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Hanesbrands Inc. (NYSE:HBI)

Q4 2008 Earnings Call

January 27, 2009 4:30 pm ET

Executives

Richard Noll – Chairman, CEO

Lee Wyatt – Chief Financial Officer

Analysts

Omar Saad – Credit Suisse

Eric Tracy – BB&T Capital Markets

[Todd Hargreiter – Goldman Sachs]

Scott Krasik – C.L. King & Associates

Reed Kim – Bank of America

[Jody Kane – Sidoti & Co.]

[Kevin Thebes – Poly]

Operator

At this time I would like to welcome everyone to the Hanesbrands fourth quarter release conference call. (Operator Instructions) Mr. Lynch, you may begin your conference.

Mr. Lynch

Good afternoon everyone and welcome to the Hanesbrands quarterly investor conference call and web cast. We are pleased to be here today to provide and update on our progress as of the fourth and final quarter of 2008. Hopefully everyone has had a chance to review the news release we issued earlier today. The news release and the audio replay of the webcast of this call can be found on 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 the SEC such as the most recent Forms 10-K and 10-Q as well as our news releases and other communications. The company does not undertake to update or revise any forward-looking statements which speak only to the time at which they are made.

With me on the call today are Rich Noll, our Chairman and Chief Executive and Lee Wyatt, our Chief Financial Officer. Rich will give a summary of our business performance and trends for the fourth quarter and full year. Lee with then provide further detail on the 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 invite you to our Second Annual Investor Day on Tuesday, February 24 in New York. We will again have our extended management team update you on our achievements and opportunities as well as provide more information to help you model our business for 2009 and beyond.

As a reminder, registration is required for all attendees so make certain to our offices as soon as possible to ensure your participation. If you haven't received our invitation, please contact me and I will ensure that you do. Now, I will turn the call over to Rich.

Richard Noll

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

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

In terms of our spend less strategy, in just 12 months our offshore textile capacity increased from roughly 50% to 75% and will be 100% offshore next month. We opened two sewing facilities in Viet Nam and one in Thailand and nearly tripled our number of Asian employees to 5,500.

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

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

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

Turning to financial results, in the fourth quarter, we saw a massive shift in consumer spending behavior. This shift led to unprecedented declines in our categories and we are clearly not immune to the impact. Total sales declined 11% in the fourth quarter and 5% for the full year.

Our declines were in the same range as challenging retailer comp performance and soft traffic trends. Our sales trends progressively worsened through the quarter. Retail sell through went down from a few percent in October to down double digits in November and December. Broadly, all of our major retailer partners experienced negative comp store sales for total apparel including our categories.

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

For the full year, we did have a few bright spots which include Champion Active wear, Hanne's men's underwear, international business and Playtex which were all up. Market data shows that our categories were down significantly. However, we have been able to offset some of the category declines by increasing our share.

In the latest data available through November, our rolling 12 month share for innerwear was up one full point. We saw notable increases for men's underwear, up over three points, intimate apparel up over one point and socks up half a point. Overall, our share gains continue to come at the expense of smaller brands and private label.

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

Turning to 2009, the one thing that is perfectly clear is that we will continue an adverse economic environment. How long and how deep remains to be seen. One initiative that helps us in this environment is our price increase. As a reminder, we're implementing a gross domestic price increase averaging 4% effective next week.

We were able to solidify this price increase because of our strong brands and the investment we have made in those brands over the last few years. We are beginning to see retail prices increase on both our products and our competitor's products. Since this price increase is just in effect, we'll have more visibility on retail pricing increases in the next few weeks. Importantly, this price increase provides us substantial flexibility to pursue incremental promotions as we continue to navigate this tough environment.

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

We'll quantify a number of these factors and discuss 2009 in more detail at our investor meeting in a few weeks. Over the next 12 months we intend to stay sharply focused on execution, to conservatively manage both inventory and costs, to actively manage our capital structure and to use available cash to pay down debt.

Our goal is to come out of this environment with some momentum and as an even stronger company. Now I'd like to turn the call over to Lee Wyatt who will review our financial performance.

Lee Wyatt

I will review the full year financial results for 2008 and the most recent quarter beginning with sales. Reflective of the current consumer environment, our sales for the fourth quarter of $1.04 billion decreased $124 million or 11% over the same quarter last year. For the full year, total sales of $4.25 billion decreased $226 million or 5%.

The quarterly and annual sales decrease was broad with all segments of our business declining in the fourth quarter and all but the international segment declining for the full year. The innerwear segment declined 11% in the quarter and 6% for the year. The outerwear segment declined 8% in the quarter and 3% for the year.

The hosiery segment which has been in a long term decline decreased 20% in the quarter and 14% for the year. The international segment declined 9% in the quarter while growing 9% for the year with 5% of the growth from exchange rate gains.

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

The majority of my remaining comments will focus on our results excluding these restructuring actions. Gross margin was 31.6% for the fourth quarter, 10 basis points below the same quarter last year despite significant sales declines. Lower sales were the largest driver of the $40 million decrease in gross margin dollars.

Gross margin dollars also reflect higher cotton costs of $17 million and higher oil related cost of $14 million. These higher costs were offset by lower duty expense of $16 million, primarily due to refunds, $6 million in lower obsolete inventory charges and a gain of $8 million from capitalizing previously expensed supplies. The retroactive duty refunds which we discussed on a previous earnings call are now available as Costa Rica approved the provisions of CAFTA.

Cost savings from our supply chain initiatives were $10 million in the quarter. For the full year of 2008 gross margin increased 40 basis points from the prior year to 33.4%. Gross margin dollars declined $58 million with lower sales being the largest driver.

Higher cotton cost and higher oil related cost totaling $62 million for the year were offset by cost savings initiatives of $48 million, lower obsolete inventory charges of $14 million and $9 million in lower duties.

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

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

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

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

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

Interest expense for the year decreased $44 million to $155 million. Our final income tax rate for 2008 was 22% within the 22% to 25% previously projected range. Unfortunately, the decline from the 24% rate in prior quarters was a result of a lower ratio of domestic income.

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

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

Due to the normal pattern of building inventories for back to school, first quarter 2009 inventories could temporarily increase this year's end level. The quality of inventories remains good with obsolete inventory down 20% from last year.

The quality of account receivable remained good, largely due to our concentration and strong retailers and diligence in pursuing late payments.

Let me now spend a moment on our debt management. Long term debt at year end was $2.18 billion and reflects a $139 million pre-payment in the fourth quarter compared to our stated goal to pre-pay $75 million to $125 million. The pre-payment was applied $125 million to term loan B, $7 million to the accounts receivable securitization and $7 million to our bonds which we

bought at a discount. We have fixed or capped interest rates upon 82% of our debt for 2009.

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

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

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

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

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

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

Brian Lynch

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

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Omar Saad – Credit Suisse.

Omar Saad – Credit Suisse

I wanted to try to get you to dig into the sales line a little bit more. It was kind of minus 10, minus 11 number, probably a little bit more than a lot of us expected and from what I understood coming into this quarter, fourth quarter was giving you an extra week this year versus last year, so if you kind of think about what that implication is, the core underlying run rate is probably even below that. Am I thinking about that properly?

Richard Noll

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

In the fourth quarter, sell through slowed considerably and it was across the board. It was across all categories and in all retailers. Additionally when you look at our retail inventories and our major retailers, they reduced our inventories by the end of December by about $30 million, so both of those factors conspired to deliver those shipment results that you saw in the quarter.

We did have that extra week. Lee, how much was that extra week worth? It looks like it was around $50 million. So that would suggest the underlying trend was a little bit worse, but there was the two factors coming together to produce the results.

Omar Saad – Credit Suisse

Help us understand because if you take minus 11 and you said the run rate is a little bit worse than that, and you look at some of the comps coming out of the retailers you sell into, you sell into some of the healthier retailers. Obviously let's say I get comps by most apparel departments but help us get comfortable with the market share question. I know you have some data that tells you that it's closing up and it's really coming across the board and categories. How should we think about that and how do we get comfortable with it?

Richard Noll

I want to correct something. The underlying trend isn't necessarily worse than the 11%. I think it's those two factors; the sell through and the pull down of inventory which they never pull down inventory in Q4. That's generally a Q1 type of thing where retailers tend to pull our inventories down in January and/or early February more tied to their fiscal year.

Omar Saad – Credit Suisse

So you're saying those two factors kind of net each other out.

Richard Noll

I don't know if they exactly net each other out but they're probably pretty close.

Omar Saad – Credit Suisse

The minus 11%, how do we get comfortable that the share is holding up and its not, especially as you're talking about pricing increases, people get concerned that perhaps you're losing share because competitors aren't going to follow on price increases, or you're getting penalized by retailers because you're pushing through a price increase.

Richard Noll

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

So it's truly a traffic and a retail decline issue. We are getting indications from our retailer partners that we've been told more than once that we're performing better than most of the vendors and suppliers that they have. Our share numbers are up in actually all of our innerwear categories.

Let me also put the sales decline in perspective because as we talk about this entire decline, there's really one category that accounts for about half of it and that is intimate apparel. So we look at our total sales decline for the year slightly over $200 million. Intimate apparel was a little over $100 million of that decline.

That category is really feeling the effects of spending pull back. Women's apparel in total and women's intimate apparel in particular. We gained about a share point there. It just wasn't enough to overcome the declines that we're seeing.

Omar Saad – Credit Suisse

So tell me what's happening. Why are women not replacing, are people out there not replacing their undergarments? Is there a structural shift in how people view what's historically been more of a replenishment item and it's really becoming more of a discretionary item? Do you have any consumer insights on that topic?

Richard Noll

I think one of the things we're seeing from the category, we look at how these markets behaved over the last 20 years, especially as it's tied to recession. There's no question that the consumer pull back right now is longer and deeper than we've ever seen before. Generally women's apparel in total does react more to recessions than any of the other categories like for example, even the men's category.

Women's apparel is more discretionary so when times are good spending goes up. When times are bad, they tend to pull back more for themselves, but actually spend for their kids. Women's intimate apparel is sort of caught up in that.

Normally however, we only see a decline for at most a year in the low single digits. We've now seen a decline of women's intimate apparel for a second year running and the decline is actually accelerated to about 6% to 8% or more. And I think you can see that by just looking at the overall women's apparel trends by tracking specialty retailers. Victoria Secret's for example has been struggling for awhile and a lot of women's apparel shops have been struggling.

Omar Saad – Credit Suisse

To stay on the sales topic, you mentioned the pick up at the end of December, has that continued in January and the retailers kind of taking down their inventory, is that going to continue to affect your top line over the next few quarters?

Richard Noll

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

separate from the replenishment business and the innerwear business.

So they're looking for solutions, but they've been coming and talking to us about and actually a number of other companies as well, they're looking for national brands with product categories that have low inventory risk because they're very risk adverse about having too much inventory, products that are priced under $10 and those are all innerwear categories and our brands and our product categories.

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

Omar Saad – Credit Suisse

But for now, they continue to pull back on inventory levels.

Richard Noll

Yes. It's one of the reasons our categories generally turn more quickly than some of the other apparel categories where it takes nine to 12 months for retailers to react to sort of trends up or trends down because our supply chain can react almost instantaneously to either slow downs or acceleration of demand.

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

Omar Saad – Credit Suisse

Then the pick up at the end of December, is that continued into January?

Richard Noll

I think it was reported in passing the number the retailers said they saw a good sales the first week or so after Christmas. I think Q1, there's not major catalyst that will radically turn consumer behavior around and what we're doing is focus on how to driving incremental promotions in last spring starting with Easter.

Omar Saad – Credit Suisse

When you're doing all this planning for your supply chain and the restructuring and organization that you're going through today, this was in a different environment than we're in today. Did you look out at what you're building and what you're planning and what you're shutting down in the western hemisphere and moving to the Caribbean or moving to the eastern hemisphere. Based on what the demand environment seems to be looking like, how do you feel about how those original plans were? Are you going to find yourself with too much capacity? Do you have any flexibility in that to manage the fixed costs associated with a lot of those plants?

Richard Noll

Absolutely. I've talked a lot about that over time, so let me give you more specifics. First of all the location decisions we've made, they are still absolutely still spot on; being diversified across hemisphere's and diversified across countries.

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

For example, when we announced closing Eden Textiles, we originally said we'd close it late spring or by early summer, we accelerated that closure to be in February. Additionally, we were originally planning to ramp up Nanjing in early '09. We're delaying that slightly to later in '09. That allows us to effectively manage our inventories and accomplish the goals that we've got set out for 2009 even in uncertain sales environments.

If for some reason sales were a little softer than we expect, we can actually delay Nanjing a little bit more. If the market turns and they're better than we expect, we can accelerate that ramp up.

Omar Saad – Credit Suisse

So you're saying we shouldn't be too worried about from a fixed cost leveraging perspective that when you made the initial plans you were a $.05 billion company and now you're looking like a $4 billion dollar company.

Richard Noll

Right now as we close Eden, before we actually ramp up Nanjing late spring or summer, our production capacity will be at about 80% of our sales rate on a run rate basis, so we clearly need to ramp up capacity in our current sales projections.

Omar Saad – Credit Suisse

One technical questions, its retroactive one time duty refund, how much of that helped the quarter?

Lee Wyatt

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

Omar Saad – Credit Suisse

Is that after tax?

Lee Wyatt

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

Omar Saad – Credit Suisse

So it was running negative and then it became a benefit in the fourth quarter.

Lee Wyatt

Yes.

Omar Saad – Credit Suisse

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

Lee Wyatt

That's SG&A.

Operator

Your next question comes from Eric Tracy – BB&T Capital Markets.

Eric Tracy – BB&T Capital Markets

If we could follow up a little bit on the sales, I think you talked about this in the prepared remarks, but I want to make sure that there's nothing on going on from a private label perspective, again just conventional wisdom would think that any time a retailer is going to try to push that a little bit it would be now, but it sounds like again just based on your share data, that is not taking place in any of the categories?

Richard Noll

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

Eric Tracy – BB&T Capital Markets

And just in terms of the pricing again, it sounds like at least what we're seeing in the market that there are vendors that are not really getting irrational. Some of the bigger players are in lock step with you in the price increase, can you confirm that?

Richard Noll

Yes. First of all the pricing is locked in. It takes affect like I said next week. All of the pricing has been changed in our retailer systems, our systems and we're staring to get orders in with the new pricing as we speak.

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

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

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

Eric Tracy – BB&T Capital Markets

And maybe taking the sales a step further in terms of you talked about the cost benefit of how you sort of manage through the debt. In the sensitivity around and the visibility that you have in terms of how bad sales could get before bumping into a breaching covenant, how do you think about that? And I guess a follow on to that, just anything out of the ordinary or different that we should be thinking about the expected free cash flow generation next year from a CapEx perspective or the inventory.

Lee Wyatt

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

The world has gotten tougher in the last quarter and with this kind of economic conditions it's as we said in my prepared remarks, we think it's prudent to clearly understand all of our options right now and the cost of those options including possibly amending the credit agreement. So right now, we're going to look at the cost of those options and then choose the best course of action for the company.

But we just initiated that piece of it to get the real hard cost so once we complete that we'll provide everybody with more direction as to what we might do there.

Eric Tracy – BB&T Capital Markets

And on the free cash flow?

Lee Wyatt

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

Eric Tracy – BB&T Capital Markets

And the CapEx. I know initially kind of thinking that rolls over as well but because of Nanjing it gets extended. Is that what you're thinking at all?

Lee Wyatt

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

Eric Tracy – BB&T Capital Markets

And lastly, pension expense, able to sort of quantify your thoughts there?

Lee Wyatt

We're working on pension right now. From a funding perspective, we a little under 80% funded right now. Recall a year ago we were about 97% funded. So it's declined. I think the good news from a cash flow perspective is at around 80% funded, we shouldn't have any significant mandatory cash contribution requirements for '09.

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

Let me add one thing. Omar asked if duties are included on our P&L. They're actually in cost of goods sold. They are not in SG&A.

Operator

Your next question comes from [Todd Hargreiter – Goldman Sachs]

[Todd Hargreiter – Goldman Sachs]

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

Richard Noll

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

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

[Todd Hargreiter – Goldman Sachs]

And we have your X and restructure items laid out for the plant closures but can you give us a look on when some of the other material add backs might roll off in 2009?

Lee Wyatt

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

[Todd Hargreiter – Goldman Sachs]

In regards to just start up costs on the other facilities and everything that you might be running duplicate facilities for a period of time, how do you tell when those will be rolling off?

Lee Wyatt

The 2009 start up will continue probably to roll off in 2009 and 2010.

Operator

Your next question comes from Scott Krasik – C.L. King & Associates.

Scott Krasik – C.L. King & Associates

One last question on the sales trends and the market share data. If you X out that extra week and currency, the trends are a little worse than 11%. Maiden form sales were only down 2%. I know they're a small player. In the fourth quarter it looks like Victoria Secret is down about 8% year over year. So again, how do I reconcile a gain in market share in intimates for example with trends much, much worse than that?

Richard Noll

I think you've got to go back not only to our sell through trends but also the inventory trends at retail. As I've said, according to our major retailers, we're performing at or above most of their vendors in their apparel space in total. I will say that we're hearing from all of our major retailers that apparel sales have been woefully slow in the holiday period, some of them having double digit declines. And we're not faring any worse. We actually thing we're faring a little bit better than everyone else.

As everything comes together in one quarter it's a little hard to tie it out exactly but I feel confident that in fact we aren't losing share. We have had no space changes. We aren't seeing private label gain at our expense by any stretch of the imagination. I think what we're really seeing is that consumers pulled back tremendously.

That's impacting certain categories; women's apparel and intimate apparel included, disproportionately for example to men's underwear, and that's impacting us. Our men's underwear ended the year up. It's actually one of the categories that isn't faring nearly as poorly. It's much more stable and level.

But in those discretionary areas, people are really pulling back and that's what's impacting our sales right now.

Scott Krasik – C.L. King & Associates

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

Lee Wyatt

I think the way you could look at this is that the cotton and oil related is a negative impact in the fourth quarter of about $31 million. You add the duties, obsolete inventory, the supplies, that's a positive of about $30 million, so those generally wash.

We have initiative savings and improved manufacturing performance which then offset the negative sales impacts to get you to the down $40 million. So we do have initiative savings in our cost of goods sold from our supply chain transformation and better manufacturing performance.

Scott Krasik – C.L. King & Associates

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

Lee Wyatt

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

Scott Krasik – C.L. King & Associates

Looking out first quarter primarily, we have what the cotton is, thank you. What's the oil? Do you get another duty true off? What sort of other off sets from cotton will we see and how impactful is oil in the first quarter?

Lee Wyatt

We walked off the fourth quarter with about $25 million to $40 million of higher oil and cotton cost. Probably $15 million of that is just cotton. So those are all detriments. Don't see any duty rebates or those kind of things going in the first quarter at this point.

Scott Krasik – C.L. King & Associates

So no major other than, you did $7 million in cost savings in the third quarter, $10 million in the fourth quarter, so essentially something from [inaudible] that would be the only major offset you see?

Richard Noll

I think it's fair. We want to try to focus right now on 2008 and in less than three weeks we'll be there and try to provide a lot more perspective on 2009 especially as it may lay out by the quarters to help you model the business. What we want to do is be careful that we run the risk of giving you only one or two pieces and not the entire picture, and people could draw the wrong conclusions from that so please try and be patient with us.

Operator

Your next question comes from Reed Kim – Bank of America.

Reed Kim – Bank of America

In the cash flow for financing section that you reported outside of that repayment was the rest of that stock repurchase in the quarter?

Lee Wyatt

No stock repurchase in the quarter.

Reed Kim – Bank of America

And debt balances, did you have any outstanding on your foreign lines?

Lee Wyatt

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

Reed Kim – Bank of America

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

Lee Wyatt

No, it's included.

Reed Kim – Bank of America

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

Lee Wyatt

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

Reed Kim – Bank of America

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

Lee Wyatt

I think the major captions are restructuring cost, start up cost which you would clearly see. There are non cash expenses, equity compensation for example, any one time charges, and a bankruptcy. For example, Mervyn's was back in the third quarter and that's about $7 million.

Reed Km – Bank of America

Those start up costs, since we don't know the exact number there, is it as we thing about next year, should we think that that's a fair add back just perhaps you're going to reap the benefits in terms of cost savings so there's not an issue of lapping that in '09 so to speak?

Lee Wyatt

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

Reed Kim – Bank of America

And then your agreement would probably allow you to have those anticipated start up costs as well?

Lee Wyatt

As incurred. We add back start up costs as they're incurred.

Operator

Your next question comes from [Jody Kane – Sidoti & Co.]

Jody Kane – Sidoti & Co.

Did you say you're expecting 100% manufacturing to be offshore going into '09?

Richard Noll

I said that our net textile capacity will be 100% offshore. A lot of people focus on the T-shirt businesses versus our competition and when we close our Eden Textile facility, that's the last U.S. knit oriented textile facility we have on shore.

[Jody Kane – Sidoti & Co.]

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

Richard Noll

We are getting close to the end of our planned closures in the U.S. due to our network reconfiguration. Now while we may still have some consolidation opportunities or things such as the sheer hosiery business continues to decline at its historical rate we may close some things.

As Lee talked about, we plan for about $250 million or restructuring costs over three years, and we're about 90% there. Now while we're close to the closing, we will start to see benefits continue to roll into our P&L over the next couple of years as those offshore facilities ramp up to full production and ultimately all of the start up costs go away.

[Jody Kane – Sidoti & Co.]

For the price increase you said, you used the word locked in. Can you tell us how long that's locked in or what retailers' options are in terms of the price increases.

Richard Noll

The innerwear categories prices change relatively slowly when the change. They rarely go down. Clearly the way you can manage price in the short term is by driving promotion a little bit more which we intend to do in 2009. But this is not something that's there to be temporary. We've changed price. Retailers are changing price and it will be there for the long term.

Operator

Your next question comes from [Kevin Thebes – Poly]

[Kevin Thebes – Poly]

On the bond buy back, I thought your credit agreement had some pretty strict limitations on that. Can you tell me what's left available on the bottom purchase basket?

Lee Wyatt

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

[Kevin Thebes – Poly]

Would you say less than five?

Lee Wyatt

Yes.

Operator

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

Mr. Lance

We'd like to thank everyone for attending our quarterly call today. We appreciate your support and interest and look forward to speaking with many of you in a few short weeks at our investor meeting.

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Source: Hanesbrands Inc. Q4 2008 Earnings Call Transcript
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