Gildan Activewear Inc. (GIL) Q3 2011 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Third Quarter 2011 Gildan Activewear Inc. Earnings Conference Call. My name is Lacey, and I'll be your coordinator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to your host for today, Ms. Sophie Argiriou, Director of Investor Relations. Please proceed.

Thank you, Lacey. Good morning, everyone, and thank you for joining us. This morning, we issued our press release announcing our earnings results for the third quarter fiscal 2011 and our interim shareholder report containing management's discussion and analysis and consolidated financial statement. These documents will be filed with the Canadian Securities Regulatory Authority and the U.S. Securities Commission and are also available on our website at www.gildan.com. I'm joined here this morning by Glenn Chamandy, our President and Chief Executive Officer; and Laurence Sellyn, our Executive Vice President and Chief Financial; and Laurence Sellyn, our Executive Vice President and Chief Financial and Administrative Officer. Shortly, Laurence will be providing an overview of our third quarter financial results and our business outlook, after which, we will open the call to questions. Before we begin, I would like to remind everyone that certain statements included in this conference call may constitute forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve unknown and known risks, uncertainties and other factors, which could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. We refer you to the company’s filings with the U.S. Securities and Exchange Commission and Canadian Securities Regulatory Authority that may affect the company’s future results. I would now like to turn the call over to Laurence.

Good morning. We will review our record third quarter results which we reported today and then discuss current market conditions and the assumptions used for our forward-looking information. Sales and earnings in the third quarter were the highest for any quarter in the history of the company. Sales revenues were $530 million, up 34% from last year; and EPS was $0.77 per share, up 42.6% from the third quarter of fiscal 2010. Sales of activewear and underwear increased by 21% due to an approximate 26% increase in average net selling prices, which more than offset a 3.9% reduction in unit sales volumes. Overall, industry unit shipments from U.S. distributors to U.S. screenprinters, declined by 9% during the quarter according to the CREST report. Compared with our assumption in our May guidance, the industry demand would grow by 3%, which would have continued the pattern of recovery and demand, which began in the second quarter of fiscal 2010. The cadence of industry demand appeared to deteriorate in successive months during the third quarter with demand in June being down by 12%. However, it should be noted that June of 2010 was a very strong month which benefited from pre-buying in advance of a selling price increase, which was announced 2 months in advance and which was not applicable to back orders, so that the true magnitude of the decline in June is overstated. We believe that the decline in screenprint market demand in the third quarter is due to a combination of factors, including overall uncertainty about macro economic conditions, the possible impact and demand elasticity of successive selling price increases and delay in the timing of shipments from distributors to screenprinters, as screenprinters seek to benefit from declining cotton costs. In addition, Gildan shipments in the third quarter were constrained by lack of capacity and low inventory availability, which limited our ability to fully service distributor demand and resulted in a slight decline in the market share from 62% to 61%. Sales revenues in international and other screenprint markets in the quarter increased by approximately 45% due to higher selling prices and currency fluctuations combined with an approximate 12.5% increase in unit sales volumes, which was achieved in spite of capacity constraints. Shipments of activewear and underwear to retailers grew by in excess of 80%. Sales of socks increased by 139%. Although the increase in sock sales was primarily due to the impact of the Gold Toe acquisition, organic sock sales also increased. Excluding the acquisition impact, unit sales volumes of socks increased by approximately 15% over the third quarter last year, and we are also continuing to successfully implement increases in selling prices in socks and other retail products. The organic growth in unit sales volumes in socks was primarily attributable to earlier timing of back-to-school shipments and to the more efficient operations in our new retail distribution center in Charleston, South Carolina. Consolidated gross margins in the quarter were 28.3% versus 27.1% in the third quarter last year and our guidance of 26% to 26.5% provided in May. The improvement in margins compared to the third quarter of fiscal 2010 was due to manufacturing efficiencies and the impact of Gold Toe. The impact of higher net selling prices, including the absence of promotional discounting during the quarter, offset the negative impact and percentage gross margins of the higher cost of cotton. Our cost of cotton in the third quarter was close to our May forecast of approximately $1.25 per pound, as we began to consume inventories produced with significantly higher cost cotton. Higher cost cotton is impacting Gildan earlier than competitors and placing us at a short-term cost disadvantage in the second half of fiscal 2011 due primarily to our faster inventory turnover, which is, however, expected to benefit Gildan in fiscal 2012 as cotton costs decline. The increase in gross margins compared to our May guidance was due to higher-than-projected net selling prices in the screenprint market. Turning now to our guidance for the fourth quarter and full year. We are developing our business plans and updating our financial projections based on assuming that weak economic and market conditions will continue. Specifically, we are assuming that overall industry shipments from U.S. distributors to U.S. screenprinters will decline by 5% in the fourth quarter compared to our assumption of 3% growth in our May guidance. Actual industry demand in the month of July appears to be in line with this assumption. We are also assuming weak consumer demand and low inventory replenishment in retail. In this environment, we have now initiated promotional discounting in the U.S. distributor channel in order to stimulate industry demand and reinforce our market leadership position. Substantial selling price increases are continuing to be implemented in the retail market, however, to catch up with increases during the year in the cost of cotton and other cost inputs. As a result of the downturn in screenprint market conditions, we are now projecting sales revenues in the fourth quarter of close to $500 million, gross margins of approximately 22% and EPS of approximately $0.40 per share, resulting in a projected full year fiscal 2011 sales revenues slightly above $1.7 billion and full year EPS of approximately $2 per share at the bottom end of our guidance range provided in May of $2 to $2.10 per share. Cotton cost in the fourth quarter are still expected to be approximately $1.60 per pound and approximately $1.15 per pound for the full fiscal year as assumed in our prior guidance. We plan to continue to run all of our manufacturing facilities at full production capacity during the fourth quarter in spite of the weak economic environment in order to rebuild inventories to optimal levels and ensure that we are positioned to take advantage of any improvement in market conditions to fully service customer demand and pursue our growth strategies in fiscal 2012. Our intention is to initiate sales and earnings guidance for fiscal 2012 when we report our results for our fourth quarter and full fiscal year in early December. While it is premature to provide guidance for fiscal 2012 at this time, we're in a position to communicate that we have completed the taxation of cotton to be consumed in cost of sales in the first and second quarters of fiscal 2012. We are projecting that all of our high cost cotton will be consumed at some point during the second quarter, and that cotton cost in each of the first 2 quarters of fiscal 2012 will successively decline compared to the fourth quarter of 2011 and then continue to decrease further in the subsequent quarters of fiscal 2012 based in our ongoing coverage and assuming that cotton futures do not reverse significantly from current trends. Currently, we do not intend to implement further selling price increases in the screenprint market if future cotton costs remain at current levels or continue to decline. Although economic and market conditions at the current time are uncertain and we will have to navigate through the transition to lower cost cotton over the next 3 fiscal quarters, we remain fully committed to the ramp up of our new capacity expansion of Rio Nance 5 and to continuing to pursue all of the growth and value drivers, which we have highlighted in our investor presentations, namely reinforcing our market share leadership and brand leadership in the U.S. wholesale distributor market and the overall U.S. screenprint market; leveraging this market share as demand recovers overtime to prerecession levels; leveraging our North American screenprint brand in screenprint markets in Europe, Asia-Pacific and Latin America; further expansion of our Asian manufacturing hub in support of our growth strategy in Europe and Asia; leveraging our large scale strategically located vertical manufacturing to become a leading full line supplier of basic family apparel for U.S. retailers; and continuing to reinvest in our supply chain to achieve ongoing significant manufacturing cost reductions and product quality enhancements. Our retail operations are now in the process of the integrated as a consolidated standalone division headquartered in Charleston. In addition, the integration of the Gold Toe acquisition is proceeding well, and we continue to feel positive about the projected financial benefits of the acquisition. Our detailed integration plans include the transfer of basic high-volume products currently sourced by Gold Toe from outside suppliers to Rio Nance 4 and the development of plans to combine the competitive strengths and core competencies of both companies to drive organic sales growth. We are actively pursuing opportunities for further development of the Gold Toe brands, including Auro, PowerSox and All Pro as well as the iconic Gold Toe brand and brand extensions and for further development of our licensing relationships with Under Armour and New Balance. In addition, we are continuing to develop our Gildan brand in retail and continue to be committed to support high-volume retailer or private label unlicensed brand programs, such as Starter, which fit with Gildan's vertically-integrated manufacturing provided we meet our criteria for profitability and return on capital. We entered the third quarter in a strong financial position with cash and cash equivalents of $89 million, $252 million of bank indebtedness, which was incurred as a result of financing the acquisition of Gold Toe for approximately $350 million during the quarter and considerable unused debt capacity, having announced on June 30, that we had increased the amount of our revolving bank credit facilities from $400 million to $800 million. Our plans for use of our unused debt capacity continue to contemplate further possible acquisitions, which would complement our organic growth strategy and meet the other acquisition criteria, which we have communicated to manage acquisition risks and seek to ensure that acquisitions will enhance shareholder value. In addition, we are pleased to announce today our regular quarterly dividend of $7.5 per share payable in September to shareholders of record in August 18, 2011.

Thank you, Laurence. This concludes our formal remarks. [Operator Instructions] Operator, we're now ready to start the Q&A session.

[Operator Instructions] And our first question will come from the line of Nicole Shevins with Goldman Sachs.

So my question was related to the gross margin increase that was up about 120 basis points, which was above your guidance. So I just wanted to see if you could break out the different drivers to that, how much came from the Gold Toe acquisition versus higher selling prices? And do you see efficiencies?

Relative to our guidance, the higher margins were essentially due to more favorable selling prices.

Can you breakout in basic points how much you think came from the selling prices versus some of the other drivers?

We're talking relative to our guidance, right?

Relative to your guidance, yes.

Yes, so the -- it was -- relative to our guidance as opposed to last year, the favorable variance was essentially lower -- was essentially the fact that we benefited more fully from the last price increase in the quarter and more favorable net selling prices. That was really the reason for the more favorable margins relative to our guidance.

And our next question will come from the line of Martin Landry with GPM Securities (sic) [GMP Securities].

Your sales of activewear and underwear to the U.S. retailers were up 80% year-over-year. Could you tell us which product is gaining traction and where?

Well, all of our retail products were up. Socks, we said, were up about 140% largely due to the Gold Toe acquisition, but even excluding the impact of the acquisition, our socks were up 15% organically. We also mentioned that sales of activewear and underwear to retailers were up over 80%.

Yes, that's what I meant in terms of your activewear and underwear to retailers. Is there like -- is the fleece program getting traction? Is it underwear? Could -- just a bit of color would be great.

Well, it was a combination of more underwear sales as well as new activewear programs across the board and all the various customers in which we currently are doing business. Most of the gains came from -- obviously from the current product lines as well as some new wins we had in the activewear category for -- to this quarter.

And is this growth rate sustainable going forward?

Well, our growth rate has always been a function of our capacity, which we've been restraint, so we're managing through our capacity. And to answer your question, obviously we're planting the seeds as we increase our capacity into 2012 with the development of our Rio Nance facility. We're working on planting all the seeds to obviously increase significantly our share at retail.

And our next question will come from the line of Jessy Hayem with TD Securities.

It seems to be -- to me that you're providing a bit of a mix views. First, you're providing some cautious assumptions in terms of lower volumes in the fourth quarter and some promotions needed to stimulate demand. And then secondly, you're alluding to continued confidence in volume growth because you're going forward with operating at full capacity and going ahead with Rio Nance 5. Can you just help me reconcile this and how to think about this?

Well, I think 2 things is that -- one, the market today is obviously not performing. The question of price elasticity is, as we refer to it, we don't really think in the wholesale market today that it's necessarily pricing that's actually deteriorating the market. We think it's largely due to the economic outlook when it comes to wholesale. And the reason why we think that is there is some potential lost revenues due to people converting from T-shirts into mugs, and that's a very small portion, I think, of the overall business. But if you look at what's happened in the industry and the trends, we're finding that customers can trade down in T-shirts. So in other words, just -- I just want to clear this point at is that if you look at the pricing strategy up until now in the marketplace, although we've increased our prices significantly, those prices have not necessarily made a major impact today in the market. So, for example, a lot of the price increases that we've had but assume that we went up x percent, a lot of what we're seeing are people trading down on shirts and buying lower-priced items. And then when you translate that into the end use consumer and what he's paying for T-shirt, if you look at the price increases that we've passed through, the channel has absorbed the law of these price increases. So price has not been a real driver in terms of what we think is driving the negative share in the wholesale market itself. So what we're in the process of doing is we're taking a cautious look at wholesale but really what is -- kind of obviously, if you look at our drivers as we go into next year, we think that there's still lots of room for us to continue to gain market share. Now we're putting in place a plan, not just to drive one part of our business, but to drive all aspects of it. And, for example, I mean, let's start with wholesale and then I'll move into some of the other categories. But in wholesale, as we go into next year, we've increased our product line significantly. We have a lot more product offering again because of our lack of capacity this year. We weren't able to -- really, so still, what we think are the opportunities in wholesale in terms of delivering new products. Our SKU base is up significantly, and we will support a lot of our inventory build in Q4 to build up inventory to support all these future opportunities as we go forward. And a lot of these products that we're adding in our lines for the wholesale market next year are all high-margin, value-added products and won't just serve the North American markets but also serve our international markets as well. Another factor is that, obviously, we haven't been priced aggressively. We've been sold out in over 18 months, and we haven't been the lowest priced product in the marketplace starting in July. As we started to promote our products again, we've seen a big turn, obviously, in terms of the sell-through of our products. And we've neglected all of our markets, really, in our international markets because we just haven't been had capacity, and we've really tried our best to maintain and service the markets in our core business, which is our U.S. distributor market. But all the other growth opportunities that the company has had in wholesale have been neglected. We haven't serviced them in terms of providing the adequate amount of inventory. So as we speak, those markets will also be replenished with inventory as we go in this quarter and that's going to drive continued share as we go into next year. So really, we're taking a view that the market is down. Partly, it's also, and -- in this quarter. But all the pieces that we're putting in place as we go forward into next year and bring our inventories and our products to market, we're very comfortable that we will gain share in every single aspect of our wholesale business as we go through into 2012. And in the retail front, like anything else, retailers work in advance. The cycle time is anywhere between 6 and 9 months. We're in the process now, and we have been planting all the seeds obviously to align ourselves with our capacity expansions, which is Rio Nance 5 coming online. And we're levering obviously the -- our core business that we have today, but we're also going to lever the Gold Toe brands and make sure that we lever not just into socks but into activewear and underwear type products. And there's lots of opportunity, and we're talking to retailers as we speak. And so for us, we feel very comfortable with, as we go into 2012, as we bring on this additional capacity that there's growth in every aspect of our business, and we're feeling very comfortable that we can mitigate through even bad economic times in 2012.

Okay. That's very helpful. So just a clarification though then, it seems to me that the lower shipments you're seeing are less of a, as you say, sort of an issue with the price increases, more of a macro environment, maybe cautiousness, but also your inability to service the channel. So if you didn't -- if you had the ability to service a channel, would your -- what would your unit shipments have been in the quarter? Would you have that handy or...

Well, we had backorders still left at the, obviously, good order book at the end of the quarter. And we still have a pretty good order book even at the end of July, to be honest with you. So as we go forward, I mean, we're still tied on the inventory. And really, the build in our inventory, the way we see it is going to really only come at the very end of Q4 for us. So the one other piece, I think, that maybe, I think, is a factor in terms of where we are today is that look at -- I mean, people see the future price of cotton coming down. And obviously, we know what we think is that there's also -- there's 3 factors that Laurence mentioned obviously, which is one is that there could be some price elasticity where we have negative sales to people converting out of T-shirts and mugs, for example, but we think that's small. And the environment, we think, is a driver of reason why the market is down. But also, there is destocking happening, we think, at the printer level, not the distributor level, but the actual printers themselves who see the future price coming down. And they're saying, "Hey, they actually maybe stocked up during along the way, but they're stocking down now." And so that could be also contributing, we think, a little bit to the negative growth in the channel. But one thing I think I want to try and maybe clarify in terms of pricing is that we, as a company, raised our prices effectively to cover cotton at $1.50. The future curve of cotton today is roughly about $1.05. And if you take the cost of buying the cotton, which we refer to as basis, that's approximately $0.10. So if you were to buy cotton in the future, you're looking at somewhere about $1.15 a pound versus $1.50 that we've set our pricing up and raise prices towards. That's a $0.35 a pound, let's say, difference. These were up at least, let's say, about 6 pounds to make a dozen T-shirts, so you're looking at roughly about $2 a dozen is where we raise price relative to the future price. But in the industry, there's been other significant cost inputs; energy's gone up, labor's gone up, transportation's gone up, dyes, chemicals. There's a lot of other related cost of inflation that have occurred during this course of fiscal 2011. Just to put a number, too, it could be remained in the $0.80 range, okay? And so if you look at really the future cost of cotton relative to where we raise prices and other input cost, there may be $1.20 gain, let's say, for example, with lower cost cotton in the future. We've already reflected that in our guidance for 2000 -- for Q4. So really, when you look at where pricing our cotton in the wholesale market and the discounts that we're assuming and the margins we're assuming in Q4, we're already reflecting the future cost prices in our margin guidance for Q4. So as we go through Q4 and to Q1 and Q2 and then into Q3 and Q4 of next year, subsequent quarters, we will continue to have increased margin as we go through unless cotton continues to come down and we might assume lower prices. But assuming that it remains at today's levels, we'll have some subsequent margin increases as we go quarter-by-quarter. But the point is we've reflected the future price of cotton in our margin guidance for Q4.

Okay, great. And just very quick on for a circle back, so you mentioned obviously that still being you have a backlog, you're still tight on capacity, you still have higher cotton cost, which will filter through, yet you're still putting through sort of, I guess, promotions or maybe price decreases again. Can you help me reconcile that?

Listen, the priced promotions are obviously trying to stimulate the marketplace. I mean, the market is definitely down and could be very explained in the 3 reasons I said. So we're trying to stimulate that market, and the people are looking and saying that the future cotton costs are x, we need to be progressive and try and make a reality. We're looking at where we'd need to price our product based on the future, future cotton curve and that's what we're in the process of doing. So it -- we're hoping that it's going to continue to stimulate business, and if not, we're going to generate a market share by pricing our products to continue our growth strategy.

And our next question will come from the line of Tal Woolley with RBC Capital Markets.

Just wondering if you can talk about again what sort of incremental volume, if you can just sort of reiterate what sort of incremental volume you expect to see from Rio Nance 5 in next year's numbers and again where are the most likely destinations for that incremental volume?

Well, right now, Rio Nance 5 is going to start production at the end of Q4 and is going to go through a ramp-up through 2012. Part of the ramp up -- I mean, if you look at where and how we sell our products, obviously, the height of the summer selling season is in June, July. So really, the part of what Rio Nance 5 will contribute to, capacity lets say, for example, for 2012 is the ability for us in the first 6 to 8 months, basically, will be we really the part that will impact our sales. And as we get into the back half of the year, our -- typically, our capacity outstrips our sales volume because, obviously, Q3 is our largest quarter. But we will be able to have significant capacity for next year. We rather refer to that in December when we provide guidance, but it's going to be a significant increase, obviously, over this year.

And then where do you expect to see most of that incremental volume go?

The volume is, like I said earlier, I mean, we have growth initiatives in every aspect of our business. If you look at our last investor presentation, we really -- and that's what, I think, is one of the strengths of our company is that there's still lots of opportunity everywhere. I mean, our wholesale business, we think we're going to get modest market share increases through taking market share and as well as all these new products that we've introduced. Service is probably going to be a big factor for us. I mean, we just haven't serviced this year. It took end users having to buy from more than one distributor just to fill orders because of the fact that we were so constrained on capacity. So service will be a big plus. And as we rebuild our inventories in Q4, our service percentages are going to be probably better than Gildan has ever done in service before in the past. So that's going to be a contributor to increasing market share, and that's in every single market again because we source ship all of our markets. International growth, we saw -- our international and other markets are continuing to grow. Europe has been capacity restrained we have new products in those markets as well. And just again, the opportunities there are huge. We have a large market share in the U.S. market, but we have a very small market share in every one of the other markets where Gildan is currently active with selling. So in Asia, for example, we accrue on a small basis quarter, and we've been up -- our sales were up significantly. And next year, we will more than double our sales in the Asian business. So everywhere we have in wholesale, we have significant growth opportunities. And in retail, because of the fact that we've been capacity restrained, we've been sort of reluctant to go get a new business because we just couldn't service it. So we've been now kicking the tires obviously knowing that we have Rio Nance 5 coming on. Our sales group is actively pursuing a new business. So we're going to lever obviously the acquisition of Gold Toe. It was part of one of the drivers for us to actually acquire the company. This will lever the brands and the opportunity we saw in Gold Toe into new product opportunities, which we're currently discussing with retailers. We're developing our Gildan brand. We're getting traction every single day, and we will have some new programs for the spring season and definitely for fall. And we're working closely with our large private label companies to look at whatever opportunities that fit our skill set in terms of large programs that are more branded-type private label programs. So everywhere we're looking, there's both opportunity, and it's always been a function of capacity. And as we bring on our capacity, we will sell it, and we're very comfortable and confident about the future.

And our next question will come from the line of Kenric Tyghe with Raymond James.

In your revised outlook, you have commented on your sort of low inventory in key products or key product category. I just wanted to check back with you, how is that trending? Or how are you positioned into '12? I mean, clearly, against the weak macro backdrop, there were pockets of strength that you weren't able to participate in or perhaps weren't able to participate in in the fourth quarter. But equally, with your sort of capacity plans and with your continuing as you are looking into '12 by way of your production volume. One would assume you're able to address that. Perhaps, you could just address where those pockets of strength are and where how well you are positioned going into '12 on it?

Well, maybe just to go try and answer your question in a little bit different way is that when you look at our inventory in the marketplace even today we have a 60-plus percent share of the inventory and we only have a 50-plus share of -- sort of a 60-plus share of the market share, but we have only about a 50 share of inventory. So inventory in the marketplace at the end of the quarter is significantly lower than our market share. And also, the quality of that inventory that's in the marketplace may not be as good as it should be, which we refer to it even probably being in the lower. So as we go through Q4, the quality of our inventory will continue to get better and which will continue to help us to service and drive share as we go forward into the balance of this quarter. I think that's maybe the way we need to look at that, if that answers your question.

Just a quick follow-up then on that, Glenn, perhaps I missed it. But your -- where is your share of channel inventory versus market share? I think previously it's been disclosed, and I may have missed it in the MD&A today?

Our market share in sales is in the 61% at the end of the quarter and our share of inventory is in the low, like, 51%, 52% in the channel.

All right. And just a final follow-up, with respect to cotton, Laurence can you still lay out trend wise where we're going, and I think we obviously all keep pretty touch pass on the curve. Could you perhaps provide a little more color to the extent you have actually comment forward at what level you currently contracted or some sort of range of estimate there in the first and second quarter?

Well, what we said is that we have very good visibility and covered for the Q1 and Q2 of next year. And each of those subsequent quarters, our cotton cost will be less than what it was in obviously Q4. And we said that if the future cotton curve remains the same, those will be sort of the prices you may see in the Q3 and Q4 of next year.

So I think you just previously have been willing to provide some indication of -- you've taken -- you've covered cotton at dollar x or dollar y or you partially covered a dollar x to a dollar y into a given quarter. Are you still willing or able to give that degree of color or...

No, I don't think we want to provide any more details than what Glenn said, we'll be initiating our guidance for 2012 when we report at the beginning of December. And for the time being, I think what you can take away is, one, that we've covered cotton for the first 2 quarters, that we'll use for high cost cotton at some point during the second quarter, that cotton in Q1 and Q2 will successively be lower than Q4 of this year and that will obviously a position to benefit from the current low futures in the second half of the year.

And our next question will come from the line of Ken Stumphauzer with Sterne Agee. Kenneth Stumphauzer - Sterne Agee & Leach Inc.: I just wanted to touch on your expectations for industry demand in the upcoming quarter. Some view -- it might be some kind of a sanguine view just given the fact that declines were much more significant in the most recently completed quarter. And you had alluded to the fact that you felt like maybe it was pre-buy ahead of a year ago price increase. So I'm curious to know your reads from the month of July, which obviously has included. Would that confirm your supposition?

Well, as I have mentioned in our comments, we don't have the CREST stature for July. But based on the information that we have as we go through the month, it reinforces the assumption we've made in our guidance of the market being down 5%. We feel we're tracking that. And also, we feel that is consistent with what happened in June when you adjust for the pre-buying issue of a year ago.

And our next question will come from the line of Susan Anderson with Citi.

I guess you talked and I know you've already talked a lot about this, but you talked about you've raised prices for the $1.50 level of cotton. How should we think about, though, the promotions running through and eating into that? And I guess heading into the fourth quarter and assuming it was about 500 basis points decline in gross margin, how much of that would be the promotions?

You were talking about the margins for Q4 versus Q3?

Yes. I guess how much should we think about the promotion [indiscernible]?

Our margins in Q3 were -- obviously, were 28% and we reported and we have guided to 22% in Q4. That's -- that change is really because of the significantly higher cost of cotton that's being consumed in Q4, which negatively impacts margins in Q4 versus Q3 by about 900 basis points. When you take price and mix together, it's not really a negative because although we have more discounting on the positive side, we have the full benefit of the last increase in gross prices that was implemented a couple of months ago, so the 2 go in opposite directions. Plus, we have more favorable mix. Plus also, our retail margins are continuing to improve, as we implement the price increases to catch up with the increases in cotton that were incurred as we went through the year. And then the other thing that also is favorably impacting our margins is that Gold Toe is a higher share of our sales in Q4, which is about just full profit.

Okay. And then the $0.80 that you talked about, their cost number, I guess maybe can you just quantify for the third and fourth quarter the impact and how we should think about this going forward?

That's a cost of sort of the reality of the inflationary environment. Let's say, for example, on I think the industry's cost of goods, it's pretty consistent with power, electricity, bunker, labor, transportation, dyes and chemicals, I mean, that's was -- the breakdown of all that was roughly about $0.80. And that's obviously in our numbers.

And our next question will come from the line of Claude Proulx with BMO Capital Markets.

My question is in previous calls, you've talked about the fact that people were increasingly sourcing out of North America, switching from Asian suppliers because shortage of yarn in Asia, big inflation in Asia in terms of cost. What are you seeing these days with cotton cost coming down significantly? And I think I guess that yarn is becoming also a lot more available in Asia.

Yes, yarn prices, obviously, in Asia are coming down fast and furious. The one thing I can tell you is that the -- there'll be a lot of opportunity because what's going to end up happening is that there's been definitely correction. And the reality is that a lot of people in Asia have a long supply chain as well and have commitments that extend themselves, let's say , for example, on high cost cotton is really even beginning of next year. So what's going to happen from what you're seeing is that there's going to be lots of believing, I would say, in terms of the manufacturing base in Asia as the future curve comes down. And that's more so because -- and Asia has, obviously, doesn't really affect our wholesale business, but Asia is a big provider of products to the retail space. And perhaps, that's retail in general, it's everywhere. I mean, all different products categories and so forth. So as the environment continues to deteriorate, if it does, there could be obviously some negative crime of, let's say, for example, which I think, which for us is one thing we're looking at because it's going to -- we think it's going to create sales opportunities as we go forward while potential new opportunities in manufacturing as we continue to invest and plan our growth initiatives.

And one thing I want to reinforce of what's said is that this shift towards vertical manufacturing in the Western hemisphere is in just kind of temporary window because of what's happened with cost. And this is a structural thing for the kind of replenishment markets that we serve, whether it's wholesale distributors or retailers that we build facilities and make this into a large-scale, capital-intensive business where labor is a low part of the cost structure. And also, the speed of response to the market to quickly respond to inventory replenishment by customers is absolutely critical. And also, the other thing as well is that it's important to have the financial strength to be able to finance increases in working capital due to higher input costs.

When you said opportunities in manufacturing, does it include potentially acquisition?

No, potentially, look at it as part of our growth strategy and developing our whole Asian business, not so much for servicing this market, but for continued growth in Asia. There potentially could be opportunities arising in the future.

And our next question will come from the line of Vishal Shreedhar with National Bank Financial.

On the manufacturing efficiencies that you've articulated in the past, $140 million, can you give us a sense of how much you've already captured? And maybe you're going to capture in this fiscal year and how much you anticipate incrementally you can capture in fiscal 2012?

I'd say about $30 million is reflected in this year in 2011. And as far as what's in 2012, we'll reflect that when we initiate our guidance in a couple of months.

But just to reconfirm that, all of our initiatives in terms of our energy initiatives will only be installed and running in the beginning of the new year, both January and February. So as we get through the next year of -- will be significant cost savings as we go towards the next -- towards the end of 2012 to our energy initiatives, our supply-chain initiatives, the building up of Rio Nance 4 as we continue to migrate all of the socks from Gold Toe into our facility. Another thing this year that occurred to Gildan was that we had a significant ramp-up in labor and selling in anticipation for Rio Nance 5 coming online, and a lot of that efficiency will continue to materialize as we go forward into next year. And our distribution and transportation initiatives will also materialize as we've communicated to you in our investment trip, so that's a trip. So we have a lot of huge opportunities. And probably, the one of the biggest opportunities, which we actually didn't even communicate was the fact that our Rio Nance 5 facility, which is going to be the largest state-of-the-art plant that Gildan owns and operates, is going to have a significant lower cost than our other facilities due to the nature of the technology and the scope of how we built that plant. We always compare ourselves, let's say, for example, when we -- we're in North America and we are moving offshore, the payback for the facilities that we've built were very -- was very quick. Believe it or not, the payback of Rio Nance 5 relative to the other facilities will have a very good ROI and then -- and we paid back in a very short period of time just in terms of its cost structure relative to the other facilities. So as far as Gildan is concerned, we continue to not just bank on one, but we're always looking to continue looking at new supply initiative, supply-chain initiatives, that will continue lowering our costs and position us to gain share in the future.

And of that $140 million, how much of that is contingent on achieving full capacity or operating at full capacity?

All [ph] of it. Because the energy pieces function of revolving our energy, all of our supply chain initiatives that we mentioned will be a percentage of every pound or every dozen that we produce. Rio Nance 4 is one that obviously will -- the big benefit of ramping up Rio Nance 4 will be somewhat because of the fact we're realizing our capacity but mostly because we're taking high cost away from other areas where we're producing those goods and putting them into our facility. We're going to get a double whammy in Rio Nance 4. We're going to get the benefit of moving and allocating high cost production at this facility, but it's not ramped up yet. And as it continues to ramp up to its full capacity, we'll have some savings there. And in our sewing facilities, there'll be a benefit from the ramp up to them because that's as a training curve because we probably hired 45,000 people during 2011. And that training curve will also cite as we ramp up those facilities in 2012. And transportation and other initiatives in distribution, I mean, those are really things that are in place and not necessarily tied to a capacity utilization number.

I mean, obviously, if we didn't run our new capacity at full capacity utilization, that would result in an efficiency, so we detract from our cost savings. But a fundamental part of the rationale and justification for building this new capacity is that we have growth strategies that make us feel confident that we will fully utilize the capacity and just acquire just for our growth strategies.

And our next question will come from the line of Scott Rattee with Stone Cap Securities.

I just have a question. Just related to the fact that you've lowered your expectation for unit demand in the wholesale channel, but you noted that you're continuing to run at full capacity. So from that, should I be assuming that you're coming into this quarter? I thought you were expecting about 4 million dozen in incremental inventory. Should that actually -- should we be expecting that to be a little bit higher given that perhaps you're still running at 100%, but your actual demand outlook is a little bit softer?

Well, the number is going to be relatively what it was before because partly -- because what happens to our capacity, it's always a function of mix. And based on the mix we're currently running, we see ourselves still in about a 3 million to 4 million dozens worth of capacity build by the end of the year.

Which we are seeing is required to be able to service our customer base.

And our next question will come from the line of Eric Tracy with Friedman, Billings, Ramsey. Eric Tracy - FBR Capital Markets & Co.: Yes, if you could kind of clarify for me the 4Q revenue guidance. On the unit volumes, are you all assuming that you all run similar to the industry demand of downsize?

Yes, as far as that segment of the business. Eric Tracy - FBR Capital Markets & Co.: So Gildan runs similarly in line to what the industry demand is. So that's basically an 8-point swing between what you are expecting previously? I think you said were up, expecting up 3?

Yes, that's right. Eric Tracy - FBR Capital Markets & Co.: Okay. And then in terms of -- can you quantify on average what the price, the promotions -- what the pricing is going to be down? Or what you expect for 4Q?

Down versus what? Eric Tracy - FBR Capital Markets & Co.: What you had previously, so are you implementing an average a 4% to 5% price decrease or...

I would say the main assumption is changing in our guidance relative to our May guidance is the lower volumes because of the lower demand. Eric Tracy - FBR Capital Markets & Co.: Okay. So there's no -- okay. I just -- I thought you said with the promotions. I would've assumed that would've down-ticked the actual average prices. Is that...

There are things going the other way as well. There are more of a mix, the benefit of the last price increase that was implemented, the price increases in retail. Eric Tracy - FBR Capital Markets & Co.: Okay. And then as we think about the first half of '12, can you talk a little bit just about the pricing, your assumption there. Does that -- are you just going to sort of test and see what happens with demand on these lower prices or with the assumption that's going to continue to downtick into the first half?

Well, again, we'll provide our guidance from we report in a couple of months, but I think what you can take away from what we've said is that margins may possibly be slightly higher in the first half due to slightly lower cotton costs. And then we're obviously positioned for both higher margins and higher volumes in the second half of the year as we benefit from consuming lower-cost cotton. Eric Tracy - FBR Capital Markets & Co.: Okay. I just want to clarify that, Laurence, higher margins in the first half. I'm assuming that's relative to 4Q?

Yes. I mean, slightly. I'm not -- the improvement to margins would more likely be in the second half of the year. We're consuming low-cost cotton, but we are -- as we said, assuming that -- well, we know that our cotton costs will be slightly lower in Q1 and then lower again in Q2. So that gives us the opportunity for some very slight margin improvement in the first half of the year. Eric Tracy - FBR Capital Markets & Co.: And just to clarify again, cotton, I think, was $0.78 1Q, $0.90 2Q, correct? So those will be the compares you've got?

[Indiscernible] Eric Tracy - FBR Capital Markets & Co.: Okay. And then just lastly on the sock business...

I'm talking relative to Q4. Eric Tracy - FBR Capital Markets & Co.: Yes, absolutely. Absolutely, yes. And then in terms of the sock business, the retail unit volume is up 15%. Can you talk about pricing in the quarter? And then I think you mentioned there's a bit of a pull forward into this quarter, how should we think about that as we go into 4Q?

Well, on pricing, we really haven't felt effectively. Price increases are -- we had a small price increase in the beginning of the year, which is January period. We have a subsequent -- price increases, in most cases, are only effective in the beginning of August. So we haven't really felt this quarter the pricing impact, and that's one of the drivers that will help as we go to Q1 and Q2 next year. We're going to have in retail much higher prices than we did this year. And as far as the demand is concerned, we don't know how well back-to-school is going to materialize. We get -- we did have some strong promotions that we set with the retailers and shipped in the -- in our third quarter. And the question is we're taking into conservative approach, in terms of sell-through and replenishments from retailers just on what we're seeing in the economic environment out there.

And our next question will come from the line of Mark Petrie with CIBC World Markets.

Given the exposure of the Gold Toe gives you to a broader spectrum of retail channels. Can you just talk about the relative health of those channels, be it mass versus department stores, sporting goods and the general sense that you have on volumes?

Well, it's -- I think the answer to your question, I think, is the help of other channels is actually performing quite well. I mean, from what we're reading and seeing is that the consumers that's getting squeezed the most is the consumer that's shopping at the mass level with a higher cost inflationary lifestyle in terms of fuel, food, energy and those consumers that are still shopping in higher-end stores happen to have -- both of that pinches badly. So typically, I think that the [indiscernible] position, that channel is still doing relatively well. And hopefully, we're going to be able to continue to drive the success of the Gold Toe brands and leave it into other areas and other opportunities in activewear and underwear as we go forward to next year, which is part of our plan.

Okay, and then just on the dynamic in terms of pricing versus being capacity constrained in the distributor channel, do you think that these promotional pricing measures that you've taken positions you as the lowest price in the distributor channel?

Well, you know what, I would say maybe not the lowest price, but Gildan has never been typically -- we don't think we have to be the lowest price, I think we're positioning ourselves to make sure that our brand is being sold successfully by our distributors. Our customers like to make money with Gildan, so it's also a question of -- and how you deceive the price in the market as a function of how our distributors are selling our products. So because we're the #1 brand in the channel, we anticipate and hope that our customers will make better margins with Gildan and then some of the other brands being sold in the channel. So we're not a price -- low-priced T-shirt, for example. We're selling really a full assortment of products and brands, and we're very -- we've always found a good balance between being customer-centric and making sure that we make our market shares and market share objectives. So we balance those 2 things and making sure that it's a good win-win for everybody.

And our next question will come from the line of Jim Duffy with Stifel, Nicolaus. Jim Duffy - Stifel, Nicolaus & Co., Inc.: So you've had good success with retail programs business. Will you begin to report the retail operations as a separate P&L item? And then related to that, what are you seeing with respect to pricing color and margins in this arena? Any comments you could provide on the competitive landscape would be helpful?

Well, I'll take the first part of your question. We're now in the process of structuring our retail business as a separate profit center headquartered in Charleston, South Carolina, and what drives the requirements for external segmented reporting is how you're managing and reporting the company internally. So I would say that we're moving towards segmented note disclosure between our screenprint business and our retail business, which would likely start in the first quarter of next year.

And as far as the pricing is concerned, I mean, we've had price increases across the board in all product categories, which really only -- the major price increase are only taking affect really on the beginning of this month, actually. And even though we've taken my second round of price increases, you're -- we're obviously priced, we think, quite significantly below the prices that are currently out in the marketplace. So we're comfortable with our positioning. We believe we will lever these price increases obviously to gain higher margins as we flow through into next coming quarters. But also, we're positioned, we think, to continue to look at the growth opportunities and continue growing our retail sales. Jim Duffy - Stifel, Nicolaus & Co., Inc.: Glenn, with your Western Hemisphere-based supply chain, are you finding yourself very cost advantaged in negotiations with retailers as you compete against Asian-based suppliers?

You know what, [indiscernible] at the end of the day, I mean, our supply chain and our ability to replenish and the scale in which Gildan operates is really the asset that we offer to all of our customers, both retail and wholesale. There's nobody in the world globally that has and has been spending the capital and has the capacity currently and coming online that Gildan can achieve. And what's going to happen is that they've realized this and it's our scale, it's our quality, it's our CSR, it's our reliability, it's everything that sort of makes our supply chain so unique. And we're very confident that the investments we're making will pay off as we go forward and continue adding capacity.

And ladies and gentlemen, we have time for one more question, and that question will come from the line of David Glick with Buck Research.

Glenn, as you look about how you're positioned for 2012 from a capacity standpoint, how do you evaluate the risk of being able to operate at full capacity? And it sounds like you're confident that you can. But as you evaluate the risk of potentially not running at full capacity versus gross margin risk of operating at full capacity, maybe having to discount more, I mean, how do you look at those 2 trade-offs and evaluate those risks?

Well, obviously, we're going do what's in the best interest of our shareholders to maximize our returns, and that's number one, and that's how we operate our business, so -- but the way we're looking at it right now is that there's a lot of growth opportunities for Gildan. We're taking a very cautious approach to the marketplace, and we're viewing that the screenprint market, which is obviously our largest market, will still be somewhat negatively affected for our first half of next year. So we're already taking some of that in account. I mean, in terms of looking at how we're going to drive our future growth opportunities and allocate, obviously, and look at those other markets in which we're currently selling to make sure that we utilize all of our capacities. So we're pretty comfortable with all. And that's what's great about our story. It's not -- we're not one-dimensional, we have huge opportunities everywhere. And it's just a question of allocating the appropriate capacity and driving the business. Now obviously, we're not going to jeopardize in the sake of driving capacity. But also, if you look at our cost structure, even in the event that we don't sell all of our capacity, there's not a material impact cost to our cost structure because obviously the more we make it, the lower cost goes. But we have a very good, I think, overhead structure in terms of where we operate, and we'll always make sure we have a good balance. But managing our EPS will obviously be the driver in terms of making sure that we continue to do for the most shareholder value we possibly can.

And then how would you evaluate -- I mean, when you have this last drop in demand, I guess, in 2008, you thought there were some opportunities to go after some of these markets. I know in the end, I mean, the drop was too big and you didn't have perhaps the infrastructure in place to capitalize on the opportunities in those other markets outside of your core distributor screenprint market. How do you -- how would you say the company is positioned to exhibit in this scenario versus the last time demand really dropped?

Well, first of all, last time, the [indiscernible], so that's the big difference, number one now But we didn't anticipate the last drop, obviously. But right now, we've been planning Rio Nance 5 for obviously some time now, so our planning process has been in place for a long time. So this is not something that what was said and we said, "Hey, we need all of a sudden bought a brand new capacity." We've already been putting the foundation and the -- and everything in motion obviously to sell this capacity as part of our growth initiatives, and part of that is looking at one of the reasons why we Gold Toe was to expedite that opportunity as we go and lever their brands and build distribution in other areas, in other retail areas, that Gildan was currently obviously selling in. So this is something that we've been planning and working and strategizing, which is part of our plan. And even the downturn in this market, I mean, if you look at the absolute dollars of the downturn, it's not that significant, 5% even if you take the screenprint market, the distributor market down, let's say, call it 5%, it's a couple of million dozens on an annualized basis. So it's not that significant for the overall size of the capacity that Gildan is bringing online, and we're looking at much bigger opportunities obviously as we continue to drive the plans we've put in place.

And this concludes our question-and-answer portion for today's call. I would now like to turn the call back over to Sophie Argiriou for any closing remarks.

Thank you, all, once again for joining us this -- joining us for our conference call. We look forward to talking to you again at our next earnings conference call, which will be held in the beginning of December. And have a great day.

Thank you for your participation in today's conference. This concludes your presentation. You may now disconnect. Good day, everyone.