漢佰 (HBI) 2008 Q4 法說會逐字稿

Good afternoon. My name is Jennifer and I will be your conference operator today. At this time, I would like to welcome everyone to the Hanesbrands fourth quarter release 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 afternoon, everyone, and welcome to the Hanesbrands Inc. quarterly investors conference call and Webcast. We are pleased to be here today to provide an update on our progress as of the fourth and final 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 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 risk 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 Chairman and Chief Executive Officer, and Lee Wyatt, our Chief Financial Officer. Rich will give us a summary of our business performance and trends for the fourth quarter and full year. Lee will then provide further details on 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 invite you to our second annual investor day on Tuesday, February 24th in New York.

We will again have our extended management team update you on our achievements and opportunities as well as provide more information to help you model our business for 2009 and beyond. 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 our invitation, please contact me and I will assure that you do. Now I will turn the call over to Rich.

Thank you, Brian, and thank all of you for joining us today. Given the current consumer environment, and although sales declines were much more than anticipated in the quarter, I am pleased with many of our accomplishments this year. We made significant progress in our strategic initiatives.

In terms of our brands, we invested in media at the second highest level in the Company's history. We gained share in our key innerwear segment. For the fifth year in a row Hanes has been voted the number one brand in both Women's Wear Daily and Retailing Today.

In terms of our spend less strategy, in just 12 months, our offshore textile capacity increased from roughly 50% to 75% and will be 100% offshore next month. We opened two sewing facilities in Vietnam and one in Thailand and nearly tripled our number of Asian employees to 5500.

We opened a brand-new 1.3 million square foot West Coast distribution center to support our Asian strategy. And even with these openings, we reduced our supply chain footprint by 14 facilities. As a result of these accomplishments, we were able to generate over $75 million in cost savings that enabled us to mitigate the sudden spike in commodity costs.

For our generate cash strategy, we paid down $139 million of debt in 2008 and over $400 million since the spinoff. And we have successfully managed our debt structure to minimize interest expense.

We accomplished much in a year in which we faced the worst economic crisis in decades, and a broad-based collapse in the consumer retail sales environment. Our organization has performed superbly while (technical difficulties) with new macro challenges and our people continue to demonstrate tremendous professionalism and commitment. It is why we will come through these difficult and uncertain times as an even stronger competitor.

Turning to financial results. In the fourth quarter, we saw a massive shift in consumer spending behavior. This shift led to unprecedented declines in our categories and we were clearly not immune to the impact.

Total sales declined 11% in the fourth quarter and 5% for the full year. Our declines were in the same range as challenging retailer comp performance and soft traffic trends.

Our sale trends progressively worsened through the quarter. Retail sellthrough went from down a few percent in October to down double digits in November and December. Broadly, all of our major retail partners experienced negative comp store sales for total apparel, including our categories.

Sales for the full year were particularly soft in women's intimate apparel. Intimate apparel accounted for roughly half of our total sales decline and two-thirds of our innerwear sales decline for the year. While our intimate apparel market share has increased, the category weakness was simply too large to overcome.

For the full year, we did have a few bright spots which include Champion activewear, Hanes men's underwear, international business and Playtex -- which were all up. Market data shows that our categories were down significantly.

However, we have been able to offset some of the category declines by increasing our share. In the latest data available through November our rolling 12-month share for innerwear was up 1 full point. We saw notable increases for men's underwear up over 3 points; intimate apparel up over 1 point; and socks up 0.5 point.

Overall, our share gains continued to come at the expense of smaller brands and private-label.

EPS increased 27% for the full year. While we were unable to overcome the impact of sales declines on operating profit, we were able to prevent deleveraging and maintain a 9.7% operating margin for the year. We paid down $139 million of long-term debt compared to our goal of $75 million to $125 million and we ended the year with inventories of just below $1.3 billion, more than $50 million below our goal, despite a larger-than-anticipated sales decline.

Turning to 2009, the one thing that is perfectly clear is that we will continue to face an adverse economic environment. How long and how deep remains to be seen. One initiative that helps us in this environment is our price increase.

As a reminder, we are implementing a gross domestic price increase averaging 4% effective next week. We were able to solidify this price increase because of our strong brand and the investment we have made in those brands over the last few years. We are beginning to see retail's prices increase on both our products and our competitors' products.

Since this price increase is just in effect, we will have more visibility on retail price increases in the next few weeks. Importantly, this price increase provides us substantial flexibility to pursue incremental promotions as we continue to navigate this tough environment.

In 2009, we will have the benefit of a number of factors that will help us mitigate this adverse economic environment. These benefits include the price increase; increased benefits from our cost savings initiative in the second half; reduced discretionary spending for 2009; lower commodity costs in the second half; and lower inventory and capital spending needs.

We will quantify a number of these factors and discuss 2009 in more detail at our investor meeting in a few weeks. Over the next 12 months, we intend to stay sharply focused on execution to conservatively manage both inventory and cost, to actively manage our capital structure and to use available cash to pay down debt. Our goal is to come out of this environment with momentum and as an even stronger company.

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

Thank you, Rich. I will review the full year financial results for 2008 and the most recent quarter beginning with sales.

Reflective of the current consumer environment, our sales for the fourth quarter of $1.04 billion decreased $124 million or 11% over the same quarter last year. For the full year, total sales of $4.25 billion decreased $226 million or 5%.

The quarterly and annual sales decrease was broad, with all segments of our business declining in the fourth quarter. And all but the international segment declined for the full year. The innerwear segment declined 11% in the quarter and 6% for the year. The outerwear segment declined 8% in the quarter and 3% for the year. The hosiery segment, which has been in long-term decline, decreased 20% in the quarter and 14% for the year. The international segment declined 9% in the quarter while growing 9% for the year with 5% of the growth from exchange rate gains.

Restructuring and related charges were $36 million in the fourth quarter and $93 million for the total year. These charges were incurred primarily as a result of plant closures and consolidation actions. Total restructuring charges announced since the spinoff is now $222 million or 89% of the $250 million projected over time. Approximately 44% of the charges have been non-cash.

The majority of my remaining comments are focused on our results excluding these restructuring actions.

Gross margin rate was 31.6% for the fourth quarter, 10 basis points below the same quarter last year, despite significant sales declines. Lower sales were the largest driver of the $40 million decrease in gross margin dollars. Gross margin dollars also reflect higher cotton costs of $17 million and higher oil-related costs of $14 million.

These higher costs were offset by lower duty expense of $16 million primarily due to refunds, $6 million in lower obsolete inventory charges and a gain of $8 million from capitalizing previously expensed supplies. The retroactive duty refunds, which we discussed on a previous our means call are now available as Costa Rica approved the provisions of CAFTA. Cost savings from our supply chain initiatives were $10 million in the quarter.

For the full year of 2008, gross margin increased 40 basis points from the prior year to 33.4%. Gross margin dollars declined $58 million with lower sales being the largest driver. Higher cotton costs and higher oil related costs totaling $62 million for the year were offset by cost savings initiatives of $48 million, lower obsolete inventory charges of $14 million and $9 million in lower duties.

We currently have visibility to the impact of cotton cost on profit for the first 2.5 quarters of 2009. The first quarter of 2009 will include cotton cost of $0.74 per pound compared to $0.54 per pound last year, approximately a $15 million negative impact. The second quarter of 2009 should reflect a cost of $0.49 per pound compared to $0.63 last year, approximately an $8 million positive impact.

With half of the third quarter of 2009 cotton costs known, the cost per pound is also $0.49. The cost was $0.69 per pound in the third quarter of 2008.

Turning to SG&A, fourth quarter SG&A expenses were $232 million or 22.4% of sales, $34 million lower than last year. As we discussed before, SG&A expenses for the quarter reflected $17 million of favorable timing of media and IT expenses and $5 million of media expense reduction. Cost savings from initiatives were $11 million in the quarter.

For the full year, SG&A expenses were 23.8% of sales and decreased $36 million. Cost savings initiatives of $28 million and reduced media expense of $11 million were the primary drivers of the full year decline. SG&A expenses included $12 million of pension-related income in 2008.

Our operating margin rate increased in the quarter to 9.2% from 8.8% last year and for the full year was flat at 9.7% in spite of the significant sales decline. For the fourth quarter operating profit dollars decreased $7 million to $95 million and for the full year decreased $22 million to $410 million.

Interest expense for the year decreased $44 million to $155 million.

Our final income tax rate for 2008 was 22% within the 22 to 25% previously projected range. Unfortunately the decline from the 24% rate in prior quarters was the result of a lower ratio of domestic income.

Net income increased by $11 million or 29% in the fourth quarter. Net income for the full year was $199 million, up $40 million or 25% from the prior year. Earnings per share increased 32% to $0.50 in the fourth quarter and increased 27% to $2.09 for the full year.

Turning to the balance sheet, inventories were $1.29 billion, over $50 million lower than our year-end target and the third quarter. We have a previously stated goal to reduce inventories to $1.15 billion over the next 15 months.

Due to the normal pattern of building inventories for back to school, first quarter 2009 inventories could temporarily increase from this year-end level. The quality of inventory remained good with obsolete inventory down 23% from last year.

The quality of accounts receivables remain good, largely due to our concentration in strong retailers and diligence in pursuing late payments.

Let me now spend a moment on our debt management. Long-term debt at year end was $2.18 billion and reflects a $139 million prepayment in the fourth quarter, compared to our stated goal to prepay $75 million to $125 million. The prepayment was applied $125 million to term loan B, $7 million to the accounts receivable securitization and $7 million to our bonds which we bought at a discount. We have fixed our cap interest rates on 82% of our debt for 2009.

We are in compliance with all debt covenants. We ended the fourth quarter with a covenant leverage ratio of 3.3, which was below the covenant requirement of 3.75, which declined from 4.0 in the third quarter. The 3.3 ratio resulted in $75 million of EBITDA cushion under the leverage covenant. That is a similar cushion to what we discussed in the third quarter.

In terms of covenant compliance, we ended 2008 with a comparable level of cushion. However given the economic uncertainty of 2009, we think it prudent to more fully investigate and cost out multiple options including amending our credit agreement. Once we have the hard cost information from the marketplace, we can assess those costs in relation to the benefits and choose the best course of action for the Company. We will provide more definitive direction when our course of action becomes clear.

Turning to cash flow. Our cash-flow statement reflects $177 million net cash provided from operations for the year. Net capital expenditures for the full year were approximately $162 million as we continued to invest in the final phase of our supply chain restructuring.

In summary, we achieved many of our fourth quarter and full year goals in an extremely challenging environment. We executed our cost savings initiatives, improved gross margin rate, lowered SG&A expense and maintained our operating margin rate, despite the significant sales decline.

On the balance sheet we reduced year-end inventories, reduced long-term debt, maintained the high quality in accounts receivables and avoided deterioration in accounts payable.

We will discuss the 2009 environment and our business goals in more detail at the February 24 investor day. As we did at last year's investor day, we will provide specific information to help model our business in 2009 and beyond.

I will now turn the call back to Brian.

Thanks, Lee. That concludes the recap of our performance for the most recent quarter and full year 2008. Before we begin taking questions I want to reiterate that while we have stated that we will provide information about our perceived business trends as appropriate, we have a policy of not providing quarterly or annual earnings per share guidance.

Now we will began taking your questions and will continue as time allows. Since there may be a number of you who would like to ask a question, I will ask that you limit your initial questions to two or three and then re-enter the queue to ask additional questions.

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

(Operator Instructions). Omar Saad from Credit Suisse.

Thanks. Good afternoon. Actually, I wanted to try to dig into the sales line a little bit more. The -10, -11 number is probably a little bit more than a lot of us had expected and from what I understood coming into this quarter, the fourth quarter was giving you an extra week this year versus last year.

So if you started to think about what that implication is that it's going to be the core underlying run rate, it's probably even below that. Am I thinking about that properly?

Yes. First let me make a couple of comments about sales. First of all we see these results as absolutely unacceptable and we will do what is necessary to turn them around. Now let me address your questions specifically.

In the fourth quarter sell-through slowed considerably and it was across the board. It was across all categories and at all retailers.

Additionally when you look at our retail inventories, our major retailers, they reduced our inventories by the end of December by about $30 million. So both of those factors conspired to deliver those shipment results that you saw in the quarter.

We did have that extra week. Lee, how much was that extra week worth?

Looks like it was around $50 million.

Around $50 million. So that would suggest the underlying trend was a little bit worse, but there were the two factors coming together to produce the results.

So just help us understand because if we see the -- so if you take -11 and you say the run rates is a little bit worse than that, and you look at some of the comps coming out of the retailers, the retailers you sell into -- and you guys sell into some of the healthier retailers. Obviously, they don't necessarily all get comps by -- for their apparel departments, but help us get comfortable with the marketshare question.

I know you have some data that tells you that it's holding up and it is really kind of an across the board category, but is there something else? I mean how should we think about that and how do we get comfortable with it?

Yes and don't think that the under -- I'm going to correct something. The underlying trend isn't necessarily worth the 11%. I think it's those two factors, sort of the sellthrough and the pulldown of inventories which they never pulled down inventories in Q4. That is generally a Q1 type of thing. Retailers tend to pull our inventories down in January and/or early February, more tied to their fiscal year.

So that was (multiple speakers).

Are you saying those two factors kind of net each other out?

I don't know if they exactly net each other out, but they are probably pretty close. So the good news is (multiple speakers) --.

Is that -- how do we know --? How do we get comfortable that the share its holding up and that it's not -- especially if you are talking about price increases, people get concerned that perhaps you're losing share because competitors aren't going to follow on price increases or you are going (technical difficulties) retailers because you are pushing through a price increase?

None of that is going on. This is all about how retail traffic and sales performance across all retailers behaved starting in late October, November and through most of December. Retailers and we saw sort of a pickup in that last week of December, but it was nowhere near enough to offset the low and soft sales that were in November and December. So it is truly a traffic and a retail decline issue.

We are getting indications from our retail partners that -- we have been told more than once that we are performing better than most of the vendors and suppliers that they have. Our share numbers are up in actually all of our innerwear categories.

Let me also put the sales decline in perspective because as we talk about this entire decline, there's really one category that accounts for about half of it and that is intimate apparel.

So we look at our total sales declined for the year, slightly over $200 million. Intimate apparel was about a little over $100 million of that decline. That category is really feeling the effects of spending pulled back -- women's apparel in total and women's intimate apparel in particular. We gained about a share point there. It just wasn't enough to overcome the decline that we are seeing.

Okay, so, tell me what's happening? Why are women not replacing -- I mean are people out there not replacing their undergarments? Are they -- there are structural shifts in how people view, what people view as they -- what has historically been more of a replenishment item and it's really become more of a discretionary item? Do you have any consumer insights on that topic?

Yes. I think one of the things we are seeing from our category data and we looked at how these markets behaved over the last 20 years, especially tied to recession. There's no question that the consumer pullback right now is longer and deeper than we've ever seen before.

Generally women's apparel in total does react more to recessions than any of the other categories. Like for example, even the men's category. Women -- women's apparel is more discretionary so when times are good spending goes up. When times are bad they tend to pull back more for themselves, but actually still spend for example for their kids.

Women's intimate apparel sort of caught up in that. Normally, however, we only see a decline for at most a year in the low single digits. We have now seen a decline in women's intimate apparel for a second year running and the decline has actually accelerated to about 6 to 8% or more.

I think you can see that by just looking at the overall women's apparel trends by tracking specialty retailers. Victoria's Secret, for example, has been struggling for a while and a lot of women's apparel shops have been struggling.

Okay and then -- so stay on the sales topic, like how you kind of mentioned the pickup at the end of December. Has that continued into January and are the retailers taking down their inventory? Is that going to continue to affect your topline over the next few quarters?

Retailers are clearly very conservative about the environment for 2009. No question about it. What we're seeing is that they are also looking for solutions. So if you break the category into two, those that require six or nine or even 12 months of lead times for the retailers to put their orders in, that's a lot of the ready to wear business and a small part of our casual wear business. Separate from our replenishment business and the innerwear business.

So they are looking for solutions. What they've been coming and talking to us about and actually a number of other companies as well is, they are looking for national brands with product categories that have low inventory risk because they are very risk-adverse about having too much inventory, products that are priced under $10.00 bucks and those are our innerwear categories and our brands and are our product categories.

So we have been having very good discussions with them about driving our innerwear brands and products in late spring and then back to school and even in holiday. So I think we will be able to get incremental promotions to help offset some of this soft consumer behavior.

But for now they continue to pull back on inventory levels?

Yes and you can -- it's one of the things -- it's one of the reasons that our categories generally turn more quickly than some of the other apparel categories where it takes nine to 12 months for retailers to react to sort of trends up or trends down. Because our supply chain can react almost instantaneously to either slowdowns or acceleration of demand.

There is no doubt at some point the consumer will start coming back. They will start spending and we will be well poised to take advantage of that.

Then the pickup at the end of December, has that continued in to January, can you say?

It's -- I think it was reported in the past in a number of the retailers said they saw good sales first week or so after Christmas. I think as Q1, there's no major catalyst that are going to radically turn consumer behavior around. And what we are doing is focus on how to drive incremental promotions in late spring, starting with Easter.

Last question, I promise. When you were doing all this planning for your supply chain and the restructuring that your (technical difficulties) undergoing today, this was in a different environment than we are in today. As you look out over what you're building and what you're planning and what you are shutting down in the Western Hemisphere and moving to the Caribbean or moving to the Eastern Hemisphere, based on what this demand environment seems to be looking like, like how do you feel about how those original plans (inaudible)?

Are you going to find yourselves with too much capacity? Is there -- do you have any flexibility in that to manage the fixed costs that are going to be associated with a lot of those [plants]?

Absolutely and I've talked a lot about that over time. So let me give you more specifics.

First of all, the location decisions we've made. They are absolutely still spot on. Being diversified across hemispheres and diversified across countries.

One of the things I've been talking about over the last six months is if in end this uncertain sales environment, the way you want to manage inventory and your cost is we have the opportunity to accelerate high-cost closures and/or delay or slow down some of the low-cost startups. And that is exactly what we're doing.

For example when we announced closing [Eden Textiles], we originally said we would close it late spring or by early summer. We accelerated that closure to be in February.

Additionally we were originally planning to ramp up Nanjing in early '09. We are delaying that slightly to later in '09. That allows us to effectively manage our inventory inventories and accomplish the goals that we have got set out for 2009, even in uncertain sales environment. If for some reason sales were softer than we expect, we can actually delay Nanjing a little bit more.

If they are actually, the market turns and they are better than we expect, we can accelerate that ramp up.

Okay. So what are you saying? We shouldn't be too worried from a fixed cost deleveraging respect, that when you made a lot of your initial plans you were a $4.5 billion company and now you guys are looking like a $4 billion company?

No. Right now when we close Eden before we actually ramp up Nanjing, sort of late spring and summer, our production capacity will be at about 80% of our sales rate on a run rate basis. So we clearly need to ramp up capacity to hit our current sales projection.

Okay. One technical question. This retroactive one-time duty refund, how much did that help the quarter?

It was $16 million in the quarter, but for the year it was about $9 million above last year.

$16 million, is that after-tax?

Pretax. It's operating profit impacts and basically Costa Rica accepted CAFTA, adopted CAFTA and gave us those duty refund from prior years. But it is about -- we normally get duty refund. These are a little bit more than normal, but it's $9 million for the year.

This thing was running negative and then it became a benefit in the fourth quarter?

Yes.

And that goes in what SG&A or cost of goods?

That is SG&A.

Okay. Thank you.

Eric Tracy of BB&T Capital Markets.

Good afternoon. I will try to get in just two or three questions.

All right, Eric.

If we can just follow-up maybe a little bit on the sales. Rich, I think you talked about this in the prepared remarks. Just want to make sure that there's nothing going on from a private-label perspective. Again, just conventional wisdom would think if any time a retailer is going to try to push that a little bit, it may be now.

But it sounds like again, just based on your share data, that is not taking place in any of the categories?

That's absolutely correct. Our sales are not down, especially our innerwear sales are not being affected by a shift to private label or in fact, what's been happening is private label has been losing share, as are smaller brands. It's the national brands that have been gaining share. For example, like Hanes.

Okay and just in terms of the pricing again, it sounds like == at least what we're seeing in the market that there are vendors that are not really getting irrational. Some of the bigger players are sort of lockstep with you all from the price increase. Is that -- can you confirm that?

Yes. And first of all, the pricing is locked in. It takes effect as I said next week. All of the pricing has been changed in our retailer systems, our systems and we are starting to get orders in with the new pricing as we speak.

We are seeing prices in the retail marketplace start to go up for our products, as well as some of our competitors. A number of competitors followed suit. Some matched, some went up but not to the same degree and some didn't go up at all. I think that seems to be correlated to brand strength as one of the things.

It's interesting to note that while the consumer environment is pretty tough, retailers are also starting to begin talking about average unit ring. They are beginning to work on how to drive their average unit ring up, because they realize that that is one of the ways they can help overcome these tough times and still deliver on their profit metrics. And I think there is a desire on a number of retailers to begin moving retail prices up.

Now that doesn't mean they are going to walk away from promotion. Promotion is critical in this kind of environment. And so what is important do is to show demonstrated superb value versus day in and day out price. So we are using some of those pricing funds to actually go after strong incremental promotions for spring, and back to school, to deliver value -- to help our retailers deliver value to consumers.

Maybe just taking the sales a step further in terms of, you talked about the cost benefit of how you managed through the debt. The sensitivity around and the visibility you have in terms of how bad sales could get before bumping into or breaching a covenant -- how you sort of think about that.

And I guess a follow-on to that just anything out of the ordinary or different that we should be thinking about, the expected free cash flow generation next year from a CapEx perspective or the inventory?

Yes, as we think about our covenant compliance, again, we ended the fourth quarter with $75 million cushion which was a reasonable level. We do have visibility because that calculation is a rolling four quarter calculation. So you do have visibility to the impact of future changes.

The world has gotten tougher in the last quarter. And with that, this kind of economic conditions, it's -- as we've said in my prepared remarks, we think it's prudent to clearly understand all of our options right now. And the cost of those options, including possibly amending the credit agreement. So we are out right now.

We are going to look at the cost of those options and then choose the best course of action for the Company. But we just initiated that piece of it and to get the [really to] hard cost. So once we complete that we will provide everybody with more direction as to what we might do there.

Okay and just on the free cash flow piece?

In the free cash flow we are, as we always said our free cash flow on an annual basis is in that $200 million to $300 million range. In 2009 we have the potential to increase that, because we've stated that goal of reducing inventory down to $1.15 billion which is about $150 million from where we finished the year. So we do have some opportunities in inventory, as well.

And then the CapEx is there -- is that because -- I know initially kind of thinking that role is over as well, but because the Nanjing gets extended, is that changing thinking there at all?

We had always talked about 2008 being the highest CapEx year we had and it netted out about $162 million. We planned on 2009 just normally in the normal course being lower in the $130 million range, for example.

And last just a quick technical [freely]. Pension expense, able to quantify your thoughts there for '09?

Yes, we are working on pension right now. I would -- from a funding perspective we are a little under 80% funded right now. Recall a year ago we were about 97% funded. So it's declined.

I think the good news from a cash-flow perspective is at around 80% funded, we shouldn't have any significant mandatory cash contribution requirements for '09.

From an expense side, we are working through that. Now we had $12 million of income this year because the plans are frozen and they were 97% funded. We will have an expense next year and we are working through what that will be, but the key is it will be non-cash for us.

All right. Thanks.

Let me add just one thing. I -- question, Omar. He asked where duties are included on our P&L and they are actually in cost of goods sold. They are not in SG&A.

Todd Harkrider of Goldman Sachs.

On the prior call, you talked about being able to reduce discretionary spending by $40 million to $50 million in 2009 and since that time have you been able to locate any incremental cost savings opportunities that's outside the same rationalization since those appear to be bearing fruit?

Yes we clearly have the opportunity to control discretionary spending. You do remember very well. I've talked about putting that $40 million to $50 million in the box and saying we need to be thoughtful about how to spend this, depending upon the consumer environment and we are going to manage cost extremely conservatively.

We are not going to pull back from, however, investing in our brand. We need to continue to do that. It's one of the reasons we are able to secure our price increase. And that has a substantial impact, that price increase, on our ability to navigate this environment. You know, 4% increase on our domestic sales volume turns out to be quite a strong amount of money to help us both secure incremental promotion, as well as navigate this environment.

Appreciate it. And we have your exit and restructure items laid out for the (inaudible) closures, but can you give us a look on when some of the other material add backs might roll off through 2009?

From a restructuring perspective we are at about 89% of our estimate of the $250 million. So those will roll back in 2009. We expect that the bulk of that will be done in 2009.

With regards to just start-up costs on the other facilities and everything that you might be running duplicate facilities for a little time and (multiple speakers) hard to tell when those are going to be rolling off?

Yes, the 2009 startup will continue probably to roll off in 2009 and 2010.

Appreciate it and good luck in '09.

Scott Krasik of CL King & Associates.

Thanks. Just one last question on the sales trends in the market share data. If you X out that extra week and currency, the trends are a little worse than 11%. Maidenform sales were only down 2%. I note they are a small player. In the fourth quarter looks like Victoria's Secret is a down about 8% year over year.

So, again, how do I reconcile that gain in market share in intimates, for example, with trends much, much worse than that?

I think you have to go back to not only our sell-through trends, but also the inventory trends at retail. As I said, according to our major retailers, we are performing at or above most of their vendors in their apparel space in total. I will say that we are hearing from all of our major retailers that apparel sales have been woefully slow in the holiday period, some of them having double-digit declines.

And we are not faring any worse. We actually think we are faring a little bit better than everyone else. As everything comes together in one quarter, it's a little hard to tie it out exactly, but I feel confident that in fact, we aren't losing share. We have had no space changes. We aren't seeing private-label gain at our expense by any stretch of the imagination.

I think what we're really seeing is that consumers have pulled back tremendously. That is impacting certain categories, women's apparel and intimate apparel included, disproportionally for example to men's underwear. And that is impacting us.

Our men's underwear ended the year up. We are actually -- it's one of the categories that isn't faring nearly as poorly. It's much more stable and level, but in those discretionary areas, people are really pulling back. And that is what is impacting our sales right now.

And then, Lee, if I add $31 million or so from the cotton and higher oil to a base of about 790 in cost of goods from last year, and then as you track out each of the things you gave us -- lower duty, inventory obsolescence charges, etc. -- I'm still short about -- and then $40 million of lower sales. I'm still short about $40 million year over year to get your cost of goods number.

Yes. I think the way you could look at this is that the cotton and the oil related is a negative impact in the fourth quarter of about $31 million. You add the duties, obsolete inventory, the supplies -- that's a positive of about $30 million. So those generally wash. We have initiative savings and improved manufacturing performance which then offset the negative sales impacts to get you to the down $40 million.

So we do have initiative savings in our cost of goods sold from our supply chain transformation and better manufacturing performance.

So the $10 million you list as cost savings, there is actually a lot more than that. Just you didn't call it out because it is more efficiencies is that --?

Exactly. As we built inventory in the year and in the quarter, we generally are operating our plants more efficiently.

Okay. That makes sense. Then, just sort of looking out first quarter I guess, primarily, we have what the cotton is. Thank you. What is the oil? Do you get another big duty true up? What sort of other offsets from cotton will we see and how it impacts (inaudible) oil in the first quarter?

You know, oil as -- we walked off the fourth quarter with about $25 million to $30 million of higher, we will call it oil and cotton costs. Probably $15 million of that is just cotton. So those are all detriments.

Don't see any duty rebates or those kinds of things going in the first quarter at this point.

So no major, other than -- I mean, you did $7 million of cost savings in the third quarter, $10 million in the fourth quarter, so ostensibly something from that. That would be the only major offset you see?

And I think, Scott, it's fair; we want to try to focus right now on 2008. In less than three weeks we will be there and try to provide a lot more perspective on 2009, especially as it may lay out by the quarter. So to help you model the business.

What we want to do is be careful that we run the risk of only giving you one or two pieces and not the entire picture; and people could draw the wrong conclusions from that. So please try and be patient with us.

Sure. No, that's fine. Okay. Thanks and I'll speak to you guys in a few weeks then.

Reade Kem from Bank of America.

Good afternoon, everyone. I just had a couple of basically housekeeping questions. I guess in the cash flow for financing section that you reported, the outside of the debt repayment. Was the rest of that stock repurchase of the quarter?

No stock repurchase in the quarter.

Okay. And then debt balances. Did you have any outstanding on your foreign lines?

Yes, we did. About $62 million that's shown in other current liabilities for the international debt.

And is that piece excluded from your leverage calculation? I couldn't remember.

No, it is included.

It is included. Okay. And then, just in terms of the EBITDA for credit agreement purposes, I think, there's a fairly large gap between what most people looking at your numbers trying to come up with an adjusted EBITDA would have and what that number is. And could you give us a little bit of color on what the add backs are? I'm coming up with frankly about a $130 million difference in the quarter.

Sure. If you look at table four of the earnings release, you'll see reported EBITDA $433 million. Our calculation is that the add backs were about $179 million, getting us to covenant EBITDA of $612 million. And then the covenant debt is $2.036 billion and your calculation then would be [3.3].

Okay. And within your credit agreement EBITDA, I believe you can add back start-up costs. Is that the majority of what? What we might not see in your press release?

Yes. I think the major captions are restructuring costs, start-up costs, which you wouldn't clearly see. There are non-cash expenses -- equity compensation, for example. Any one-time charges, any bankruptcy. For example, the Mervyns was added back in the third quarter and that is about $7 million.

Okay. And those start-up costs, since we don't know the exact number there, I mean is it -- as we think about next year, should we think that that's a fair addback perhaps because you are going to reap the benefits in terms of cost savings? And so there is not an issue of lapping that in '09, so to speak?

Yes, I think our start-up costs will be fairly consistent year over year '09 versus '08.

Okay and your agreement allow -- would probably allow you to add those anticipated start-up costs back as well?

As incurred. We add back start-up costs as they are incurred.

Okay. Thanks a lot.

Jody Kane from Sidoti & Company.

Lee, did you say you expected 100% manufacturing to be offshore going into '09?

I said that our knit textile capacity will be 100% offshore. A lot of people focus on the T-shirt businesses versus our competition and when we close our Eden textile facility that is the last US knit-oriented textile facility we have onshore.

So going into '09 there [won't] be much more shifting or much more margin benefit as you move more offshore?

Yes, you are -- we are getting close to the end of our planned closures in the US due to our network reconfiguration. Now while we may still have some consolidation opportunities or things such as the sheer hosiery business that continues to decline at its historical rate, we may close some things. But as Lee talked about, we planned for about $250 million of restructuring costs over three years and we are about 90% there.

Now while we're close to the closings, we will start to see benefits continue to roll into our P&L over the next couple of years as those offshore facilities ramp up to full production and ultimately all of the start-up costs go away.

Then for the price increase, you used the word locked in. Could you tell us how long that is locked in or what the retailers' options are in terms of the price increases?

In the innerwear categories prices change relatively slowly. When they change, they rarely go down. Clearly the way you can manage price in the short term is by driving promotion a little bit more which we intend to do in 2009.

But this is not something that is there to be temporary. We've changed price. Retailers are changing price. And it will be there for the long term.

(Operator Instructions). Kevin Ziets from [Polly].

Just one quick question on the bond buyback. I thought your credit agreement had some pretty strict limitations on that. Can you tell me what's left available to -- on the bottom purchase basket?

Yes, we do have limited ability to buy back debt in the open market. Basically we can use proceeds from, for example, stock option exercises to buy it back. So we bought back at face about $7 million and we don't have a lot more left that we can do at this point.

Would you say less than 5 or --?

Yes.

Thanks very much.

There are no more questions in queue. Mr. Lantz, any closing remarks?

Yes, we would like to thank everybody for attending our quarterly call today. We appreciate your support and interest and look forward to speaking with many of you in a few short weeks at our investor meeting.

This concludes today's conference call. You may now disconnect.