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Gildan Activewear (NYSE:GIL)

Q3 2013 Earnings Call

August 01, 2013 8:30 am ET

Executives

Sophie Argiriou - Director of Investor Communications

Laurence G. Sellyn - Chief Financial & Administrative Officer and Executive Vice President

Glenn J. Chamandy - Founder, Chief Executive Officer, President and Director

Analysts

Martin Landry - GMP Securities L.P., Research Division

Anthony Zicha - Scotiabank Global Banking and Markets, Research Division

Chad Sutherland - Goldman Sachs Group Inc., Research Division

Kenric S. Tyghe - Raymond James Ltd., Research Division

Stephen MacLeod - BMO Capital Markets Canada

Vishal Shreedhar - National Bank Financial, Inc., Research Division

Devin Prater - D.A. Davidson & Co., Research Division

Mark Petrie - CIBC World Markets Inc., Research Division

Chase Bethel - Desjardins Securities Inc., Research Division

David J. Glick - The Buckingham Research Group Incorporated

Tal Woolley - RBC Capital Markets, LLC, Research Division

Operator

Welcome to the Third Quarter 2013 Gildan Active Earnings Conference Call. My name is Larissa, and I'll be your operator for today's call. [Operator Instructions] Please note this conference is being recorded. And I like to turn the call over to Sophie Argiriou, Vice President, Investor Communications. You may begin.

Sophie Argiriou

Thank you, Larissa. Good morning, everyone, and thank you for joining us.

Earlier this morning, we issued our press release announcing our earnings results for the third quarter of fiscal 2013 and our interim shareholder report containing management's discussion and analysis and consolidated financial statements. These documents are available on our website at www.gildan.com and will be filed with the Canadian securities regulatory authorities and the U.S. securities commission.

I'm joined here today by Glenn Chamandy, our President and Chief Executive Officer; and Laurence Sellyn, our Executive Vice President and Chief Financial and Administrative Officer. Our call today will begin with Laurence taking you through our third quarter performance and providing an update on our business outlook. After which, a Q&A session will follow.

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 authorities that may affect the company's future results.

I will now turn the call over to Laurence.

Laurence G. Sellyn

Good morning. This morning, we were pleased to report adjusted EPS for our third quarter of $0.95 per share, which represented EPS growth of 44% over the third quarter of last year. EPS were at the top end of our prior guidance range and were a record for any fiscal quarter in the history of the company. Both of our operating segments reported strong results, and we believe that both segments are well positioned for continuing growth in sales and earnings as we continue to implement our growth strategies.

One of the highlights of the quarter was the initial success of our national branded underwear program with Wal-Mart. Sell-through to consumers significantly exceeded our expectations. And while we recognize that it is still early days, this reinforces our view that our Gildan brand promise of better product design and better quality features, combined with low prices, will be a winning formula and successful value proposition in retail as it has been for us in the Printwear business over the past 20 years.

We believe that we're uniquely positioned to deliver this brand promise to consumers as a result of our continuing major capital investments in our vertical manufacturing in support of our brand. In addition to continuing to invest in widening our manufacturing advantage, we are supporting our brands with continuing investments in marketing and advertising. We are continuing to raise our brand awareness and enhance the equity of the Gildan and Gold Toe brands.

We will discuss our results and outlook for Printwear and then for Branded Apparel. Our Printwear business is generating record earnings and strong free cash flows. Cotton costs are now generally in good equilibrium with Printwear selling prices, and we are continuing to achieve unit volume growth and increased manufacturing efficiencies.

Unit sales volume growth in Printwear in the third quarter was approximately 4%. However, although unit sales volumes were up from last year, growth in both the U.S. and international markets was limited by availability of inventory. As a result of which, we were unable to fully capitalize on customer demand during the peak selling season in the third fiscal quarter.

Shipments to the European market, where the Gildan brand currently has very strong momentum in spite of the macro economic situation in the region, increased by close to 10% in the quarter, but were lower than planned due to lack of product availability. Shipments in Asia Pacific region were up approximately 80% from the small base in the third quarter of last year.

Last night, we announced a restructuring of our Printwear price list. Selling prices were reduced for certain product lines, and we applied the benefits of these price reductions to distributor inventories. The ongoing margin impact of these selective reductions in selling prices will be essentially offset by the elimination of short-term promotions.

Although the selling price reductions and distributor inventory devaluation were announced this week, the proportion of the devaluation, which is applicable to inventory sold before the end of the third quarter, has been accounted for in our third quarter results. The impact of the inventory devaluation on sales and earnings in the third quarter was approximately $6 million. The impact in EPS was $0.05 per share.

We would like to provide some color on our pricing actions yesterday. Firstly, we are using budgeted unspent promotional monies to finance a special distributor devaluation and enhance the profitability of our distributor partners. Secondly, we are realigning product pricing to respond to distributor needs and provide more rational pricing for them. The pricing actions are in line with our objectives for EPS growth and return on investment. Apart from the inventory devaluation, the ongoing impact of the realignment of pricing is expected to be largely EPS- and margin-neutral for Gildan.

Turning now to Branded Apparel. We were pleased to report top line growth in sales revenues in the third quarter of 20%. Sales revenues in the quarter grew by 24%, before the impact of private label product returned by a retailer, which was replaced its private label with Gildan-branded socks.

Operating margins for Branded Apparel were 15.1% compared with 9.4% in the third quarter of fiscal 2012. The higher margins in Branded Apparel reflect the increasingly more favorable mix of higher value Gildan- and Gold Toe-branded products, as well as the lower cost of cotton compared to last year.

The third quarter was an important quarter for Gildan in our continuing development as a consumer brand for basic family apparel. We launched our national Gildan-branded underwear program at Wal-Mart.

Retailer sales to consumers were significantly in excess of our expectations, and as we said at the outset of our remarks, our initial success reinforces that consumers will embrace new brands, which offer better design and quality features and better value. We're confident that we will be successful in achieving additional growth at new programs in all categories for our Branded business for fiscal 2014 and that we will achieve strong sales growth in retail, underwear and activewear, after including the impact of discontinuing our private label underwear program.

We were pleased with the market share performance of our high-value Gold Toe men's sock programs. Gold Toe has industry-leading market share in men's and ladies' socks in department stores and national chains and further increased its market share in men's socks to just over 24% in the June quarter, following our recent advertising in support of the brand.

We are also gaining traction with the Gold Toe G brand for underwear and activewear, which has been targeted at a younger consumer demographic, and is gaining additional distribution in national chains and department stores. Another important breakthrough is our success in placing the premium Gildan Platinum brand in national chains and department stores.

We are continuing to invest in media advertising. We have launched new commercials to support our men's underwear programs and our activewear programs and are preparing a major creative campaign for the beginning of calendar 2014. We are confident that we can pursue our marketing initiatives at the same time as continuing to increase the operating margins for Branded Apparel.

In addition to our focus in developing Gildan as a consumer brand, we are continuing to build Anvil's business as a long-term strategic supply chain partner to global athletic and lifestyle brands. These brands are seeking to consolidate their sourcing with supply chain partners in the Western Hemisphere, which are geographically located to service large replenishment programs, and which can be relied upon for consistent high product quality and adherence to strict standards of corporate social responsibility. During the third quarter, we announced the acquisition of New Buffalo, in order to be able to provide a more streamlined sourcing solution for these brands, and we announced in our release today that we have been successful in obtaining further important new programs for fiscal 2014.

We reiterated our full year sales and EPS guidance for fiscal 2013 and further narrowed our guidance to the top end of the previous range. EPS for the full year is now projected at $2.67 to $2.70 per share, and EPS for the fourth quarter is projected at $0.81 to $0.84, up 4% to 8% from the very strong comparative adjusted EPS of $0.78 per share in the fourth quarter of last year, which was the previous record for quarterly EPS for the company prior to the third quarter, which we reported today. Sales revenues in the fourth quarter are projected to be in excess of $600 million, up over 7% from last year.

Gross margins in the fourth quarter are projected to slightly decline on a sequential basis compared to the third quarter due to the impact of the recent increase in the cost of cotton. Our projected EPS and gross margins in the fourth quarter also include the impact to the balance of the distributor inventory devaluation announced yesterday.

We are now projecting capital expenditures for the full year of approximately $175 million compared to our previous forecast of approximately $200 million due to the later timing of some equipment deliveries. Free cash flow after capital expenditures is now projected to be approximately $225 million. Free cash flow in the third quarter amounted to $150 million, and we ended the quarter with essentially no net indebtedness as amounts outstanding in our bank facility were offset by cash and cash equivalents.

The ramp-up of Rio Nance V is completed, and our results in the third quarter reflected the benefits of manufacturing efficiencies from the new facility. We're now in the process of beginning the ramp-up of Rio Nance I in order to support our projected sales growth. In addition, the ramp-up of Rio Nance I will allow us to better rationalize our product mix at the Rio Nance V facility and generate further manufacturing cost efficiencies.

We are upgrading and expanding the former Anvil textile facility in Honduras and further expanding our biomass facilities. We are currently analyzing options for construction of our next major textile facility in order to support our projected sales growth. We are also making good progress with the construction of our new distribution center in Honduras.

Our new ring-spun yarn manufacturing facility in South Spring, North Carolina is currently under construction and is on track to begin production early in the second quarter of fiscal 2014. The ramp-up of the new facility is expected to be complete by the end of next year with material cost savings projected to be realized in fiscal 2015. Ring-spun yarn will be utilized to further differentiate our branded product offerings.

The refurbishment and modernization of the open-end facilities of Clarkton and Cedartown will be complete by midyear 2014. We will provide details of our capital spending plans for fiscal 2014, when we initiate our guidance for next year at the end of November.

Finally, we are also continuing to monitor potential acquisition opportunities to complement our organic growth. Our goal is to reinvest our free cash flow in complementary acquisitions, which will lever our competitive strengths, further enhance our top line sales growth for the long term, provide meaningful synergies and provide IRRs which, on a risk-adjusted basis, exceed the returns from repurchasing our own shares.

Sophie Argiriou

Thank you, Laurence. [Operator Instructions] Larissa, we are now ready to begin the -- begin taking questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question is from Martin Landry from GMP Securities.

Martin Landry - GMP Securities L.P., Research Division

You've won new programs to supply global athletics and lifestyle brands. Can you give us an order of magnitude of these programs?

Glenn J. Chamandy

Well, we can't give you a real magnitude at this point in time, but I can tell you that with the purchase of New Buffalo, we're very confident that we could sell that capacity and is pretty well committed to, in terms of its growth. And these programs and commitments will be for utilizing the capacity at the Anvil facility, and it will grow over the next 2 or 3 years. So it's something that's going to be really a long-term growth strategy, and it's a business that we're working in conjunction with these brand companies to build a long-term relationship. And it's going to be quite meaningful to us over the long run.

Martin Landry - GMP Securities L.P., Research Division

Okay, okay. And with regards to the revision of your price list, so if I understand correctly, you're saying that this is going to be margin neutral. So if I understand correctly, you're going to reduce dramatically your promotions, and you're going to apply that money to permanent price reductions. Is that the case?

Glenn J. Chamandy

Yes. So what happened was that we had a lot of different types of promotional spending going on, and some of this promotional spending was short-term quarterly spending, which really created, what we think, irrational pricing amongst our customers in order for them to obtain their pricing on these promotions. And by eliminating the promotions and just having a -- what we call a lower permanent price on certain basic products, which they really use to drive their business, it will allow us -- it will allow them to have more stable -- eliminate irrational pricing and increase their profitability and margins. And this is something for -- what Gildan has done consistently in the industry, and it's sort of what really positioned us to be an industry leader and focusing on our customers and their profitability.

Martin Landry - GMP Securities L.P., Research Division

Does that include your -- what people call your growth incentive program?

Glenn J. Chamandy

Well, there's different elements of it. So a part of our growth incentive program, which was more quarterly, and as well as some of the account recounts would be eliminated.

Operator

The next question comes from Anthony Zicha from Scotiabank.

Anthony Zicha - Scotiabank Global Banking and Markets, Research Division

Glenn, could you give us some more details relating to the new 2014 programs, relating to global athletic, lifestyle partner brands? Is this Bangladesh-related? And could you give us some color in terms of potential capacity expansion plans, like what's your current capacity and would you have to look at a new manufacturing hub?

Glenn J. Chamandy

Okay. Well, maybe we just look at the -- let's start with new programs. Well, first of all, just going to this year, a lot of the new programs -- and I'll start with retail first, because with retail, we obtained quite few large programs this year. And just to refresh your memory, the programs in here this year are only going to be representing about $50 million of incremental sales in 2013. But on an annualized basis, we'll exceed $100 million in these new programs. In retail, we're definitely confident. We have a lot of options and programs in the pipeline now that we'll be able to bring to our December call, in both -- in all categories, in underwear, socks and activewear, that will materially increase our revenues in 2014. And as far as the private label sales with these branded companies, these are programs that basically we had ongoing with Anvil when we acquired the company. And we're going to definitely expand on them as we go forward and partly through enhancing the opportunity with the purchase of New Buffalo, but as well as the types of products of which we're going to develop in the Anvil facility as we reconfigure it. So as we go through next year, we will start seeing significant increases in sales. I have -- through the commitments that we're working with these customers. That piece of business will be growing steadily over the next 3 years. This company is planned 15 months in advance. So it'll be something that will be constant growth for us, and it should be quite material by the time we finish.

Anthony Zicha - Scotiabank Global Banking and Markets, Research Division

Okay. And others that impact our current capacity, and will you be looking at new manufacturing hub, maybe Vietnam?

Glenn J. Chamandy

We'll look at -- first of all, our capacity, just to go through with this, that we're running full out right now no. Our DR, Rio II, Rio V. Anvil's still running only around 80%, because we're still in the process of refurbishing its facility, and it will be complete by our Q1 and then ramp up to 100%. And we're ramping up Rio Nance I. We've actually going to start production this month in August, and it's going to re-ramp up over the next 12 months. At Rio Nance I, will add significant capacities to us next year. During 2014, we will start construction of another textile facility that will bring incremental capacity. We're very confident in all of the initiatives that we have, that we're going to need more capacity, because we have a lot of great opportunities in every aspect of our business. And that facility -- I would not like to say where it is today, but it will be in Rio complex, for sure. They will be somewhere outside our Rio facilities. And that answers your questions.

Operator

The next question comes from Taposh Bari from Goldman Sachs.

Chad Sutherland - Goldman Sachs Group Inc., Research Division

This is Chad on for Taposh. The first question I have is on capital allocation. You guys had, obviously, kind of reduced the CapEx for this year. And as we move into next year with free cash flow, how are you guys thinking about it? You obviously mentioned acquisition from the call. But given your cash position, are you thinking about additional leverage? Or just anything more on that would be helpful.

Glenn J. Chamandy

I'll answer the CapEx piece that we didn't reduce any of our projects. What happened was some of them slid into Q1 just because the timing of some of the equipment and installation, et cetera. So all the projects are still committed. The major projects, obviously, are ring spinning, expansion of our biomass, the distribution center, the refurbishment of Rio I, Anvil, and as well as we're building a new corporate office in the Honduras. So all these projects are still ongoing, but just slid into a little bit into Q1. As far as continuing spending capital as we go forward, 2014 will be also a large capital expenditure year for us. We have a lot of other big cost-reduction projects that we're going to bring to the table, including the construction, obviously, of the new textile hub then. Do you want to answer the rest?

Laurence G. Sellyn

Yes. And throughout our whole history, we've always made significant investments in capacity expansion and cost-reduction projects to support our growth and been able to finance that out of our internally generated free cash flow. In 2014, we're going to continue to make major investments in capital expenditures. We'll provide the details of that when we initiate our guidance at the end of November. But we've talked about ramping up Rio Nance I, we've talked about starting construction of a new facility, we're making major investments in yarn-spinning, we're doing cost-reduction projects. But we expect to continue to generate free cash flow after our investments in capital expenditures. And what we've always said is that our first priority use of excess free cash flow will be to continue to do complementary acquisitions, like Anvil and Gold Toe, which complement one of the other aspect of our organic growth strategies, and provide -- that lever our competitive strengths and that provide IRRs, which, on a risk-adjusted basis, exceeds the returns from repurchasing our shares.

Chad Sutherland - Goldman Sachs Group Inc., Research Division

Great. And then one follow-up, just on inventories. Obviously, up a little over 9% versus sales, up a little over 2%. Any color on there?

Glenn J. Chamandy

Well, the inventories are up because of a lot of the geographical markets that we're doing business in now, because we've expanded quite a bit in Asia, in Europe. And as well as other product categories, we have a lot of new styles in our line this year. We've increased our SKU count significantly this year with all of our performance products, et cetera. So a lot of that inventory, basically, is built in, in the new products or new markets in which we're penetrating. The -- where we're short on inventory right now and where we missed a little bit this year is in basic colored T-shirts. And the reason why we had somewhat of a lack of capacity is because of the -- of what the mix in which we're selling as we sold much more proportion of colored T-shirts versus white that take longer to make and to utilize equipment, as well as we had a little bit of downtime in our Bangladesh facility during all the different political scenarios that affected a little bit our availability in Europe. But overall, we feel that as we're going through this quarter, we will be caught up probably by the end of August, and we'll continue to build capacity to support next year. And as we bring on Rio Nance I, we're very comfortable with the -- of having a great year in terms of increasing our capacity and sales into 2014.

Operator

The next question comes from Kenric Tyghe from Raymond James.

Kenric S. Tyghe - Raymond James Ltd., Research Division

Glenn, just on your closing commentary. With Rio Nance I ramping and Rio Nance V now fully ramped, am I characterizing it correctly to say that you are very comfortable, both with the new program wins that you anticipate announcing at the end November and with your current sell-through on your capacity through '14 and that it's not likely to see a repeat in '14 of any capacity-constrained considerations or concerns?

Glenn J. Chamandy

Well, you know what I mean. We're going to bring on quite a significant amount of capacity. So I hope that's our problem, to be honest with you, but it's always a good thing to have. But we're very comfortable that we'll have a good increase in sales in 2014, based on the capacity we're bringing on. And when you look at really the opportunities for Gildan, I mean, we really, as a company, have really 4 growth initiatives. I mean, really, our Printwear business in the U.S. is still growing, although it's in low single digits, but it's on a quite a large base. We have a lot of new products that we're going to bring to market in 2014, again, in the U.S. printwear market. And we've really -- like in our international businesses, we've been capacity constraint, not this year, but somehow, we've been capacity constrained since we started. And we're going to allocate a lot of our capacity to grow our international markets, which are doing very well. We actually had a pretty good breakthrough in our Chinese business this year, where we've seen some pretty good POS. And our Asian business is up about 80% and most of that being in China, which is quite -- on a small base. But we're quite excited about that as well. And when you come to retail, I mean, we look -- we have a lot. The success of our underwear rollout to Wal-Mart has been phenomenal. I mean, it exceeded our expectations. We were pretty aggressive in terms of what we projected in terms of initial rollout, and we've exceeded it, between 30% and 40%. I mean, it's only been out now for a couple of months, but -- it's early days, but it's been fantastic. All of our programs, I mean, either be it the programs of the Gildan Platinum, our rollout of Smart Basics, I mean, we've really -- Gildan this year increased, in terms of its brand, about 300% this quarter versus last year, and it's close to a 1/3 of our business in Branded Apparel. So we're going to lever there, as well as the Gold Toe brand. And we think that we're very comfortable with the -- with ongoing programs for 2014 in the expansion of all our categories, which is underwear, activewear and socks. And with the non-retail or private label, I mean, that's a program that's going to be steady as she goes. We'll see good increases year-by-year, and we're very comfortable with our position. So the good thing is that we have 4 real growth areas still in the company, and that's why we're confident not only to ramp up Rio I as quick as we possibly can, but also to put divested capital in building a new textile facility to support even future growth from this point on.

Kenric S. Tyghe - Raymond James Ltd., Research Division

Great. And then just switching gears briefly on the underwear program and successes there. A recent competitor making acquisition in this space, is that, to your mind, about shoring up defenses, given the success you've had in the early goings? Is that about filling a gap in their offering? How would you characterize sort of the reason of competitor actions in the underwear space?

Glenn J. Chamandy

Well, we don't believe we want to talk about our competitors, to be honest with you. I think that in our cases is that when you look at our proposition and really what's driving Gildan, I mean, at the end of the day, what's made Gildan successful is making huge capital investments in manufacturing, which enabled us to add better quality features, better products and, most importantly, better pricing to our customers. And we're priced to sell right now, and we're doing a fantastic job. Our products are flying off the shelf. We think that there's a lot of huge opportunity for us. I mean -- and one thing with our business is that, as we add up all this capacity, we're going to fill it with all these 4 growth drivers, and we're going to fill this from -- organically. And then we're going to use our capital to continue to spend and do more of the same. So the other piece of our -- if I think of others, which is really relatively important to us, is that I think that people viewed our company as really being great in manufacturing. But you can see, as we've changed and reinvest, not just our capital and the manufacturing cost reductions and better quality, but we're also going to significantly invest our capital into our brands. And those 2 things combined, we think, is going to be a winning formula. So we're not one dimensional. We're not just a marketing company, we're not just a manufacturing company. It’s combining low-cost manufacturing, big investments with brand strategy. That's a winning formula. That's been so successful for us in wholesale over the 15 years, and we're pretty excited about it. The one thing we didn't mention is in -- in our CapEx is that all of our CapEx requirements, we have pretty tough threshold in terms of returns on investment and -- our returns are usually between 25% to 30%. And if you look at the type of investment we're making this year, $175 million to $200 million, as we complete these investments, that will continue to roll into future cost reductions, which we'll reinvest into better quality, better products and more market share, basically. So it's not something that it's stagnant. We're going to continue to do more of the same and we're very comfortable that the future of Gildan is quite bright.

Operator

And the next question comes from Stephen MacLeod from BMO Capital.

Stephen MacLeod - BMO Capital Markets Canada

I apologize if you've already answered the question. I got on a little bit late. But I'm just wondering if you can talk a little bit about the capacity constraints that impacted the quarterly results and whether that's something that will continue into the fourth quarter and then into fiscal 2014?

Glenn J. Chamandy

We sort of went through it, but I'll just give you a quick recap is that the capacity constraint was twofold. There's one that's mix, in terms of us selling more colored T-shirts, which take more dying capacity, and there's some disruption in our Bangladesh facility, basically, because some of the political unrest there. But that's all -- will be behind us by August, and we should be in a good position going forward from that point.

Stephen MacLeod - BMO Capital Markets Canada

Okay, great. And then can you just talk a little bit about your M&A outlook? I know, Laurence, you talked about it with respect to complementary acquisitions. Do you expect to have to do more M&A in order to grow your business with global and lifestyle brands?

Glenn J. Chamandy

No. This is Glenn. Look, we -- right now, we feel very comfortable with all the growth opportunities we have that we don't necessarily have to acquire or do an acquisition to have pretty good growth as we go forward into the next couple of years. Any type of acquisition would be something that would either add value and bring in a new channel distribution or other product categories that we're currently not selling. But within the core space we are today, we feel very comfortable that everything is in place to grow our sales in the 4 drivers that we have in place today in terms of growth initiatives.

Laurence G. Sellyn

Just to add to what Glenn's saying. The driving force behind continuing to do acquisitions is to utilize our excess free cash flow that we're generating to create value for shareholders and not because we need to do it to drive top line growth, which we can achieve organically.

Operator

The next question comes from Vishal Shreedhar from National Bank.

Vishal Shreedhar - National Bank Financial, Inc., Research Division

Glenn, I was hoping you could help us understand the process of evaluating and installing new capacity, and what kind of processes management follows to know that the capacity is required. For instance, do you have contracts in place that if you install new capacity you'll get certain orders or soft indications from customers? How do you go about that?

Glenn J. Chamandy

Well, it starts off with, obviously, good long-term planning. I mean, we just finished our strategic planning session, which we have with our board every year, looking out 5 years. We put together what we think our growth objectives, looking at each one of the different growth drivers, which is Printwear, U.S., adding product, our international markets, our branded opportunity and the success we've had in every one of our product categories, underwear, socks and activewear, our Gold Toe Brand and, obviously, the non-retail or private label. So when you look at all the different 4 growth drivers and we project out what we think are realistic shelf space gains that we're going to get and the momentum we have within the market place, we can pretty well project what type of capacity we need and when we need it. And that's why we're pretty confident of bringing on new capacity during 2014 to support the future growth of the company.

Vishal Shreedhar - National Bank Financial, Inc., Research Division

Okay. And just on these wins with the licensed brands. I was hoping to -- and I know you phased out of private label and certain programs in the past. I was hoping to better understand what the distinction is between these global brands and the private label programs that you phased out of, in particular, like -- would these new licensed brands have bigger contract sizes, longer contract durations, superior margins? Any color there would be helpful.

Glenn J. Chamandy

Well, most of these brands, first of all, don't make anything. They basically source all their products. Typically, they source and source a lot of other products from Asia, which, you can see, there's a lot of issues there in terms of social responsibility, et cetera. And also, what's a big requirement of these brands is in bringing product back to this hemisphere to be more responsive to consumers. It's a different business. It's -- than retail or private label, because in retail or private label, it's more price sensitive and mass driven and more replenishment, where this is a different product category, a different type of business. So where we shine in the mass area is really driving our own brand strategy, because that's where we can add the best value to our customers. Because in order to have the best possible prices, you need to be consistent, you need to sell a brand strategy. And we can add better features, better quality at better prices with Gildan,, let's say, for example, than we could with private label. So the value proposition that we have, which is proven in underwear as we displaced some of retail or private label, we've seen in the same shelf space a significant increase in sales during our brand strategy, because of our proposition with better quality and better prices. So it's 2 distinct types of business, I mean. I would say, that answers your question.

Operator

The next question comes from Andrew Burns from D.A. Davidson.

Devin Prater - D.A. Davidson & Co., Research Division

This is Devin Prater on for Andrew. Just a quick question. You guys have mentioned those new 2014 programs. We wanted to know if those programs are directly tied to the New Buffalo acquisition, or do they occur because of new capabilities on your end?

Glenn J. Chamandy

Well, see, the way it works is that we're working with strategic long-term relationships. So part of our development of these relationships is to make sure we provide a full service to these customers. Our commitment to them is to -- with -- through New Buffalo was to make it easier for them to do business with Gildan, and conjunctionally, we're going to get more business and grow our sales. So as we go forward into 2014, we will continue to get more and more business, and that could be in every product category. So it's a step-by-step process. But we're doing it, obviously, because we feel comfortable with the commitment of these customers. We just didn't go out on a limb and purchased a company.

Devin Prater - D.A. Davidson & Co., Research Division

Okay, great. And then also just quickly, you guys mentioned the sell-through at the new program at Wal-Mart has been great. And we were just wondering, how much data or sell-through data that you have for that program that's been -- how long it's been completely rolled out?

Glenn J. Chamandy

Well, we only have our own data right now, because it's early days. So what we did is we put together a plan and, objectively -- which was -- we thought was pretty aggressive at the time, but we've exceeded our expectations, and it's going very well. So as we go forward, we'll continue to -- and we'll be able to start measuring our share. And look, we expect that, in 2014, to be the #3 brand in underwear in United States. I mean, that's sort of where we see our positioning. So we're probably, today, the largest sock provider in the U.S. And as we continue to grow all of other product categories, we -- just like we did in wholesale, we'll start one share point at a time. And hopefully, in 25 years from now or 20 years, whatever time it takes, we'll be #1 in every single category, and that's really our objective. So that answers your question.

Operator

The next question comes from Mark Petrie from CIBC.

Mark Petrie - CIBC World Markets Inc., Research Division

I just had a quick follow-up in terms of the capacity. The new facility that you're looking at, I mean, is it reasonable to think of it as being probably on par with Rio Nance V in terms of cost and capacity? And then also, just in terms of capacity, could you remind us what the capacity of the Anvil facility is and how we should think about capacity at New Buffalo?

Glenn J. Chamandy

Okay. Well, first of all, Rio Nance I is a little smaller plant than Rio Nance V. But the way you have to look at it, the way we're aligning is that one of the big advantages with these facilities we're bringing on is the fact is -- that we're moving certain products from certain plants. So Rio Nance I, will produce ring-spun underwear -- I mean, certain categories. So the objective is in the old Anvil plant, we'll produce some of our performance items. So what's happening is that we're with -- not only are we increasing our capacity, but we're actually going to streamline more our production and have a pretty good synergy in terms of cost reduction by managing more facilities. Rio I in the Dominican Republic are more basic T-shirts, and they're big plants that produce more pounds just because of the nature of the simplification of the product that will go in those facilities. So some of -- and we'll actually probably -- in Rio Nance V, actually, we'll go up in capacity when we start Rio Nance I, to be honest with you. So there's just -- it all depends on mix and what goes on. But end of the day, we're going to manage it to maximize our capacity and our cost structure. As to your question on Anvil, Anvil would be roughly between -- about 10 million dozen. The capacity expansion plans will be above $15 million to retrofit the facility, which will be complete in December, and it'd be run -- a run rate of about 10 million dozens a year. And New Buffalo, you can't really look at the capacity like that because it's more of embellishment-type things. So it's basically -- it won't give us incremental sales of textiles. It's just basically going to give us added value as we go forward, because it's really an embellishment facility and not necessarily a textile facility.

Mark Petrie - CIBC World Markets Inc., Research Division

Yes. No, I understand that about New Buffalo. And so that's sort of what I'm trying to understand. Like how do you think about capacity there? Like what point would you need to add screen printing capacity? How much product could you actually put through New Buffalo as it is now?

Glenn J. Chamandy

Well, that's -- it's quite large now. But based on our commitments that we have, on a longer-term basis, we're probably going to need to double the facility for sure. So right now, our first objective is to take over the acquisition, again work with these brand companies, fill the existing capacity that we have. And then as we go to Phase 2, we -- way we project it, we think, most likely, over the next couple of years, we'll double the size of the plant.

Mark Petrie - CIBC World Markets Inc., Research Division

okay. And my first question, I guess, wasn't so much about Rio Nance I or Rio Nance V. It's the new facility that you're sort of considering. Like -- should we think about it as on par with Anvil in sort of that 10 million dozens or something much larger scale like we've -- like you've done in the past, like Rio Nance I, Rio Nance V?

Glenn J. Chamandy

No, much larger scale ,because we're going to -- it won't be in the same complex. So it will be a bigger, larger-scale facility, basically, that will -- again, every time we build one of these plants, it will be the biggest, largest, low-cost facility in probably our arsenal at that time by the time we get it up and running.

Mark Petrie - CIBC World Markets Inc., Research Division

Yes, okay. And just terms of Printwear, can you just talk about the volume trends through the last quarter and how you see that through the balance of the year?

Glenn J. Chamandy

Yes. I mean, the -- things were pretty good. I mean, our POS, in the way we see it so far, was low single digits. So it's been pretty steady. I think it could've even been better, to be honest with you. I think we still got hit with a little bit of weather here and there because of this -- the rain and so forth. But the U.S. was single low digits, which is really what we planned. Our European business -- and I think we lost opportunities, so it's hard to tell for us, to be honest with you, because we missed sales, because we didn't -- we went -- we didn't have all the product we needed. But that's where we sort of ended up with what we did ship. And then our European business, despite all the economical issues they have there, I mean, we were up 10%, but it would've been a lot more than that if we would have product. And Asia, like I said earlier, I think we've -- to be honest with you, I don't want to get ahead of ourselves. But I mean, on a small base in Asia, we had a big increase. And that was mainly in China, where we now have good distribution and we're seeing pretty good POS. So things are -- but I think, overall, good, not to knock yourselves shoes off, whatever you want to look at it, but I mean, it's pretty well steady, steady as she goes. So we're pretty confident that we're going in the right direction.

Operator

The next question comes from Chase Bethel from Desjardins Capital Markets.

Chase Bethel - Desjardins Securities Inc., Research Division

I was wondering, first of all, on the -- just on the investments you've made in brand building in the year, whether you could share some measures in terms of how you moved the needle maybe with regards to aided and unaided awareness or in effort motives or anything that you would deem relevant. Just showing how those -- ultimately, I guess, the grade measure of how that's doing -- is translating to sales. But anything else that you could share on how things are going on that front?

Glenn J. Chamandy

You know what, look, we have quite a bit of information on all of our awareness as we stand today. But rather than sort of telling you today, I think that when we come to December, we're going to have really more of a full year of all our marketing initiatives put together. We're planning to have an investor trip in Honduras in December, which will be the time for us, really, to show where we stand and what we're doing in terms of all of our initiatives. But put this way, like I said before, our Gold Toe piece has gone up to #1 position, up 100 -- couple of basis points. Our Gildan is going off the charts, basically, because of the investment we're making and the distribution we have. So I'd rather not get ahead of myself and sort of just throw a number with you, but we'll substantiate these numbers in December. But we're going hockey stick type of growth in terms of our awareness, and that's part of what we're going to continue to do, like Laurence mentioned in his script is that we're planning another major campaign for 2014. We're going to continue to spend on developing our brand strategy, at the same time, making sure that we continue to increase the returns. And our profitability -- not only do we get sales increases in our Branded segment, up 20%, but we've also seen the operating margins grow, despite the fact that we're spending heavily on advertising. And we continue -- we will continue to see our margin expansion, though I can tell you, we will continue to invest heavily in our brand strategy, at the same time, to develop Gildan, to be what we think is a major consumer brand and continue to drive our Gold Toe business.

Chase Bethel - Desjardins Securities Inc., Research Division

Okay, great. I look forward to hearing more in December. Just a question for Laurence. I was just hoping you could, maybe as you've done in the past, bridge the year-over-year change in Branded Apparel's sales. Just trying to get at what might have come through by way of affecting those receivables on New Buffalo. And then I know you had been resetting the sock program based on declines earlier in the year. So just trying to get at the moving pieces year-over-year, if you can help with that.

Laurence G. Sellyn

Well, the 20% growth in sales was all driven by volume growth and by our enhanced mix with the development of the branded programs. So all of the growth was driven by these 2 factors.

Chase Bethel - Desjardins Securities Inc., Research Division

All right. And just lastly, what was realized cotton in the quarter?

Laurence G. Sellyn

It was slightly over $0.80, and it'll be a bit higher in Q4.

Operator

The next question is from David Glick from Buckingham.

David J. Glick - The Buckingham Research Group Incorporated

Glenn, just a follow-up on marketing. Obviously, you're going to get into more detail in December when you plan -- when you present your plans. But from a kind of a leadership perspective, can you talk to us about the team you've built in -- on the Branded Apparel side from a marketing perspective, just to give us some understanding? Obviously, you're spending a lot more on marketing. You want to spend it effectively. The product is off to a great start. So obviously, it appears to be working. But can you help us understand the team you've built, the experience, the expertise around the marketing side, so that we get a sense for how you're evolving the company, which has its history in -- as an expert manufacturer and more of a branded company? That'd be very helpful.

Glenn J. Chamandy

Okay, well, thanks. But my guess -- 2 things I would say. Number one is that you'll have a chance to meet everybody in December when we have our investor trip. I think that's -- meeting and hearing from them will speak for itself. Obviously, the company has invested heavily in our retail strategies since we started it in, really, '08, when we started with our first small acquisition and building of our first major socks facility in Honduras. So we spent the last 5 years developing the resources, the skill set through the acquisitions that we have, and as well as some type of -- and hires and organic. And like I said before, in my last call, everybody wants to work for Gildan. So we've been able to recruit what we think are the best talent in the industry to help us to drive our strategy. The way you can evaluate it is probably -- if you go to the stores and just look at the Gildan positioning, our packaging and underwear, how our products are positioned, you can see that the brand is positioned. We think -- and that's one of the reasons why -- we think the brand is positioned. We think, uniquely, amongst its peers in the underwear area, I mean, that's one of the reasons why we're seeing the type of sell-through we have. It's really the brand strategy, it's our marketing, it's our packaging, it's our price strategy. So we have a great team of people. That's what makes Gildan successful. It's all about team. Anybody can buy equipment. You can have a lot of money. But at the end of the day, it's all about the people and that's what drives Gildan. We have a great team and we're proud of it, and we'll be able to show it off in December.

David J. Glick - The Buckingham Research Group Incorporated

Great. I just had one quick follow-up for Laurence. Just very quickly, Laurence, if you could take us through Rio Nance I, II and V. You gave us a lot of detail on Anvil capacity. But just the annualized capacity for each of those and the relative product specialization within those facilities, that'd be very helpful.

Laurence G. Sellyn

So I mean, the capacity of the existing facilities are the same as what we've always said. I mean, obviously, as Glenn said, it's impacted by the different product mix. But if you look at it all in T-shirt equivalence, Rio Nance I, Rio Nance II and DR are all equivalent to about 20 million dozens a year of annual capacity. The Rio Nance V is our largest facility, which is about 30 million dozens. And then as Glenn said, the Anvil facility is about 10 million dozens and then about 5 million from Bangladesh.

David J. Glick - The Buckingham Research Group Incorporated

Okay. And then Rio Nance I you said was ring-spun and underwear and DR was basically T-shirts. Is that accurate? And...

Glenn J. Chamandy

That's -- David, look, the whole thing with capacity, look, as things move around, mix changes and as we continue to add more products and plants and things. So -- but just generally, DR and V are basics and then II mix are fleece and some golf shirts and I mix underwear and some ring-spun and Anvil mix -- look at it. But everything works on mix. But at important as that look, they have a lot of capacity coming online with Rio I, and we'll continue to build capacity as we see fit to grow ourselves. I mean, that's the most important thing.

Operator

The last question comes from Tal Woolley from RBC Capital.

Tal Woolley - RBC Capital Markets, LLC, Research Division

Just wondering, Glenn, if you can speak to the sock business and the performance there and what your production plans are there. Is the sock capacity within Honduras being fully utilized? Do you need to build more there? Are you looking at outsourcing more with the Gold Toe team? How are you thinking about that business in total?

Glenn J. Chamandy

Well, it's going well. I mean, first of all, our socks sales were up over 6% this quarter, and we're projecting sales to be up some -- same type of range next quarter. So I think the -- what's happened is that we divested ourselves quite a bit with some of the private label programs we have had in the past, and we filled our facilities up with Gildan brand and as well we're bringing Gold Toe products into our facilities. So everything in terms of socks, we think, is pretty good right now. And look, we'll continue to look at the new opportunities to grow in the sock category, particularly in the Gildan brand, as we go forward.

Tal Woolley - RBC Capital Markets, LLC, Research Division

Okay. And just my last question. I'm just -- your implied guidance for Q4, you're running at about 4% to 8% EPS growth. What are the sort of key factors as we look out beyond that, that are going to be the real drivers to boost that, to boost that number?

Laurence G. Sellyn

Volume growth and cost reduction as a result of our investments in our capacity expansion and cost-reduction projects.

Glenn J. Chamandy

And then -- they're quite significant. I mean, if you look at -- first of all, if you look at our growth strategy, and look, we're able to obtain pretty good top line growth with all these initiatives we have. Like I said before, you got, basically, the Printwear growing, you got international. Our retail is just, basically, in its beginning stages. I mean, we have huge momentum in every product category. And with our non-retail, private label, basically, with the commitments we have, we're going to see significant growth as we go forward. And that's why we're comfortable bringing on all those capacity. You combine that with really the cost reductions. And like what I said before, was that you look at 25% to 30% returns, we just haven't started spending this year. I mean, we've been spending every year. So each year, we have incremental costs. I mean, we're just -- so as we spent in '11, '10 and '12, those cost savings, basically, are hitting our P&L now as we drive them and as we spend now. We'll continue to spend as we go, and we'll see cost reductions in '14, '15 and '16 and continue driving it. So the long-term growth strategy of the company is to grow top line sales and reduce our cost, basically, increase our margins and our operating margins and EPS.

Operator

I'll now turn the call over to Sophie Argiriou for final remarks.

Sophie Argiriou

Thank you. Before ending the call, we would like to announce, and as we alluded to during the call, we're in the process of planning an analyst and investor trip to tour our facilities in Honduras and meet the management teams of our Printwear and operating segments, which is expected to take place early December, shortly after we release our fourth quarter results and provide our guidance initiation for fiscal 2014. We'll be communicating to the investment community more specific details about the trip in the coming months. The Gildan management team looks forward to welcoming you in Honduras, where we will have the opportunity to show investors and analysts our extensive manufacturing infrastructure and to discuss our business strategies and opportunities with you.

Thank you, again, for joining us, and we look forward to talking to you at our next call in November. Thank you.

Operator

Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.

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