarter compared to last year. The decline was $13 million and reflects the impact of increased cotton costs of $12 million at $0.69 per pound and higher oil-related costs of $7 million, partially offset by $7 million of cost savings from our supply chain initiatives. These results were in line with the estimated impact previously discussed with investors.

SG&A expenses were flat in the third quarter, compared to last year at 22.3% of sales. Lower spending of $8 million was offset by $6 million in higher bad debt expense, due to the Mervyns liquidation, and $2 million in higher distribution cost.

Operating profit decreased $13 million to $102 million, an operating margin rate of 8.9% versus 10% last year. Excluding the impact of the Mervyns liquidation, operating profit decreased $7 million to $108 million or 9.3% of sales.

Our net income increased by $3 million or 7% in the third quarter due to lower interest expense and a lower effective tax rate. partially offset by the lower operating profit. Interest expense decreased $12 million to $37 million.

Our income tax expense decreased $4 million. Due to our offshore supply chain investments, the tax rate declined from 30 to 24%. This rate is consistent with the first and second quarters.

Earnings per share increased 8% to $0.52 or $0.04 above last year. Excluding the $0.04 decline due to Mervyns liquidation, earnings per share increased $0.08 or 17% to $0.56 in the third quarter. For the first nine months of 2008, our earnings per share increased 23% to $1.59.

Turning to the balance sheet, inventories were $1.36 billion, similar to last quarter. As I discussed last quarter, inventory in this range during the balance of 2008 is necessary to hedge the supply chain transition and reflects higher commodity cost. The higher commodity cost currently in inventory is $52 million and should come out of inventory over the next two quarters.

Inventory levels are not expected to increase during the fourth quarter and should have either a neutral or positive impact on year-end cash. Year-to-date, net capital expenditures were approximately $100 million as we continue to invest in our supply chain.

To summarize the third quarter, we saw sales that were equal to the prior year; operating profit was negatively impacted by higher input costs and the Mervyns liquidation, which offset the benefits from cost reduction initiatives, while we continue to benefit from lower interest expense and tax rate. Excluding the Mervyns liquidation, earnings per share was $0.56, a 17% increase.

Now let me give you my thoughts on modeling the business for the fourth quarter of 2008.

Cotton was purchased last spring at $0.75 per pound for the fourth quarter. And, therefore, cotton costs should be $17 million higher than last year. All related costs will be $9 million higher in the fourth quarter. This is consistent with our previous comments to investors.

Barring any unforeseen circumstances, we could see cost reductions of $20 million to $30 million in the quarter from supply chain initiatives and other cost reduction actions. Many of these costs are already reflected in inventory, and could allow our gross margin to be 50 basis points higher than prior year in the fourth quarter on lower sales.

SG&A could be lower $15 million to $20 million in the quarter, due to the previously discussed timing shift of media and IT spending, as well as other cost reductions. So even if the year-to-date sales decline of 3% continues, we could see operating profit increase in the fourth quarter.

Interest expense should be lower than last year by $8 million, and a 24% tax rate is assumed.

In terms of inventories, we are on track with our previously stated goal of ending 2008 at $1.35 billion as we begin to execute the supply chain restructuring announced in September. Year-end inventories should include about $40 million higher commodity cost, which will come out of inventory in the first half of 2009.

Capital spending for the full year 2008 should be around $155 million on a net basis. Our goal is to pay down between $75 million to $125 million of long-term debt by the end of 2008.

Turning to the longer term, as Rich mentioned earlier, in this challenging environment we will be conservative in our management of expenses and inventory. We will focus intensely on maximizing our cash flow to pay down long-term debt. So let me spend a moment on debt management.

We've proactively managed our debt structure since the spinoff. Let me highlight our recent actions. In July, we fixed interest rates on our $500 million of floating rate notes at 7.64% for four years. In September, we capped LIBOR on $600 million of floating rate debt at 3.5% for one year. And in October, we fixed LIBOR on $400 million of floating rate debt at 2.8% for two years.

Of our Company's $2.3 billion in long-term debt, LIBOR rates are either fixed or capped for 2009 on $2 billion. So 86% of our debt has either been fixed or capped, providing a little material exposure to higher LIBOR levels, and we have no short-term maturity.

Let me quantify the impact of this interest rate strategy. We expect full year 2008 interest expense of around $155 million. Given that most of our debt is fixed or capped, we now expect 2009 full-year interest expense to be in the range of $140 million to $155 million.

We have received a number of questions about our ability to manage our debt through this financial crisis and economic downturn. So let me address this next.

Let's begin with our bank groups. First, when we became an independent company, we chose strong banks to work with, based on broad experience with many banks. These were apparently wise choices as they are turning out to be the strongest banks.

Second, these banks are confident in our ability to manage through this environment and are, in fact, eager to support us.

Now let's turn to covenant compliance. We've closely monitored compliance for all of our covenants since the spinoff. We continually test our compliance under a broad range of scenarios, and are comfortable with our ability to remain in compliance through 2009.

Before I address this issue in more detail, I'd like to make two broad comments about the leverage covenant calculations. First, the leverage ratio is calculated based on the most recent four quarters. This significantly dampens any negative impact from the most recent quarter and it provides time to both anticipate and react to negative trends.

For example, EBITDA would have to decline more than 80% in the first quarter of next year in order to fail the leverage covenant in the first quarter. For 2009, with the benefit of price increases, lower commodity costs and other cost initiatives, our current analysis shows that we would continue to meet our covenants even with an 8 to 10% sales decline.

My second broad comment is about what if there are large negative charges? Under our covenants, significant events are added back to EBITDA.

The definitions for both EBITDA and debt are very broad under our covenants. For example, covenant EBITDA adds back items such as restructuring, start-up cost, non-cash and one-time charges. Year-to-date total addbacks increased our $337 million reported EBITDA by around $118 million.

In addition, the definition of debt excludes items such as the $250 million of accounts receivables securitization. So these calculations are significantly different from our published leverage ratios.

So how will we reduce the covenant level ratio in 2009 to 3.0? Well, let's consider the denominator and that is EBITDA. Price increases of $100 million to $125 million, in addition to lower commodity cost, should bolster EBITDA, even if units decline and promotional activity increases.

Let's consider the numerator of debt. Debt can decline from multiple actions. Let me mention a few.

In the fourth quarter of 2008, our goal was to pay down $75 million to $125 million of debt. Assuming a $100 million payment, this alone would reduce our covenant level to around 3.25. To reach 3.0, in 2009, we would then need to pay down another $165 million of debt and this assumes that EBITDA remains flat in 2009 in spite of price increases and lower commodity cost. So how can we pay down debt in 2009?

First, our normalized annual free cash flow is $200 million to $300 million annually. In addition, we have a goal to reduce inventory by $200 million over the next 18 months as we complete our supply chain [and] restructuring. $40 million of the decrease should be due to lower commodity cost alone with the remainder driven by reducing units. So while the current financial crisis and economic environment is extremely challenging, we have confidence that we can manage through it.

In summary, you should now have a clear picture of third quarter results, our expectations for the fourth quarter of 2008, and how we will manage debt through 2009. While we are planning for a challenging topline environment, we have tailwinds to help us successfully manage the economic uncertainty. I'm optimistic about our operating profit and EPS potential; and I'm confident in our ability to manage our debt structure and balance sheet effectively.

I'll now turn the call back over to Brian.

Thanks, Lee. That concludes our recap of our performance for the third quarter of 2008.

Before we begin taking questions, I want to reiterate that we have a policy of not providing quarterly or annual earnings per share guidance. However, we have stated that we will provide information about our perceived business trends as appropriate. We decided to provide more trend information on today's call to help investors better understand our business in this challenging environment.

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 initial questions to two or three and then reenter the queue to ask additional questions.

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

(Operator Instructions). Eric Tracy with BB&T.

Good afternoon. Congrats on operating in a very difficult environment and very much appreciate all the detail and color you provided.

Rich, maybe just starting with sales trends, certainly Q3 from the Innerwear standpoint seen to come in above our expectations. Maybe talk through a little bit of what transpired there, whether there was a little bit of pull forward from Q4 or just some timing versus market share?

First of all, with Q3 we are overall pleased with our results, especially when you look at it from a share perspective. Because, as I talked about in my remarks we are gaining share in back to school.

We had a similar offering for back to school as we did the prior year with the exception that we actually decided to increased our use of bonus pack. So, last January when we started seeing the tough environment, we decided that this might be a year to provide a little more value to consumers. And I think that actually helped us.

In terms of timing shifts in the quarter. You actually may remember the Q2 was a little dampened because there was a little bit of a shift from Q2 into Q3. There was absolutely no pull forward from Q4 into Q3.

In terms of you mentioned in the Q4 the trends, obviously, decelerating sort of meaningfully. Can you talk, again, obviously we have seen it in the retail sense over the last four or five weeks kind of drop off. But your assumptions that those trends continue at those levels, the minus 3 or low single digit declines for the balance of the year?

Q4, everybody is calling for a tough environment and we are very similar. In terms of the patterns, there are three different distinct time periods that I think about for 2008. Business seemed soft from January through April/May. And then it got a little bit softer.

It was a clear impact from gas prices and that's what overall retail traffic was down. The last week of September with the financial crisis in the first couple of weeks of October, we saw not only in our categories, but retailers very broadly saw a real slowdown in sales.

In fact one of the retailers commented that the day the Dow dropped 777 points, I think it was the last week of September, they had the worst comp store sales day than they had since September 11. So I think the last couple of weeks have just gotten everybody a little bit nervous.

I don't think that trend is going to stay and continued for all of Christmas. But I do think it is going to be challenging and we think that sales will decline. Exactly how much, I'm not sure. The trend that we've seen year-to-date has been 3%.

Will it be a little bit more than that? A little bit less? It's a little bit hard to tell right now.

Turning to the price increases, prior the expectation was for those price increases to offset the higher input cost; and then maybe talk a little bit through, obviously, the environment and slowing demand has certainly taken back some of those commodity costs.

So the expectation for those price increases next year as well as just coupled with the supply chain and maybe the cadence of how we should expect that supply chain moves to manifest next year?

Let me focus a little bit on pricing and I really want to talk about a couple of things in pricing. What these price increases demonstrate, what it allows us to do, and also our thoughts about how it might impact volume.

I think the first thing is first of all these price increases are locked in. We are now in execution mode with all of our retail. What that demonstrates in our categories' brand matter. No ifs, ands, or buts about it.

Price increases in our categories don't need every single competitor to move in lockstep dollar for dollar, penny for penny. We are very comfortable and routinely deal with the price premium at retail and at wholesale.

I think it also demonstrates that we are important to our retailers. They need and want strong partners that can invest in their brands and invest in innovation and invest in supply chain and we have heard that over and over again from them.

In terms of what this allows us to do relative to cost increases and so on. This increase allows us to cover our cost increases, not only commodity cost, but also wage inflation that we've seen over the past year or so, and other cost increases that don't move up and down like commodities.

But it also provides as the flexibility to continue and invest in our brands as well as take advantage of promotional opportunities that I think may be out there in 2009. So it really gives us a lot of flexibility to get through this pretty tough environment.

From a volume prospective, we have not had any space declines because of this price increase. I think that is very important for people to understand. The other thing in terms of how retailers set prices, they have -- a lot of them have already been working on optimizing their own price mix and covering their own cost. And we've started to see prices in our categories start to float up over the last six or nine months.

So the actual impact on retail prices remains to be seen. We will have to wait until February and March to really see what transpires at retail. So the volume impact really at this point is also unclear.

But we feel good about it. We think it is a good reflection of our brand strength and as they kick in in February, obviously, in Q2 and beyond, we will start to see the benefits in a strong way.

And then on the supply chain again, the assumption that Asia begins to ramp next year and is fully operational by, I believe, fall next year is still on that time frame?

Yes we actually started talking about, we had -- start-up happens in Asia in the Nanjing textile facility in '09. It really will spill into being fully operational and full capacity in 2010 because it is about a year ramp up. A full year ramp up.

But it will be clearly providing a lot of benefits towards the back half of '09. So the supply chain strategy, we are still right on where our plans call for and right in line with achieving -- ultimately achieving our plus or minus $200 million in gross savings.

Then Lee, just real quick, I appreciate all the detail, particularly the debt covenants, given the concerns out there. Could you maybe just remind us again how the covenant resets as the year progresses?

In the third quarter, the requirement was four times -- 4.0. It moves down to 3.75 in the fourth quarter. Stays there in the first quarter of '09. Moves to 3.5 in the second quarter of '09 and then goes to 3.25 in the third quarter and 3.0 at year-end.

Okay. Then just running through all the puts and takes that you provided and we were running the numbers, seems to come in well below that that three times at the end of '09. Correct? I mean --?

Yes. We have, again, as I said in my remarks, we have a lot of opportunity to manage this. We are comfortable with being complied with all of our covenants. There are so many factors that give us that and including the way the calculation is made to all of the positive price increase to the lower cost around commodities. All those things are very positive to us and we think we will have normal cash flow next year which should allow us to get that.

I would remind you that in the third quarter of this year, it was -- the covenant was 4.0. We were 3.5. So we feel like half a turn is a nice cushion there.

And the normal cash flow about $200 million to $300 million, obviously lower CapEx that you talked about. You mentioned the inventory reduction $200 million through the next 18 months. Able to quantify the expectation over the next 12 into '09?

Not really on the inventory. A large piece of it should come out some time in '09, but we don't really have that kind of detail.

Omar Saad from Credit Suisse.

Good afternoon. I wanted to follow up on the price question. How -- was this a surprise to your retailers? Are they in the mindset that this is kind of the environment that we are in? How did you -- how do you set that up? Have you been in discussions with your retail partners? Give me some flavor for where they are coming from and how they could react to this?

We have actually been talking to them about this for quite some time. In fact, it was as far back, I think, last -- late July, early August. So this isn't something we just sort of dropped on them just lately. These things take actually a good 60 to 90 days to get to the point where it is all locked in.

There was a wide range of reactions from retailers. There's a number of retailers that actually fully understand and appreciate the benefit of retail prices going up, as long as they are in the same relative competitive position.

So for them national brands taking price increases allows them to increase their average unit ring. They recognize that that is good. Their costs go up. That helps them cover because they get more margin. So we saw that reaction.

There are a number of other retailers, as I said, that are independent of wholesale prices, working to optimize their own retail prices. And generally in this environment that has been actually taking price up over time.

And then, there's a number of retailers who like and believe that prices should be low and should be stable and shouldn't go up at all. So we have a whole range of actions.

At the end of the day, it really comes down to two things. All of our retailer partners want and need strong brands. People can invest in innovation. I can tell you supplier reliability is clearly something that is on a lot of retailers' minds and they want to make sure that they are aligned with big companies that have big strong cash flows and can invest in their supply chain.

And then our brand, it's -- at the end of the day they understand that we've got strong brands. And they can help support higher prices.

Okay. Thanks and then you know, Lee, you threw out a scenario out there for next year, that sales were down 8 to 10%. Rich, obviously that is not necessarily a guidance number but can you talk about some of the areas where there's risk to the revenues and then what you're seeing in the category and how things might play out? You know, throughout this down, deep down turn in consumer spending, (inaudible) certain businesses that whether it's hosiery or some of these other areas that might be viewed as more discretionary than some of the other --?

Yes, let me be crystal clear. When Lee was talking about that, that is just a simple method of stressing the outlying range of what could happen as a way to make sure that we are always within covenant compliance. By no means do we think that volume would be down anywhere close to 8% to 10%.

Now let me talk about sort of -- answer your question by really talking a little bit about recession and history. Around here we have actually been looking at a lot of data of -- in our industries over the last 15 to 20 years to try and get a good understanding of what happens in downturns.

It is interesting in Innerwear, you will tend to see the apparel category in total drop, maybe 4% or 5% and that would include basic replenishment apparels such as our Innerwear category. The differences, however, Innerwear generally will only stay down for at most a year whereas the apparel category can stay down for and be soft for two to three years and that's because of the replenishment nature of our product. They tend to wear out and people replace them and they are low dollar value.

That is actually the worst example we've seen in the last 20 years. It was actually in 2001. The other recessions, their pullbacks were in '91, '92 and actually '97, '98, they were less severe of a downturn and they actually lasted a shorter period of time.

So I don't think this time is going to -- I think that is a good pattern to look at on how things may behave through this recession.

Thank you. One last question on -- I'm sorry, your inventory and cash flows. I know you're not really talking in that much detail for next year, I think you gave some high-level guidance. But if you look at historically where your free cash flows have been on a normalized basis, it seems like -- and correct me if I am wrong -- it seems like there's the opportunity to really bring -- generate a free cash flow next year given the inventory take down, given the pricing and some of the other puts and takes, even in a down revenue scenario that the free cash flows could be quite significant. And I'm missing something there?

Yes -- no, you're not. When we think about $200 million to $300 million normalized free cash flow, that does not consider any working significant working capital changes. So any success we have with inventories coming down and generating cash, that would be added to that.

Scott Krasik with C.L. King.

Let me echo my compliments on the quarter and very clear description of your view of the business.

So just a quick question. Again, Lee, in your breakout you mentioned that you could get to 3.0 times by paying down $165 million. Assuming you are going to generate significant more cash than that, could we expect even greater debt paydown (inaudible) $165 million in '09?

I think as Rich and I both stated we are going to take a conservative approach in 2009, given the environment that we are working in. So our primary focus of excess cash would be to reduce debt.

That's great. Then, Rich, maybe tell us everybody sort of viewed this commodity run-up bubble with slanted eyes, but you held pretty firm. I mean, you did have buy higher than maybe you would've liked and you're paying for now.

How do you view that, then, going forward in terms of your cotton cost?

There's no question I think that the volatility of commodities is here to stay. And as quickly as stuff can run down, I think if the world starts to get a whiff that oh, the worldwide recession isn't quite as bad, we may see a run-up again. Who knows? You can't predict.

I think what's important, though, is our price increases wasn't just predicated on the commodity cost or cotton increase. Because cotton is only one piece of our business.

We are seeing and have seen other inflations, other inflations -- other inflation around the world that won't reverse. Wages, for example, in Asia, Central America, the DR, the US are tending to go up. I mean, in the United States, medical inflation is here. Even down to little things like our local power utilities -- Duke Power -- recently raised rates.

Well, those things aren't going down, regardless of the price of oil. So there is inflation that is built into our numbers that came in over the last year, you know, that is here to stay. I don't think we are going to see it continue to increase. Cotton and commodities was just one piece of that. Does that answer your question?

That does. Let me just follow up. I assume first quarter, cotton will still be high, probably north of $0.70. Are you buying aggressively down here under $0.50 and -- per pound. How do you see maybe by quarter -- at least for the second quarter, can you give us some direction on what the cotton per pound price would be?

Well, in the first quarter we are still flushing out some of the $0.73, $0.74 cotton. I think as we look at our buy now, and the way we have staggered our buys and our hedging, I think the second quarter is more in that 51, 52, 49% range. But we are not fully bought in or hedged for the second quarter yet, but the early indications are that's the range we are buying in.

That's great. Lastly you mentioned $40 million to $50 million potentially of spending cuts in 2009. That's based on media. Does that also incorporate other synergies related to the restructuring? Would those be incremental to the $40 million or $50 million? And should we see that flow -- does that [matter] or is that going to be offset by basic increases in things?

I'm very glad you asked that question. Think of that $40 million to $50 million that we've identified as clearly being discretionary as -- there's clear value in spending that. What it is is, we are going to scrutinize it very closely. And it gives us some flexibility that if things are a little bit slower than we anticipate, to protect ourselves on the downside.

But if things are a little bit better, for example media, we may actually then release those funds and take advantage of continuing to build our strong brands and innovation. So think of it as giving us a little bit more flexibility to navigate a fairly uncertain environment at no (inaudible) rather than thinking of it as cuts that are definitively made and would flow through to the bottom line.

Reade Kem with Merrill Lynch.

Just wanted to ask you a couple of things. Firstly, in light of the strange environment, does that open up acquisition opportunities for you? Looking through your supply chain, how should we think about that?

We have always said for the first two or three years after the spin, our value creation wasn't really not through acquisitions but it was all the cost initiatives around supply chain and consolidating the business. However, now, as we enter that next evolutionary phase of our business we will always consider acquisitions, because we will have opportunities after we get our cost spaces in place.

Okay. But should we generally think of those as places where you can maybe acquire a step in your supply chain or maybe branching out into a different brand or a different category? I'm sorry -- a different price point within your categories?

Yes, let me talk a little bit about acquisition. First you mentioned like supply chain acquisitions. We've actually been executing small acquisitions to help build out or speed our supply chain transition actually over the last two years. We purchased a textile facility in El Salvador, for example.

We actually -- our first entry cellphone entry in Vietnam was actually -- I'm sorry, in Thailand, was an acquired facility. So we have been doing that and we will continue to look for opportunities to do that.

In terms of commercial acquisition, there are some areas that we have been thinking about and targeting. There could be some opportunities within the United States to help round out our overall business. Requirements would be for any acquisition, both cost as well as revenue synergies.

Another area that I've talked about historically is potentially building a bigger commercial business in Asia as we build out our supply chain. And that could involve acquisition as well.

One more, Rich, while I've got you, I mean, just given the change in the real economy and markets, is there any chance you might revisit your overall leverage goal? I appreciate the deleveraging focus. But maybe take that deleveraging goal down even a little bit further just given the change in the world?

Absolutely I think the entire world's predisposition towards leverage is is changing -- ours as well. Clearly, we are going to focus on paying down debt now. Exactly what the new goal should be, we will figure out, I think, over the next number of months. And we actually may talk a little bit more about that at our Investor Day in February.

Last one and maybe this is for Lee along those lines. I mean is there any -- does your agreement, your bank agreement prevent you from perhaps, say, opportunistically purchasing some of the [terme] in the open market which has the more restrictive covenant package and maybe that way you take some of the covenant discussion off the table? You know --?

We currently have restrictions on buying back our debt in the marketplace, but we are thinking about how to consider that.

Arthur Roulac with CAI.

Couple questions. First, thanks for providing so much detail. It is very helpful when we are trying to look at the Company.

One, Rich, just going back to a study you had done. I know Innerwear you had said was down roughly 4 to 5% and stays down per year. From an Outerwear like a Champion-type product line, what did your studies say with regard to that in terms of the percent decline and duration of it?

In terms of Outerwear or, specifically, the Activewear categories that you are talking about, there's a little less data because those markets have actually been growing over the past 15 or 20 years. So you don't see the same types of ups and downs. So I can't explicitly answer your question.

Overall, we are extremely pleased with Champion Activewear. We had another quarter of double-digit growth. It continues to grow.

If you think about it it's at a -- it's Activewear, but it's also value-priced. And so it actually has a little bit of tailwinds in these types of economies.

Next question, then, would be -- obviously oil has been a big head wind. We've seen it come from $150 down to the mid $60s now. Any thoughts about what cost savings that might be? I know you did a nice job and you do -- sending cotton prices out. What do you expect in terms of cost savings from oil in '09?

Yes, as you take about what has been rolled off onto our P&L in the third quarter of about $7 million from oil-related and it looks like $7 million to $9 million will roll off in the fourth quarter. So I think -- and those were based on oil cost of $100 to $120 a barrel.

So I think it as it rolls down over time, you may see some of that come back, although those prices can be pretty sticky. You've got to go out and actually take down freight -- incremental freight charges for that.

So, yes, we could see that kind of range of reductions at some point in the future.

I know you -- I believe -- had set a goal reducing inventories. Was it $200 million over the next 18 months?

That's correct.

What about looking further out? As I recall the story originally had been roughly $50 million of inventory reduction per year over the next five years or something in that category of $250 million. Obviously, though, we've rolled up now as you've been transitioning some plants.

Is that $250 million level from the original spin date of inventory still what you're targeting?

I think when we think of what our long-term turns should be, it should be around three times over time. And that's a multiple year process to get them there. We think this $200 million over the next 18 months is the result of just completing supply chain initiatives and those things. To get to [3 0] times turn there's more processes, a lot of other things involved with that, but that is still our long-term goal.

Finally can you comment a little bit on what retailers have seen in terms of trends in October, in terms of what's the severity level in terms of shock to the consumer? Has it been down 10% or down 5% type number?

Certainly. In those couple of weeks, we saw it decline a little bit more. But and again I'm not going to talk about overall retail because I think they're reporting the numbers. You saw an additional couple of points of decline from what we're seeing over back to school. Not on the order of 10% or 15% or something like that.

So it was a little bit more moderated. I also want to go back to the first question because you asked the question about Outerwear in total and I really just answered on Activewear as I was sitting here thinking about it. There's another category within our Outerwear business, which is that wholesale T-shirt market, which actually behaves a little bit differently.

So within Outerwear, we have Activewear which is doing quite well and growing. But in that wholesale T-shirt business a good portion of those sales, this is where we sell product to wholesalers who then sell it to screen printers where that screen printers sends it, sells it to end-users.

The biggest portion of where those goods go is actually to businesses and corporations. And our 25-year history of data in this business says that in these kinds of downturns as corporations and businesses cut back pending, that channel undergoes sales declines as well. Very, very tied to not only recessions, but also -- believe it or not -- the stock markets ups and downs as businesses pull back a little bit.

So that is another area we are watching and managing very closely. Fortunately for us it is a small part of our business. I think it probably contributes less than 3% or 4% of our total profits.

Kenric Tyghe with CIBC World Markets.

Good afternoon, gents. I wanted to check it would you quickly if I could and just went through (inaudible) your revised CapEx after. Could you give a little more color around the El Salvador and Dominican textile facilities, particularly with regard to what impact this environment will have on your Phase 2 expansion plans in those facilities? And any additional color you might have on the textile facility expansion in the Central America and Caribbean?

We are continuing to execute our plans as we've originally laid them out. One thing is, though, as we have gone into fewer bigger facilities, we are actually starting to understand how to squeeze more production out of a certain amount of square feet. So we actually think we are going to be able to save maybe over the life of the [staff] supply chain transmission $25 million to $50 million and still be able to accomplish all the things that we've laid out.

And that is the type of thing that just goes with experience and you getting in there and you are starting to operate. A good example of that is being able to run multiple shifts in Vietnam, for example. which we didn't anticipate going in.

We also believe that that is the case in that whole El Salvador expansion. We're able to get out more pounds per square foot than we originally envisioned. And so we are making sure that we've got the right footprint for our business.

So we are getting close to our end state footprint in Central America and the Caribbean Basin. And we've now laid all the stakes in the ground, if you will, for Asia. And that will continue to start up and ramp the start up over the next 12 to 18 months.

Could you quantify on your -- you mentioned how you've managed to and have it more efficient in those plans in terms of the pounds per square foot. Do you have any metrics on that from where you were when you began your contract production facility to where you are now and perhaps where you would like to be once the new [stock] facility is in? Or do you not have effects or are unable to disclose that at this point?

Actually I can give you a couple of anecdotes from a few facilities. For example in Vietnam, as we are running now, we are convinced we can run multiple shifts. The second shift isn't quite as big as the first shift so that increases productivity in those facilities by a factor of 60% or 70%.

Another one was we actually highlighted in our last Investor Day last February the facility we bought in Thailand, we were able to double production by installing our processes and methods in the same square footage with the same number of people and substantially reduce the cost. Those are just some examples of how we have been able to improve our productivity as we have been rolling out our supply chain.

Would that apply to your Central America and Caribbean or is it more specifically focused around your capabilities and expansion capabilities in Asia?

The particular examples obviously (multiple speakers) absolutely seen productivity opportunities improvements within Central America and the DR as well.

Thank you. If I could, one final question. You touched on the wage inflation and perhaps if you would give a little bit of a refresh on wage cost strategies or pressures in your Asian (inaudible) against your Central America or Caribbean? Put some sort of measure on the delta to everyone if you could give a little more color on that?

Well you know the (multiple speakers)

Even in order of magnitude not dollarwise. Just in terms of sort of whether it is a third grade or double or half whatever the case might be?

Over the past 12 months and especially in the last six months, we are seeing similar types of percentage increases on wages, both in Asia as well as in Central America and the Caribbean Basin. For example I think it was in Honduras, the government declared a 15% wage increase for government employees, similar to the percentage increases that you are seeing in Asia.

But there's one important thing to remember. The wage rate in Asia is one-half to one-third of what it is in Central America. So at the same percentage increase, the $0.01 increase or the $1 increase per hour is much higher in Central America and Asia -- or in Central America and Caribbean than it is in Asia.

And that is one of the things that further reinforces our belief that balancing our supply chain equally across the Western Hemisphere and Asia is the right thing to do.

(Operator Instructions). [Andrea Cohen] with [Aries Management].

We were just wondering if you could give a little bit more color on the bad debt expense? Because Mervyns was only 175 stores. So $5 million seemed high. And we're just -- and as this sort of goes on, as you have more retailer rationalization, how are you managing the receivables balances? And what do you think your bad debt expense could be on a go forward basis?

Yes. As we thought about Mervyns, recall that they filed Chapter 11 in July and we assumed our -- we had about $6 million, $6.5 million of receivables. We assumed a realization rate or a recovery rate of about 75% or so on that.

Once they then filed a going out of business liquidation, we assumed basically on pre-petition we would only get about $0.10 on the $1. So we tried to take a pretty conservative -- a reasonably conservative approach to that. That's why we had the $5.5 million charge in the quarter.

And going forward, we have very strong receivable realization due to our customer concentration. Our overall bad debt rate's about 1.5% of receivables. We feel very good about that. You know occasionally you'll have a blip like a Mervyns, but those things happen.

But our -- I'll give you an example of how we think about receivables because our bad debt is built around how much of the receivable is aged. For our domestic receivables, only about 2% of our receivables are over 30 days outstanding.

Only 2% are over 30? Okay that's very helpful so (multiple speakers).

Yes, it's pretty solid.

Okay. That's great. Then one other question if I might. In your press release here in the P&L for the September quarter, you have an inventory write-off included in cost of sales of $14 million.

Can you speak to us a little bit about what that is? Because obviously your EBITDA looks to be down around 41%. And I know that there was a lot of -- you know a big [hit] to cost of goods sold. But is this something that we should be adding back? Is it a 1 to -- what is that?

Yes, that $14 million is actually included in our restructuring charges. As we closed the last domestic plants, what you have is both work in process and raw material associated with those plants. That is basically just as economical to dispose of them than to try to ship them to Asia or somewhere. So that is work in process and raw materials, associated with those high-cost domestics, generally domestic plants that we are closing. So it should be added back as a restriction.

Eric Tracy with BB&T capital.

Maybe just a quick couple of follow-ups. Rich, in talking through the wage increases and you talked to, relative, Asia versus the Caribbean Basin, but maybe just remind us again given that labor is the biggest piece of this story just on a sort of absolute dollar basis domestic versus Asia versus the Caribbean Basin in production, what it is on an hourly rate?

You are going to see US fully loaded wages, $15, $16 an hour. You'll see fully loaded wages in Central America and the Caribbean Basin maybe $1.65, $1.50 to $2, say, $1.75. And in Asia you are going to see anywhere from a low of $0.30 to $0.60 an hour. So you can (multiple speakers) .

Yes so the order of magnitude even if we are seeing it is 20, 30% in increases in Asia.

Are still fairly low. So for example $0.03 on $16 is -- 3% on $16 is $0.48. 10% on something in Central America would be $0.17 but 10% press release even 12% on $0.40 is only going to be $0.08.

So over time Asia's advantage will continue to grow vis a vis Central America's Caribbean Basin and, obviously, the United States.

Now it is important though, I just want to reiterate, that while Asia's advantage will continue to grow, for some product categories, Central America and Caribbean Basin makes all the sense in the world. A great example of that will be basic products that's heavy and expensive to ship. Basic fleece would beat the classic example there. It makes the most sense to make those products in Central America and the Caribbean Basin.

Yes. Okay. Maybe just lastly, on -- talking about the sales trends in Q4, but again I believe there is a 53rd week in Q4. Maybe, Lee, just kind of quantify what that impact could be?

Yes. It's always hard because it is not a full five days because it ends January 3rd, but it could be $20 million to $30 million in sales.

I will now turn the call back over to your Chairperson, Mr. Lantz.

We would like to thank everyone for attending our quarterly call today and look forward to updating you after our fourth quarter call. Thanks again.

This concludes our conference call for today. You may now disconnect your line.