漢佰 (HBI) 2009 Q3 法說會逐字稿

Good afternoon. I will be your conference operator today. At this time I would like to welcome everyone to the Hanesbrands third-quarter 2009 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question-and-answer session. (Operator Instructions). Thank you. I would now like to turn the conference over to Brian Lantz, VP of investor relations. Please go ahead.

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 2009. Hopefully one -- everyone has had a chance to review the news releases we issued earlier today. The news releases and the audio replay of the webcast of this call can be found in the investor section of our hanesbrands.com web site.

I want to remind everyone that we may make forward-looking statements on the call today, either in our prepared remarks or in the associated question-and-answer session. These statements are based on current expectations and are subject to certain risks and uncertainties that may cause actual results to differ materially . These risks are detailed in our various filings with 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. Also, any references to gross margin, SG&A, operating profit, earnings per share or EBITDA on today's call will focus on results excluding restructuring and other actions, unless otherwise specified.

With me on the call today are Rich Noll, our Chairman and Chief Executive Officer, and Lee Wyatt, our Chief Financial Officer. Rich will highlight our 2010 net space gains and give a summary of our business performance for the quarter. Lee will then provide further detail on various aspects of our financial performance. Following our prepared remarks we've allowed ample time to address any questions that you may have. Before I turn the call over to Rich I want to take a moment to let everyone know that we are planning our third-annual investor day on Tuesday, February 23rd in York. We will, again, have our extended management team review our achievements, strategies and opportunities in detail. We'll send the invitations out in the fourth quarter and we look forward to seeing all of you there.

I'll now turn the call

Thank you, Brian. I am pleased with our performance through the recession and I'm very optimistic about our potential in 2010. Overall both the quarter and year are unfolding as we stated and we continue to invest in our business. As a result we are poised to begin 2010 with significant momentum. We have secured substantial net space gains and program expansions that will result in approximately 5%, or $200 million of sales growth in 2010. We are following a simple path to growth. While we are number one or number two in all our core categories, we're not number one or number two in all accounts or in all of our core programs. In 2010 we are growing our market share by capitalizing on these distribution opportunities, filling in the holes in our distribution grid, so to speak.

Let me hit a few of the highlights. All are innerwear segment -- excuse me -- our innerwear segment accounts for the majority of the increases. Specifically, men's underwear is benefiting from confirmed net space gains at all major account, including Target, Wal-Mart and Macy's, plus new distribution at Dollar General, J.C. Penney's and BJ's. These net gains should produce high single-digit growth for men's underwear in 2010. Intimate apparel also has substantial gains. We have confirmed expansions for bra programs on most major accounts, including Kohls, Target, Wal-Mart and Macy's, as well as expansion across all of our brands. Hanes panties are also getting space and new distribution at major accounts. Overall intimate apparel gains should produce mid single-digit growth in 2010. The remaining underwear categories have both space gains and losses that should generally offset or provide low single-digit gains.

Outerwear segment growth will be driven by the multi-year agreement with Wal-Mart to significantly expand the Just My Size brand in casual. This program could provide $75 million in incremental casual wear sales in 2010, growing to $150 million over time. Champion has confirmed space and distribution gains in sporting goods, department stores and mid-tier accounts. The only segment with net losses is sheer hosiery. Retailers continue to reduce space in this category as the industry continues to decline. Some of these programs began shipping in Q4, but the bulk of the programs start shipping Q1, resulting in much of 2010's growth being weighted in the first half, therefore these new programs allow us to begin 2010 with top-line momentum, even if consumer spending does not rebound. If it does rebound we have upside potential.

To support all of this growth we are very quickly increasing our production capacity. Our Nanjing textile facilities started production this month and we have secured additional capacity with outside contractors. These capacity expansions, coupled with our continued planned cost savings, will go a long way in 2010 in helping us achieve our annual operating margin expansion goal of 50 to 100-basis points. We'll provide further 2010 top line and EPS guidance early next year after we see holiday results, which will allow us to gauge consumer sentiment.

Now let me turn to a recent consumer spending trends. Over the last quarter we have not seen a sustained consistent rebound in consumer spending but rather mixed results. Back to school started week in July and early August, then we saw five weeks of strength from mid September before it softened again for a couple weeks. More recently we have seen October retail sales show strength due colder weather. So for back to school it felt as if consumer spending was bouncing along the bottom, as we overlapped last year's fourth quarter declines bouncing along the bottom may imply relatively flat sales. While important, however, the fourth quarter is not a gauge of how we will perform in 2010. Whether Q4 sales are a few points better or worse remains to be seen, but our momentum in 2010 is driven by space gains rather than a rebound in consumer spending. 2010 has great potential. Our projected sales growth, combined with our cost savings, should drive greater operating profit growth, and when combined with our debt pay down should drive even higher EPS growth.

Let me now turn to our third quarter financial results. Overall sales declined 8%, in line with what we projected on our last call. EPS grew 21% in the quarter and I'm particularly pleased with our 10.5% operating margin. We also ended the quarter with $153 million less inventory than at the start of the year, achieving our year-end goal a full quarter early, and we remain firmly committed to paying down $300 million of debt in 2009. For 2010 we see the potential for robust cash flow and our major priority will be to continue to delever and pay down another $300 million of debt. Additionally, we want to be prepared to use 2010's excess cash flow for potential bolt-on acquisitions that could provide value by leveraging our low-cost global supply chain. To that end, we will discuss our thoughts on refinancing. As I have said before, it's tough times like these that test organizations and our people are truly rising to the occasion. Through their collective efforts we have overcome this recession and laid a solid foundation for a successful 2010.

I'd like to turn the call over to Lee Wyatt.

Thank you, Rich. To summarize the third quarter results, earnings per share, excluding actions, were $0.63, 21% above last year. Operating profit increased $9 million, or 9%, despite the sales decline. Operating profit margin increased 160-basis points to 10.5% and we paid down $177 million of debt in the quarter. We're very pleased with these results in this environment and they again confirm our modeling assumptions for the full year. Let me review our results for the third quarter in more detail.

Sales of $1.06 billion decreased $95 million, or 8% from the same quarter last year. This decrease was in line with our previously-announced projections. Restructuring and related charges were $16 million in the third quarter. These charges were incurred primarily as a result of plant closures and consolidation actions. Year-to-date charges have been $53 million. Total charges since the spinoff have been $262 million. Our current estimate for the fourth-quarter charges are around $18 million, bringing the total restructuring charges since the spinoff to $280 million. Approximately half of the charges have been non-cash. The restructuring charges will be completed in 2009, so in 2010,we will no longer report results on an XA basis, we will only report on a GAAP basis.

The gross margin rate for the third quarter was 33.7%. The third quarter rate was higher than the 2008 rate, due primarily to the benefits of our price increase, cost savings initiatives, and lower cotton cost that more than offset higher trade spending. Our decision to increase trade spending has proven valuable in building momentum with customers and has contributed to the significant space gains in 2010. The gross margin rate has improved sequentially in each quarter of 2009. Cotton costs for the third quarter was $0.49 per pound, approximately a $14 million positive impact. We have visibility to cotton costs for the fourth quarter of 2009 and first quarter of 2010. The fourth quarter should reflect cost of $0.48 per pound, approximately an $18 million positive impact. The first quarter of 2010 should reflect cost of $0.52 per pound, approximately a $12 million positive impact.

Turning to SG&A, third quarter SG&A expenses were $246 million, or 23.2% of sales, $12 million lower than last year. The quarter reflected $10 million in savings from the cost savings initiatives and lower bad debt, distribution and IT expenses that more than offset $8 million higher pension expense. Operating profit of $111 million for the third quarter resulted in an operating margin of 10.5%, 160-basis points higher than the same quarter last year and better than the 2008 full-year margin of 9.7%. Interest expense for the third quarter was $43 million, $6 million higher than the same period last year. Our revised expectations for the full-year tax rate is 16%, due to a higher mix of offshore profit caused, in part, by restructuring charges in 2009. Our income tax rate in the third quarter was 14%, as we trued up our year-to-date tax expense to our full-year rate. And earnings per share were $0.63 for the quarter, up 21% compared to $0.52 last year.

Turning to the third quarter balance sheet, inventories were $1.14 billion, $153 million less than we began the year and $222 million below the third quarter of 2008. We've achieved our goal to reduce inventories by at least $150 million, a quarter earlier than planned. Debt at October 3rd was $2.04 billion and we remain in compliance with all debt covenants. We paid down on $177 million of debt in the quarter and have reduced debt by $134 million year to date. Our cash flow statement reflects $211 million of net cash provided from operations year to date, reflecting the reduction in inventory. Year-to-date capital expenditures of $100 million were on plan, with $16 million of proceeds from property sales reducing net expenditures to $84 million. For the full year we expect gross capital expenditures of $125 million, with net capital expenditures of no more than $90 billion.

In summary, the third quarter results were very much as we expected. We significantly increased our operating margin. Sales declined at a rate within our projected range. We significantly paid down debt and we reduced inventories. Despite the recession, third-quarter profit results were strong. And most importantly, we made investments in our business that have generated substantial top-line momentum for 2010.

Let's turn to our outlook for the fourth quarter. It's important to remember two aspects of the 2008 fourth quarter. First, it included a 53rd week of sales worth approximately $50 million, or 5% of quarterly sales. And second, it included $16 million in unusual income from duty refunds from Costa Rica, as the country adopted [capta] provisions. Our sales assumption continues to be that we will continue in a consistent run rate all year and as we overlap last-year's fourth quarter decline, it implies that sales should be relatively flat with last year., after adjusting for the impact of last year's 53rd week. Other factors, such as last year's inventory destocking by retailers and this year's timing of shipments as retailers managed the transition of our space gains, could positively impact sales by $20 million to $30 million in the fourth quarter, but this is still uncertain at this time.

Operating margin in the fourth quarter should improve over the 2008 rate, in spite of at least $8 million higher trade spending and $2 million to $3 million of increased supply chain cost, such as air freight to transition retailers for the 2010 space gains. Should the operating margin show significant improvement we may choose to use the excess to reinstate some media spending to drive additional sales momentum in 2010. As for the fourth quarter balance sheet, debt should be reflect total pay down of $300 million in 2009, and since the sale of our yarn operations closed today we could realize up to $50 million in reduced working capital with the majority reflected in lower inventory.

We'd like to make them to additional announcements related to fundamental shifts in our capital structure strategy. While continuing to generate strong cash flow since the spinoff, we've invested heavily in building out our low-cost global supply chain, in addition to paying down debt. This period of heavy investment is ending so we will now direct our strong cash flow primarily to achieving a lower leverage target. We will also be positioned to use excess cash to make acquisitions, or return cash to shareholders, but to realize these opportunities to create value we will need a more flexible tax structure than today. So first, we're announcing a leverage target of two to three times debt to EBITDA, with the potential to achieve the target range in 2011. Achieving this leverage target would be a radical shift in our leverage profile and reflects both our stated priority to reduce leverage and our robust cash flow expectations during this period. And second, we feel the time is right to evaluate refinancing our debt. Refinancing could both simplify the overall debt structure and provide additional flexibility to create value, so we will begin developing plans on structure and timing and we'll communicate, as appropriate.

To summarize, we are pleased with the third quarter profit results, the inventory reduction and the debt pay down in the quarter and we are excited about the prospects for 2010 sales and earnings growth and the opportunity to radically change our leverage profile over the next two years. I'll now turn the call back to Brian.

Thanks, Lee. That concludes the recap of our performance for the third quarter of 2009. Now we will begin taking your questions and we'll continue as time allows. Since there may be a number of you who would like to ask the question I ask that you limit your initial questions to two or three and then re-enter 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). Your first question comes from the line of Omar Saad with Credit Suisse.

Thanks, good afternoon. Great job on t he quarter, guys, congratulations.

Well, thanks, Omar.

I wanted to start with the commentary you guys made around sales guidance for next year and some of the things that are happening it sounds like that drove your ability to put out that plus five number. What -- so help me understand. We knew about the Just My Size and that win out there, but can you point to some of underlying fundamental things that are happening, either at the retail level or a competitive standpoint? What's really under -- driving from an underlying basis this meaningful shift and what could be your meaningful sale's trends?

Well, I think -- when you're talking about this kind of increase and it's so broad-based across many different accounts from department stores through dollar stores and across most of our brands it's really a reflection of the investments that we've been making in our brands of the last few years. Retailers are seeing that they can use our brands to drive traffic to their store and help them drive both their sales and profits and I think that's the fundamental reason for a lot of these gains. Additionally, I don't want to also lose sight of the fact that, while we're number one or number two in all of our categories, we've still got a lot of distribution voids out there to gain share and we're going to aggressively go after it. I think one of the prerequisites was we needed to have a low-cost global supply chain in place from which to competitively go after this share. We now have that and so you think of this as a new phase, this optimize it and leverage this supply chain and it's all about driving the top line and leveraging that supply chain to the best that we can.

Is there a shift in the way retailers are thinking about their different suppliers that's triggering this now? What's different today versus a year ago? Is it really just the completion of a large chunk of the supply chain restructuring?

Well, I think it's a couple things. One is that our brand equities continue to build over time. Two, during the recession what a lot of retailers were gravitating to was driving well-known national brands with broad appeal to bring people in their stores, because their number one issue is traffic, right, and it's one of the issues why, for example, in our innerwear category we haven't seen a big shift on retailers' parts toward private label, they're actually shifting more towards driving national brand. But importantly, the gains that we're seeing are coming from our major competitors, as well as minor brands in the marketplace and private-label, so I really do think it speaks to our brand equity that'as been building over time.

The second factor is that there is a strong desire on a lot of retailers parts to drive what I would call moderate-priced brand and it's interesting. So if you go to the dollar stores they want to drive moderate-priced brands, not for them but relative to the marketplace, hence they're pushing Hanes. You can go all the way to mid-tier at department stores and they want to drive moderate-priced brands, such as Hanes or a Bally, so I think that's also been a factor that's helped us. Importantly, though, retailers aren't looking at this as a short-term reaction to the recession, they're looking at it as a way to build their business long term.

Okay. And then I know it's not all -- you alluded to the fact that there's space gains, but there's also some space losses. What are toughest parts of your business as you out over the next year or two, excluding the hosiery business? What are some of the areas where you're finding it tougher to deliver -- to generate space gains?

We actually -- every year we always have space gains and losses, especially around this time because a lot of major retailers reset their floors in February/March timeframe. So we always have pluses and minuses on gains and losses. So this year we had losses across all of our categories like we normally do that are relatively minor but the gains just swamped at those losses that we have and I think it goes back to retailers wanting our brands to drive their traffic. So we saw losses across all our categories. It's not like there are more in some places than the others. But I am quite pleased with the strength of we're seeing in men's underwear. As I said, we should be up high single digits and that's probably the one that's got the broadest new distribution, as well as women's intimate apparel should be really, really strong.

Okay, and then just last quick question, I promise. I know you said you're not assuming any consumer rebound in these assumptions but what is your view on the consumer today. The weather's gotten colder but is there really anything that you could read into the mindset and health of the consumer and their willingness to spend, given what you've seen over the last few months?

One of the reasons my prepared remarks went through almost a week-by-week or month by month play-by -- play out of how back to school went was to give you a feel for it. It's sort of bouncing along the bottom, it's mixed. We see some pockets of strength and then you've got a couple of weeks that are soft, so from our perspective we haven't yet see a consistent sustained rebound. What's going to be interesting is really watching what happens in November and December and that's why we wanted to wait until next year to give our better -- our thoughts on will consumer spending rebound. I'm going to guess -- I'll go out on a limb without that information and say usually there's no catalyst in Q1 or even until later in spring towards Easter for people to change their spending habits, so more than likely you're not going see a spending rebound until late spring or back to school. So you could see some real strength in the second half of the year, but we want to go through a holiday to better gauge it. And that's why I'm so excited about our prospects for 2010 because we can have strong robust growth from a top-line perspective cascading down onto the bottom line, irrespective of that consumer spending rebound..

Okay, thanks. Congratulations, good luck.

Thanks.

Your next question comes from the line of Jim Duffy with Thomas Weisel Partners.

Hey, Jim.

Thanks and congratulations on your --

Hey, Jim, we can barely hear you.

Oh, okay.

That's much better.

Thanks for taking my question and congratulations on the space wins into 2010. I want to make sure I understand that 5% number. Is that a gross number, or is that net of programs that you lost with retailers, as well?

That is a net number of confirmed space gains and losses and pretty much we know what;s going to happen definitely through the first part of the year. Most retailers make one or at most two resets with the February/March reset been the most important one. So that's confirmed net gains, so gains minus losses and so roughly $200 million.

Great. And then with regards to how that will flow through the model, how will you prioritize your spending in support of programs and setting the table for new programs in future years versus just letting -- [lowering] the revenues strength lever over some of the cost improvements that you've made in past years?

So are you asking how we might see that impact the overall bottom line?

Well, yes, in general terms what will SG&A spending look like in a plus 5% revenue growth environment. Could we expect --?

Let me just start it with a couple things. Overall we still have a goal for 2010 to continue to im -- even with these gains to improve our operating margins 50 to 100-basis points. The only real thing that we want to -- that we know we want to add back from a SG&A perspective that I've talked about, actually, for the entire year is that we cut media earlier in the year, which is about $25 million in the first half and I think that was the absolute right decision to make. If people weren't in stores buying a lot of stuff there's no reason to be spending a lot on media. That cut will need to get restored. I think we need to get back up to that $100 million level and then eventually it will grow with sales. Lee, do you want to comment anything more specifically?

Yes, just a little color on SG&A this year. In the third quarter we've reduced absolute dollars down by $12 million and year to date we've reduced SG&A by about $78 million so we think we're getting to a nice run rate on SG&A, with the exception with the need to improve or restore some of that media. So we think we're at a point with a base rate that we can now leverage that in the future. In 2010 it should be very favorable to the bottom line.

Okay. And is it fair to say that you believe you have the infrastructure in such a place of the best use of capital now maybe now more focused on growth initiatives? You mentioned acquisitions and what are the characteristics of the type of acquisitions that might make sense? Anything you can speak to on that fund would be helpful. Thank you.

Yes. I've always talked about our life in two phases. The first three or four years coming out of the spin was where we needed to spend time investing in rebuilding our infrastructure and rebuilding our brands, and we've now pretty well completed that with the exception of our Nanjing facility, which needs to ramp up this year. And then the second three to five years is what we would call the optimize and leverage it phase. That's where we've got the opportunity now that we've the supply chain in place to optimize it for both cost and working capital deficiency. So both of those things can help our operating margins expand, as well as help us generate pretty robust cash flow. But then you also want to leverage that infrastructure, both with consistent share gains, which we are demonstrating we can achieve in 2010, but also to begin contemplating bolt-on acquisitions. These would be the types of acquisitions that would be in our core apparel essentials category, would us therefore to beverage synergies through our supply chain and maybe some overhead, but also provide a platform for growth. So it could be in areas that would either help us expand in consumer segments that we're not, or distribution channels that we're not as strong, or even in -- expand in certain geographies, for example, international. To that's where we think we could go.

The size of the magnitude of these, for example, we -- they're not going to be huge or major things that are going to radically transform the size of our Company, they could be acquisitions that could be in the $100 million or $200 million range that would be relatively small in scope, safe, conservative but provide tremendous energies or value. It's now time for us to begin to thinking -- think about those from a -- and start taking a look more seriously. We're not in any negotiations now, but it is time for us to begin thinking about it.

Great, that's very helpful. Thanks, I'll jump back in the queue.

Okay, thanks, Jim.

(Operator Instructions). Your next question is from the line of Scott Krasik with CL King & Associates.

Hey, Scott.

Thank you. Hey, how are you guys?

Good.

So, just a question. You mentioned that you're -- to go back to the 2010 sales guidance you mentioned that the increase would be weighted to the first half. know that you have visibility there in terms of the commitments, but it's not like sales picked meaningful for fall this year why shouldn't you get similar growth in the back half of the year ,as well?

We will clearly -- right now our plans show that we would grow with these space gains in both halves, no question about it. What I was trying to communicate is you would probably see slightly higher than the 5% growth in the first half and maybe not so much in the second half, but we clearly have the opportunity for strong growth. And then additionally, while we're feeling pretty good about the back half given the commitment and the space that we have, I also think there is some opportunity for consumer spending rebound or other things to happen that could be positive in the back half of the year.

So really there's a few different avenues where you could be conservative in terms of the outlook?

Yes, and I also wanted to say that generally our Q1 tends to be the lowest quarter of our four quarters just seasonally, but a lot of these programs are going to begin shipping in Q1 so Q1 could be pretty strong.

Okay, great. Then, Lee, in the quarter other than the lower commodity costs year over year are the other benefits in the fourth quarter to gross margin? I don't think he spoke to that specifically. Because to get to the -- I know you don't give guidance but at least to get the consensus estimates that are out there it would take something additional to get -- to be a meaningful increase, at least sequentially, on the gross margin.

In terms of the fourth quarter the things we know are out there, we'll continue to have lower cotton costs, we talked about $18 million; lower oil and related costs of maybe $5 million to $7 million; and we'll still have some price increases and our initiative savings. We've year to date we have had about $62 million in initiative savings, that's about $20 million a quarter, so that should continue. So we know of those things.

Now, just as a reminder. One of the things Lee talked about weighing on those are some additional costs that we'll incur in the quarter for additional trade spend and some supply chain cost, like air freight, to help support the strong shipments that we'll see in Q1.

And the outlook right now relative to keeping some of those opportunistic (inaudible) those replenishment sales, the $20 million to $30 million that you mentioned?

Yes, we do not know enough right now to know that. That's purely on, for example, timing of shipments between the fourth quarter and first quarter ,so hard to tell right now.

Okay.

If you remember, last December all of the retailers were reacting and pulling inventories way down, then they've never pulled inventories down in September or December, they always do it in January or February. So last year we felt that pull down happen in December. If that does not happen again this year there's some upside, but it would really be a timing shift from Q4 to Q1. It wouldn't be a fundamental change in what our sales results would be over those two quarters.

Okay. And then lastly, Lee, in terms of refinance you do have some language in here that it could come as early as the fourth quarter, have you begun the process? And then, to get the flexibility do you have to accept higher rates and just with the pay down do you expect to offset that in terms of accretion/dilution? Maybe talk about that.

We have not announced or initiated a refinancing at this time but the markets are -- the credit markets are strong enough right now that it would make sense, if we could get it done, to go ahead and get moving but we're planning that right now. We're working through what the structure might be and what the timing might be right now. In terms of rates, when we amended the first lien the first quarter we basically marked most of the debt to market, so from a rate perspective a refinancing shouldn't fundamentally change our effective rate. However, from an interest expense perspective next year this $300 million of pay down this year and then the $300 million next year will obviously take the overall interest expense down.

Right. Okay, thanks, guys. Good luck.

Thanks.

(Operator Instructions). Your next question comes from the line [Rushid Hakhi] with Sterne, Aggy.

How you guys doing?

Hi, how're you doing?

Under your --

Hello?

Hello?

Now we can hear you.

Sorry. Under your existing covenants how much can you spend on acquisitions? Basically where's you restrictive payments basket today?

Well, there's an acquisition basket today that limits us to $100 million.

And that $100 million debt pay down for next year, does that in any way reflect the possible increase in the cost of capital if you do a global refi or --?

The $300 million paydown next year?

Yes.

Should -- would not be impacted by whether we do refinancing or don't do a refinancing.

Okay, Great. Thank you.

Your next question is from the line of Eric Tracy with FBR Capital Markets

Good afternoon, guys, and --

Hey, Eric.

-- I'll add my congrats. Maybe if I could tackle the -- next year's top line in a different manner and that is from a capacity standpoint. Talked about not only the incremental from Nanjing, but adding contract manufacturing, is that based on a 5% incremental or what is the assumption around other growth that would be imbedded in that?

Yes, if you remember we actually pulled production capacity down in 2009 below our sales -- projected sales rate in 2009 to help bring down inventories so we've always had to ramp production up for 2010, even if we weren't going to see this kind of sales growth rate. Now that we're seeing it and a lot of it's actually weighted earlier in the year, I tell you we're ramping up as fast as we can. Now we're going to be able to service all of the business, but we are -- the entire organization is rocking and rolling and bringing capacity on line as quickly as possible. And I'll tell you, after the last 18 months it feels real good chasing upside instead of chasing down side.

Right. And that was going to be my next question. Obviously Nanjing just earlier this month coming on line, nothing you're seeing from a traditional standpoint , and then obviously layering in contract manufacturing always brings in some complexities, but you feel like the infrastructure's there, particularly to support an

Yes, absolutely we feel it's in place and we see -- in fact, what a lot of retailers were doing with these new program expansions is they kept calling up trying to move the date's forward and now they're going really, really early so I think that's a signal of how much they really want our brands. Nanjing isn't actually early in the year going to play a big part in providing and supporting some of this capacity. It's actually ramp ups in some of our other sewing facilities and some other textile facilities that we're doing to make sure that we can cover it, as well as working with outside contractors, but that are really in two groups, Eric. One would be people that we have strategic relationships with where we contract a huge portion of their production. Year in and year out we've been ramping up with them and that's actually at a much lower cost and doesn't add as much complexity. But we're also adding just outside contractors, as well. At this point pretty well we are sold out for at least through first quarter and mainly most of the second quarter so we're feeling pretty good about our situation.

Okay. And then maybe turning to top line next year and talk a little bit about G&A to support that, but from a gross margin perspective, I know you're not giving exact guidance on it but is it fair to assume the similar run rate from the supply chain initiatives of the $20 million per quarter, or is there potential with Nanjing coming on and if so, how should we think about the cadence as the year progresses?

I think about it from a pro rata basis the run rates going to continue next year in the same rates it is this year from a savings perspective. And from a SG&A perspective we thing we've sized to the SG&A based to where it needs to be, with the exception, again, of that media increase. We should be able to leverage the SG&A.

Okay. And then in terms of bringing the Nanjing online, you've obviously got a lot on your plate just from domestic growth opportunities, but again, could you speak to whether it's next year or longer term the international play, whether that's organically developed or now potentially through acquisitions, how you think about that, particular the in Asia?

Yes. Let me actually start and talk a little bit about what we've been doing in Mexico because we have these -- it's about $400 million in sales spread between Mexico and Canada and Europe and Asia and even Brazil, and they're like small independent companies almost and they've got anywhere from $60 million to $100 million of sales. The overall strategy internationally is you can think of them like they're bolt-on acquisitions that we don't have to buy and there's synergies that we can create by plugging those smaller companies into our larger global low-coat supply chain. We started the process with Mexico a little over two years ago, able to help really lower their costs and it is allowing them to be much more competitive against everybody else in those markets in gross sales. In fact, Mexico;s been growing consistently, even through the recession. We think that's a winning strategy. We can then build out each of those international businesses in our core categories over time and have some good international growth, and we think that we should be able to consistently get at least mid single digits or better growth internationally from our existing businesses by following this strategy.

Longer-term, acquisition opportunity could make sense, absolutely. Probably not a lot of people know this, but we have the number one men's underwear share in Brazil. There's no fundamental reason that we couldn't have the number one intimate apparel share in Brazil, as well. In China we've also got plans where we're starting to build our business and I think that markets really a market that we'll focus on very heavily over the next couple of yours. Continue to build organically, but also think about acquisition. International acquisitions would be a little bit longer term, not something near term. It's like you want to make sure you're doing something where you can get your arms around if it's you first acquisition. But I think longer term it could be a good play.

Okay. And then, Lee, maybe just last here for you on the tax. How should we think about that? Are we resetting that 22% to 25% lower next year? I know as you start producing out of Asia and shipping back the duties (inaudible) just talk through what that might look like in '10?

Let's look at '09 first and then '10. We determine our tax rate on an annual basis for the full year on the GAAP -- under GAAP tax. Since now we have better visibility to the amount of restructuring charges, about $70 million this year, that's actually driving that rate down to the 16% on an annual basis this year. This should be the last year, though, that we have the restructuring, so I think that the 20% to 25% range that we've been using historically should be a fine range next year, again. And we'll go through it as we develop our plan and when we get into February we'll talk more about what the exact rate is, but I think that 20% to 25% rate is good for next year.

Okay, great.Thanks, guys.

Thanks, Eric.

Your next question is a follow-up question from Jim Duffy with Thomas Weisel Partners.

Thanks. Yes, just -- as you're in this optimized phase I'm wondering if you speak to some of the areas where you see low-hanging fruit opportunity for productivity improvement and what any potential benefit to margins might be as we look to 2010?

Well, I think a lot of these -- I'm going to break it into both cost reduction, as well as working capital, and I'm going to actually start working capital. Before, when we had textile facilities in the US and we had the sewing facilities offshore, we had a lot of working capital floating around, either on boats or going between on trucks. Now that these are tight clusters, where sewings within a couple hour drive of the textile facilities, or at most eight days away, you're going to need a lot less working capital, work in process, between that textile facility and those sew facilities and that's a great example on how you can optimize these clusters. For example, where we have textiles in El Salvador and sewing both in El Salvador and Honduras. Nice tight cluster you can reduce the amount of working capital.

Second, because we've only got three clusters -- one in Central America, one in the DR, and one now in Asia -- we can also start to work with our suppliers to do supplier-managed inventory and that was one of the appeals of the yarn deal. So we can actually reduce our working capital requirement for that, as well. Cost is the same thing. if you're moving less product and you'er -- now you've got a nice tight focus cluster you can work on improving productivity through Six Sigma types of programs and Lean programs to continue to improve our overall productivity. So we see a lot of cost savings to come. We've got our goal of the 50 to 100-basis points of operating margin improvement and we see through this optimization and leverage phase to be there for the next three to five years.

Okay. And then with regard to ramping capacity from the new programs do you expect any margin hits in that? You mentioned air freight is a potential. Does using third-party contact manufacturing change the cost profile such that it would alter the margin structure, or is that not an issue?

In the short-term when you're ramping up capacity this quickly obviously it's not going to be the lowest cost capacity in the world. You're going to use things like air freight. Outside contractors there's obviously a penalty versus all-internal production. But those are things that while it'll add a little bit of pressure onto the gross margins that little bit of pressure will be swamped by the additional volumes that you have and the nice thing is you have the opportunity to internalize that volume and make it lower costs later. So these are all the problems to have, we love to have them. And like I said, the organization is actually very excited about ramping up production to service all of this growth and all of these market share that will gains that will come in 2010.

That's great to hear. Thank you.

Your next question comes from the line of David [Schmuklah] with Kingsland.

Hi, guys.

Hi, David.

Thanks for all the details, as usual. If I remember correctly you guys pushed through a 4% price increase back in February in the innerwear segment. Are you guys looking to take a more price in 2010, or was there any discussion around pricing as you guys negotiated this extra space at the retailers?

No we have no planned price increases for 2010. Apparel's actually been in a deflationary environment for quite awhile, so our ability to get priced last year I think was a testament to our strong brands, so pricing isn't that something that happens in this industry every year. I do think it the start to see the economy rebound and some more commodity pressure pricing will once again become part of the apparel equation, but it will not be an every year thing, it'll be in every few year type of thing. We're feeling real good about our price increases. It allowed us some extra margin to play with to use to invest in trade spend and I think it was a contributing factor to us getting these share gains this year.

Okay. And then as you mentioned on the commodities, specifically cotton, you gave the numbers for the first quarter, but given the further move up in cotton currently how should we be thinking about your cotton costs through the middle to the end of 2010 next year?

Yes, cotton right now is in -- has been trading in that $0.60 to $0.65 range and that's the range we planned for next year, so if it's in that -- although we know the first quarter, but if it's in that range, cotton will have not a significantly negative impact on the P&L next year, A little bit negative but not materially.

On a year-to-year basis you me?

Yes, on a year-over-year basis.

Got it. And then just lately to clarify, you mentioned acquisitions you're looking in the $100 million to $200 million range, is that what you're willing to spend or is that the size of the target on a revenue basis you're looking at?

I was talking more in terms of the amount of cash flow you'd have available to do an acquisition.

Got it. All right, thanks, guys.

Thank you.

Your next question is a follow-up question from Scott Krasik with CL King & Associates.

Lee, just to follow up on that cotton question, there was some speculation that with production planned up next year you could see the price being driven back down into the $0.50 range, is that what you're seeing, expecting or --

What, that cotton would be -- go back down next year?

Right. As you get to the back half of the year that production will actually be up and the demand will not be considerably up and you can see it back into that mid $0.50 range?

Yes, we would love. For us projecting commodity markets is not something that we try and do. Our philosophy's the dollar cost average and it'll be what it'll be. I do think, though -- we used to think of a long-term average price for cotton at around $0.55 per pound, but as we've seen the cost of producing, cotton in the world has actually gone up over time and so we now think of it more in terms of that low to mid $0.60 range and it'll fluctuate above and below that. But where it ends up for '10 remains to be seen.

That's fair. And then any material changes if the market doesn't move a whole lot from here? Do you have any thoughts on pension expense that delta next year? Will it be favorable?

The expenses is around $20 million this year. Should go down a little bit, we would think, next year but there'ill still be an expense. But it could -- don't know yet, will not know until the end of the year, but it could go down $5 million or something.

Okay, thanks.

At this time we have reached the allotted time for questions. I will now turn the conference back over to Brian Lantz.

Thank you., We'd like to thank everyone for attending our quarterly call today and we look forward to speaking with all of you again soon.

Thank you. This concludes today's conference call, you may disconnect.