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Gildan Activewear Inc. (NYSE:GIL)

F2Q2014 Earnings Conference Call

May 02, 2014 8:30 AM ET

Executives

Sophie Argiriou –Vice-President-Investor Communications

Glenn J. Chamandy – President and Chief Executive Officer

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

Analysts

Kenric S. Tyghe – Raymond James Ltd.

Chad H. Sutherland – Goldman Sachs & Co.

Martin Landry – GMP Securities LP

Andrew S. Burns – D.A. Davidson & Co.

Stephen MacLeod – BMO Capital Markets

Vishal Shreedhar – National Bank Financial Brokers

Chase Bethel – Desjardins Securities, Inc.

David J. Glick – The Buckingham Research Group, Inc.

Sabahat Khan – RBC Capital Markets LLC

Derek Dley – Canaccord Genuity Corp.

Jim V. Duffy – Stifel, Nicolaus & Co., Inc.

Mark Petrie – CIBC World Markets, Inc.

David Hartley – Credit Suisse

Brian Morrison – TD Securities

Operator

Welcome to the Q2 2014 Gildan Activewear Earnings Conference Call. My name is Vivian and I will be your operator for today’s call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Ms. Sophie Argiriou, Ms. Sophie, you may begin.

Sophie Argiriou

Thank you, Vivian. Good morning, everyone and thank you for joining us. Earlier this morning, we issued our press release announcing our earnings results for the second quarter of fiscal 2014 and our interim shareholder report containing management’s discussion and analysis and consolidated financial statements. These documents will be filed with the Canadian Securities Regulatory Authorities and the U.S. Securities Commission and are available on our website.

Joining me today are 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 second quarter performance and our business outlook for the fiscal year and will be followed by a Q&A session during, which Laurence and Glenn will respond to your question.

As always before we begin, I would like to remind you that today’s conference contain certain statements which 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 for 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.

And with that, I'll turn the call over to Laurence.

Laurence G. Sellyn

Good morning. Today we announced record results for the second quarter at the top end of our prior guidance, in spite of the impacts of the colder weather which negatively impact the demand for T-shirts and contributed to softer retail market conditions.

We’ve also reconfirmed our full year earnings guidance range. The positive impacts of higher than previously projected sales in the second half of the year is projected to be offset by transitional manufacturing inefficiencies to support new programs and the introduction of new products. These costs will impact results primarily in the third quarter. We expect to end fiscal 2014 with strong sales and earnings momentum in the fourth quarter due to the impact of new retail programs and the initial cost reduction benefits of capital expenditure program.

On a consolidated basis, EPS increased by 8.5% in the second quarter to $0.64 compared to $0.59 in the second quarter of last year. Sales volumes increased due to strong growth in sales of branded underwear to U.S. retailers. Growth in sales of licensed brands, increased sales to global lifestyle brands and increased sales to international printwear markets.

Printwear net selling prices were higher than the second quarter of last year due primarily to the non-recurrence of the $0.04 per share impact of a special distributor inventory devaluation last year. These positive factors were largely offset by the $0.08 per share impacts of higher cotton costs compared to the second quarter of last year.

Manufacturing costs was slightly favorable compared to 2Q of last year. Positive efficiencies in textile manufacturing due to Rio Nance 5 and other capital projects were largely offset by inflationary cost increases and by short-term transitional manufacturing inefficiencies in stock manufacturing operations and the former Anvil facility related to the upgrading of facilities and development of new product capability. As well as by start-up efficiencies at Rio Nance 1 related to the integration of increased underwear production into the ramp up plans.

In spite of the colder weather conditions which resulted in lower demand for T-shirts in the U.S., sales revenues for the Printwear business increased by approximately 3% from the second quarter of last year, due to approximately 20% growth in international printwear markets. A higher proportion of higher valued fleece and long-sleeve T-shirts and slightly higher net selling prices due to the non-recurrence of the distributor inventory devaluation in the second quarter of last year.

Operating margins for Printwear were 24.3% compared to the 23.7% in the second quarter of last year. Gross margins for Printwear increased due to the non-recurrence of the inventory devaluation, lower promotional discounting and increased textile manufacturing efficiencies, which together more than offset the negative impact of higher cotton costs and inflationary cost increases.

Branded Apparel sales revenues increased by 10% from the second quarter of last year in spite of soft retail market conditions due to the continuing success of our Gildan branded national mass-market underwear program, the growth of premium Gildan Platinum socks and underwear in national chains and department stores, increased market share for Gold Toe and new activewear and underwear programs, the G by Gold Toe brand, increased sales for licensed brands and increased sales to global lifestyle brands.

Sales of Gildan branded programs increased by approximately 50% compared to the second quarter of last year and we are continuing to secure increased shelf space and new programs in multiple channels of retail distribution for fiscal 2015.

Operating margins for Branded Apparel declined slightly in the second quarter compared to a year ago from 8.6% to 7.8% in spite of the increased sales volume leverage, which reduced SG&A expenses as a percentage of sales. The lower operating margins for Branded Apparel in the second quarter were due to the impact of higher cotton costs, which were not passed through into higher selling prices to retailers, the transitional manufacturing costs in order to upgrade facilities and support new branded programs and broaden product capabilities and inflationary cost increases.

Our updated full year guidance for fiscal 2014 reflects slightly higher than previously projected top line sales growth. Full year sales revenues are now projected at approximately $2.4 billion. Sales revenues for Printwear are now projected to increase by approximately 5.5% from fiscal 2013. Projected sales revenues for Branded Apparel are projected to be approximately $850 million, up from our previous projection of $825 million, and up approximately 19% from fiscal 2013.

The positive earnings impact of the projected higher sales revenues will however be fully offset in the short-term by additional transitional manufacturing costs to upgrade facilities to support our sales growth and by some further inflationary cost increases.

On our previous call in February, we had indicated the results for the third quarter would be negatively impacted by short-term manufacturing inefficiencies to expand our product capabilities and to support new retail programs. These inefficiencies are now projected to be higher than previously forecasted. In addition, we will incur training costs in our sewing operations to support a planned significant further increase in branded underwear sales and increased sales of new high value products in fiscal 2015.

The net effect of these revised assumptions is that we are reconfirming our prior full year EPS guidance of $3 to $3.10. EPS for the third quarter is projected to be approximately the same as the third quarter of fiscal 2013, which was a very strong quarter. The favorable impact of the projected approximate 14% growth in sales revenues in the quarter and the benefit of manufacturing cost reduction projects are expected to be fully offset by higher cotton costs, the impact of the short-term manufacturing inefficiency and inflationary cost increases.

Strong EPS growth is projected in the fourth quarter compared to the fourth quarter of last year. The projected higher EPS in Q4 compared to Q3 is due to higher value retail programs in Branded Apparel and more favorable Printwear product mix, which are projected to result in higher margins for both segments compared to the third quarter. And more than offset the lower seasonal demand for T-shirts and printwear in the fourth quarter compared to the third quarter.

We expect to generate approximately $200 million of free cash flow in the second half of the year. Our updated guidance continues to assume no material deterioration in overall economic conditions, which will negatively impact overall market demand.

Cotton costs will decline slightly in the second half of the fiscal year compared to the second quarter. In the third quarter, cotton costs will be higher than the third quarter of last year and negatively impact EPS on the quarter, compared to last year by approximately $0.10 per share. Cotton costs in the fourth quarter will be comparable to last year. Our cotton costs including the cost of basis have remained difficult similarly the same level in the high 80s to the $0.90 range since the fourth quarter of last year.

We are continuing with our major program of capital expenditures and now expect to be at the higher end of our previous full year guidance for capital expenditures for fiscal 2014 of $300 million to $350 million. About half of the fiscal 2014 capital spending is for the new yarn-spinning facilities, including the ramp up of the South Spring ring-spun facility which began operations in the second quarter.

The balance is for the ramp up of Rio Nance I, further new underwear making machines at Rio Nance I, new stock manufacturing equipment to upgrade Anvil textile facility, further biomass investments, the new Honduras distribution center and the initial investments in our new textile facility in Central America.

As stated in our press release this morning, the location of this facility has now been confirmed as being in Costa Rica, which is strategically located for duty-free, quota-free access to U.S. markets, and which allows us to leverage our management infrastructure and expertise in Honduras, while at the same time obtaining a degree of geographical diversification.

In addition this site is well located for our sewing operations in Nicaragua and has good access to ports for transportation to both the East and West Coast of the U.S. We will present a plan for the ramp up of this facility in our next call when we report our third quarter results.

In conjunction, with the ramp up of the Costa Rica textile facility, we are reviewing our overall capacity requirements and plans to support our sales growth, integrate new high value products and alleviate manufacturing capacity constrains which we are currently experiencing for certain parts.

As we go forward the drivers of our EPS growth and value creation continue to be, firstly, continuing top line growth in Printwear in both the U.S and international markets, including the introduction through the distributor channel of new high value products such as ring-spun sport shirts with high end premium design features, the new Anvil product line of ring-spun contemporary fashion basic T-shirts and the Gildan core performance T-shirt product line, which all command higher price points and higher margins.

Our main growth opportunity is continuing development of Gildan as a consumer brand. The success of our initial Gildan, Gildan Class and then Gildan Smart Basics branded programs is continuing to result in new branded programs, increased shelf space and better placement within retailers as both retailers and consumers recognize our volume proposition of better quality and design features for basic family apparels and innovation combined with lower prices.

We are very excited about our momentum in retail and our opportunities for new branded programs in fiscal 2016 in all product categories. Also, we have now begun implementation of our plans to penetrate retail market in Canada. Thirdly, we are continuing to build in our leading market share for Gold Toe men socks and to leverage the Gold Toe brand and brand expansions into other markets and other product categories. We are continuing to expand placement of G/Gold Toe for underwear and activewear in national chains and department stores.

Next is growth in licensed brands. We’ve obtained a national underwear program for Mossy Oak and expect to obtain new programs for 2015 for Mossy Oak in multiple channels of retail distribution. We will continue to seek other complementary new brand licenses. We also believe that we are uniquely positioned as a long-term strategic supplier for replenishment programs to global lifestyle brands. We have now begun to supply socks as well as T-shirts to these brands.

We are continuing to support our brands with major capital investments in our vertically-integrated manufacturing to further differentiate our product technology and product quality and to widen our cost competitive advantage. In this regard we have projected $100 million of annual cost savings, which are expected to phase in over three years, beginning in fiscal 2015.

And finally, with our organic strategies in place, we are placing strategic focus on acquisition opportunities, which will complement our organic growth and allow us to utilize our unused debt capacity and free cash flow to enhance return on capital and further increase EPS growth.

Sophie Argiriou

Thank you, Laurence. That concludes our formal remarks on the second quarter results. Before moving to the Q&A session of the call, I ask that everyone please limit the number of their questions to two in order to give everyone the opportunity to ask a couple of question. If time permits we’ll circle back for a second round of question.

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

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) And our first question comes from Kenric Tyghe from Raymond James. Please go ahead.

Kenric S. Tyghe – Raymond James Ltd.

Thank you, good morning. Glenn good momentum in retail shop sales gains and new program wins that you’re calling out. I wondered if you give us a little more color or main names perhaps with respect to those program wins?

Glenn J. Chamandy

What I would say is that first of all, we have great momentum in our retail strategy. Two fold, this one is that we’ve seen the bigger increase in our existing products in the share with the products we are selling today at retail. And as well as we’ve obtained new programs both in the Gildan brand underwear as well as our Platinum underwear.

I better not say who at this point, but (indiscernible) shop to stores, we’ve expanded our Gildan brand underwear to four new retailers and we’ve now expanded Platinum brand into four additional retailers as well. So we continue to see a good product, good brand extension in our underwear, which has resulted in obviously as increasing our sales guidance for this year.

And most of the sales guidance increases were really coming from underwear probably because of the additional sell through because of our brand positioning within the market and as well as the shelf space that we’re obtaining which most of it is coming towards end of the year, but that’s really what we think and what’s really excite us is the fact is that we have huge momentum going into 2015. A huge headwind with all the programs and expansion of our distribution in the brand particularly in underwear.

One thing I’d like to point out is that we will get into a little bit later, but we’ve actually had a significantly increasing our underwear capacity as we speak and that’s one of the drivers to our efficiency issues that we have, but we’re actually going to the increasing our underwear capacity over 100% versus our original plan for 2014.

Kenric S. Tyghe – Raymond James Ltd.

Great thank you Glenn and Laurence just with respect to the succession planning, you’ve indicated, you’ve now that through the calendar year versus the prior expectations. Could you perhaps share some color on your sort of partial shortlists is or, at what point you’d expect you’re making a decision, such as you’d have the runway you would expect for the transition.

Laurence G. Sellyn

Well, I’m not the one hiring my successor, Kenric, that’s Glenn. He’s always known his luxury of media bridging significant a little bit more time and I think the new timeframe he appears to be confident that will provide enough time to brining in a successor to make sure an orderly transition of all of my responsibilities to the new person.

Kenric S. Tyghe – Raymond James Ltd.

Fair enough and sorry, just thinking a very quick last one. You’re approximately the same as last EPS guidance for this next quarter. Could you just clarify the point reference you made at around $0.95? Is that the midpoint of your expected sort of range on this next quarter or that really a flow on the next quarter? I just want to clarify the terminology with respect to approximate on this next quarter?

Laurence G. Sellyn

I mean I’d say approximately, it means a couple of pennies on either side, I think the important thing from our point of you is not couple of pennies in the quarter, but providing the platform for our continuing sales growth and the value creation as we go forward.

Kenric S. Tyghe – Raymond James Ltd.

Great thank you, I leave with that.

Operator

And our next question comes from Taposh Bari from Goldman Sachs. Please go ahead.

Chad H. Sutherland – Goldman Sachs & Co.

Good morning, it’s Chad Sutherland on for Taposh. Hi guys.

Glenn J. Chamandy

Hi.

Chad H. Sutherland – Goldman Sachs & Co.

First question again on retail, just wondering, you obviously talked about good growth and encouraging to hear the shelf space gains, but for the time being at least not passing through the higher production costs, higher cotton costs, over time is that something what you plan to do or is the dialogue with retailers a little different relative to printwear, I guess how do you think about cost in that business?

Glenn J. Chamandy

Well, we were very comfortable with our pricing in the market and the fact is that we have the negative variances that are flowing through in Q3 which represent roughly about $0.15, so normalizing that we’d have pretty good margins. The fact is that, the inefficiency are coming from a couple of areas, one is that we are still in the process of developing and modernizing the technology for the Anvil facility which is extended beyond what we have originally anticipated, which is a result of little bit lower volume and some higher costs.

We’re wrapping up still our sock factory and in terms of that configuring it to a bit more higher value-added products and part of that added value products, is the fact is that we’ve put an additional steam boarding type of capabilities for better quality open package socks which has left us with about $0.04 of non-cash charge in the quarter of Q3. And the bigger part of our business, the ramp-up of our underwear which is something that we really put the pedal to the metal, really I would say as we start developing in Q2 because of the momentum in the sales we have in our underwear business in our sell-through.

It’s a combination of trading, we’re going to be doubling our underwear capacity in a very short period of time, so we are going through an extensive training of labor as well as reducing outsourcing of letting into all the equipment that we’ve purchased and then actually, one comes in. So, those costs once they normalize, we’re pretty comfortable with our pricing and our margins on a go forward basis.

Chad H. Sutherland – Goldman Sachs & Co.

Understood, thanks. And then just a follow-up on doubling the capacity of underwear, is that come at the expense of expanding T-shirt or fleece capacity or how does that dynamic work obviously, you guys are ramping up facilities that if you could just provide some context, thanks.

Glenn J. Chamandy

Well, the thing is that we always talk about mix and I would say to you today is that, a mix is evolving for sure. And maybe this is looking to aggregate total of our capacity. As we ramp up our underwear and ramp up all of the performance and other things we have in our fleece business which is growing considerably this year. Once we get fully ramped up coming September, we will be running at 100% utilization of our capacity. And I would say that based on the sales momentum that we have in all these categories, we will need a 100% of that capacity support 2015.

So one other things that we are going to do and what Laurence mentioned is that, when we come to our August call, we’re going to give an update, we are very excited about the Costa Rica and developing of that facility. We need to have some incremental capacity coming on line in 2015 to really give us a chance to support our growth rate that we have for 2016. So we are in the process right now, we’re evaluating additional capacity before even Costa Rica comes on line. And we’ll give you the whole breakdown when we come to our August call basically in terms of our full capacity expansion plans but we are running at 100% today or we will be running at 100% come September to support next year’s growth.

Chad H. Sutherland – Goldman Sachs & Co.

Great, thank you very much.

Operator

And our next question comes from Martin Landry from GMP Securities. Please go ahead.

Martin Landry – GMP Securities LP

Good morning.

Glenn J. Chamandy

Good morning.

Martin Landry – GMP Securities LP

Glenn, can you give us some or refresh my memory in terms of timeframe of as to when your construction is going to start for your Costa Rica facility. How long is it going to take to built it? When is the production going to start, and when you think that production is going to be fully ramped up, and how much does it you think you can come out of that new facility.

Glenn J. Chamandy

Well, related to the launch referred to is, I was going to you a full update in August but the plan is for us to start construction in the 2014, obviously bring the facility on some time in 2016, but to give you the exact buildup and break down I will do that in August. But I think referring to what I just said earlier the point for us is that we need to bring incremental capacity on prior to Costa Rica just to support because we need to have installed capacity in 2015 to support our growth for 2016 based on the momentum we have, the new programs in underwear and activewear we are generating a retail to support our international growth.

Martin Landry – GMP Securities LP

Okay, and any plan to share point-of-sale data on the retail side at some point in time.

Glenn J. Chamandy

Well, what we’re planning to do is, I think we said in the last call as well is that we are going to provide point-of-sale market share in our August call, only because that's going to be really a fairer number in terms of us – in terms of having our products in the market for full year. And we are going to be pretty excited about it, I think that when we share the numbers they are going to be quite exciting.

I don’t think that there has been any brand in any industry that's been able to penetrate market share in 12 months to have the level of share that we are going to have in underwear come our two or three call, so you rather wait till then just so we can give you a full annualized number, but it’s going to be pretty exciting when you see where we stand today.

Martin Landry – GMP Securities LP

Okay, thank you so much.

Glenn J. Chamandy

Thanks.

Operator

And our next question comes from Andrew Burns from D.A. Davidson. Please go ahead.

Andrew S. Burns – D.A. Davidson & Co.

Good morning.

Glenn J. Chamandy

Good morning.

Andrew S. Burns – D.A. Davidson & Co.

I was thinking, you could comment on your ability to capture this opportunity of manufacturing higher value product in 2014 and 2015, the timeline you’re refurnishing the Anvil facility ramping yarn, increasing training in sewing facilities. When do you think you’ll have the full capacity and capabilities to really push at that strategy at 100%?

Glenn J. Chamandy

Well, right now look at, we are ramping up like we said, I said earlier, we will be at 100% operational capacity by September, which means obviously one of our clients will be running at 100% capacity in which we need to support our 2015, so we will be optimizing our cost structure and our capacity at the same time.

Our Salisbury yarn facility and the two facilities at Clarkton and Cedartown yarn facilities that will be modernized, through the finished modernization Salisbury is ramping up as we speak and almost have full capacity probably by the end of our third quarter. So all of the installed capacity that we have with the yarn or textiles will be fully operational and that optimal capacity and efficiency levels by September.

Andrew S. Burns – D.A. Davidson & Co.

Great, thanks. And just on the distributor channel. You highlighted some promotional activities. Some of the smaller competitors emphasized it and as well. Wondering if the promotional levels you saw in the channel were above or below your plan and have they changed your view for the balance of the year in any way?

Glenn J. Chamandy

Well, as far as we’re concerned what we’re saying is that our pricing is actually slightly up on a year-over-year basis. So we feel that the market is stable and we didn’t see any significant promotional activity, I would say, in the quarter. So, I mean POS is a little bit on the weak side due to weather. Unfortunately, we saw that a little bit in January, and we’re on our call. It’s continued through March and slightly into April so far, but we’re pretty optimistic about the season kicking in. It always does. And we’re really excited about the continued growth in our international business, which continues to show great growth and good momentum.

Andrew S. Burns – D.A. Davidson & Co.

Thank you.

Glenn J. Chamandy

Thank you.

Operator

And our next question comes from Stephen MacLeod from BMO Capital Markets. Please go ahead.

Stephen MacLeod – BMO Capital Markets

Thank you. Good morning.

Glenn J. Chamandy

Good morning.

Stephen MacLeod – BMO Capital Markets

Just wondering if you can – you mentioned new shelf space in 2015, and I thought what I understood was that you said good momentum coming into [2000] (ph), particularly in underwear. So is that where a lot of your expected growth is coming from right now on the retail side?

Glenn J. Chamandy

Well, I think two things are going to happen and we expect the growth actually in other categories as well, but I’ll start with underwear. And the first thing is that we’re expanding the shelf space on our existing programs. We’re also looking at adding new products because like anything else as you develop your business, we start-off with a limited product offering. So there’s a big opportunity for us, we think to continue to expand within the category, which also will expand margins as we go forward because obviously as you add more product you get more styles, which allows you like we’ve seen, over the years, expand our margins. And at same time we’re expanding distribution into new retail space.

So it’s a combination in underwear of those three opportunities really that will allow us to, what we think is, be comfortable to double our capacity from our existing plan of 2014. And also we’re focusing on driving our activewear as well. I mean, activewear is a huge opportunity for us and we’re looking to get placement as we go forward into 2015.

We have a lot of irons in the fire right now. So we’re pretty excited about going into next year and we’re running a capacity, we’re gearing up and we think we’re positioned perfectly to continue driving our branch strategy in every single segment of Gildan. The Gildan brand, our Platinum, Gold Toe brands, we’re expanding in most categories as well both in underwear and activewear. And we’re also driving our sock business as well. And in socks we continue to look at deductions of private label, which is becoming a smaller and smaller piece of our business as we drive our brand strategy and produce higher value products, which ultimately will bring us better sales level and as well as higher margins.

Stephen MacLeod – BMO Capital Markets

Okay, great. And then, just my second question was surrounding global lifestyle brands in national accounts. Are you able to just sort of quantify where you are in those growth initiatives?

Glenn J. Chamandy

Our global lifestyle brands is continuing to grow, a lot of the opportunity and the future opportunity of that segment for us is developing the Anvil facility, which we’re in the process of doing so, part of the inefficiencies of Anvil today are flowing to our cost in Q3 our function of developing those fabrics that we need to actually drive the sales in 2015.

So we are very comfortable with the – we will have a good sales increase in that area through 2015, and as far as the national accounts business, I mean that business is somewhat flattish because it’s a function of the weather and retail environment basically that we are still comfortable with our positioning in the market.

Laurence G. Sellyn

In the second quarter sales of global lifestyle brands were up 15% and growth in all of our major target growth markets was up significantly in the second quarter.

Stephen MacLeod – BMO Capital Markets

You mean the target markets were specifically with respect to global lifestyle brands?

Glenn J. Chamandy

So what I mean, is if you look at their markets we’ve identified it’s our major growth opportunities all of these showed strong growth in Q2. As I said in the call overall Gildan branded programs were up 50% compared with Q2 a year-ago. Underwear was up 60% even socks the weak market was up 3%, activewear was up 12%, licensed brand were up 30%, global lifestyle brands were up 15%. International printwear markets were up 20% and the only market that was, where our sales were down were retail private label.

Stephen MacLeod – BMO Capital Markets

Great, okay, thank you.

Operator

And our next question comes from Vishal Shreedhar from National Bank. Please go ahead.

Vishal Shreedhar – National Bank Financial Brokers

Hi, thanks for taking my question. Just on acquisitions, Glenn I know you signed the share disposition plan in February, and you had no material information at that point in time, but as you look at the outlook today and the files on your desks, what’s your take on the opportunity related to the quarterly acquisitions the availability of pricing, just your thoughts there?

Glenn J. Chamandy

When I look at this there is some bigger initiative for our company right now I mean, we are in the process of continuing to looking for ways to reinvest our free cash, which is again $72 million in our balance sheet, we should be debt free company at the end of the year, and have some surplus cash.

So it’s part of our focus and again part of what we are looking to do in terms of acquisition criteria is to continue looking for opportunities to expand distribution, span product offering, looking at new brands. So with lot of opportunity for us and we are comfortable that we can complement organic structure, organic growth with potential acquisitions as we go forward, I mean we’ll be very selective, but definitely there is opportunity out there for us.

Vishal Shreedhar – National Bank Financial

Okay, so in terms of the files on your desk, there are files that you are looking at currently which you may or may act on?

Glenn J. Chamandy

I don’t want to comment what’s on my desk, thanks.

Vishal Shreedhar – National Bank Financial

Okay, fair enough. In terms of the brand the underwear brand given that Gildan, is the Gildan brand has momentum that you are commenting on. And then do you also plan to continue to aggressively grow Gold Toe underwear brand and I guess, I’ll leave with that?

Glenn J. Chamandy

Both of those brands, I showed to really different consumers, I mean, basically Gold Toe is an iconic brand. It’s growing in the department and specialty stores. We have expanded the socks into underwear, activewear, into ladies as well. So it’s growing everywhere. And our market share, now it’s 15. What is it 15?

Sophie Argiriou

15%.

Glenn J. Chamandy

No. We had 15, we had significant market share.

Sophie Argiriou

15 consecutive months.

Glenn J. Chamandy

Yes, we had 15 consecutive months basically of market share growth in the Gold Toe and it’s back to where it used to be, in the high 28% towards pushing 30% range in terms of its awareness in the department stores in national account. So it just really reinvigorates that brand for advertising. And we’re comfortable that we can continue levering that opportunity.

Gildan is a little bit different piece because it’s the value product in every one of the channels of distribution we’re in. So if you walk into any type of mass-market retailer or even in national account you’ll see that Gildan will be the value equation in their stores, has the best value, but it’s also the best quality and that’s one thing that the difference between Gildan and I think – and what’s making our sell-through so successful is that we don’t just have the best value. We have had also the best quality. You can look at it and you can go and take any garment apart in any of these retailers and look at our last take, our fabrication. We put value and quality and innovation in all of our products basically and we price them so. And I think that’s sort of been the success of our launch in our underwear and that’s what’s given us what we think is the big opportunity and we’re just getting going, and as we go into next year with our momentum, it’s pretty strong right now.

Vishal Shreedhar – National Bank Financial

Thank you.

Operator

And our next question comes from Chase Bethel from Desjardins Securities. Please go ahead.

Chase Bethel – Desjardins Securities, Inc.

Thanks. Good morning. I just had a question with regards to the subject of capacity. Can you talk about maybe the incremental factors that led you choose cost Costa Rica over Nicaragua. And then secondly, as you think about where to put money to work, whether it’d be capacity, cost savings with yarn sending or a power plant or acquisitions, can you just talk through how you’re looking at each of those and prioritizing what we should expect maybe over the medium-term?

Glenn J. Chamandy

Well, I’ll start with Costa Rica. I guess there’s a lot of factors that made us choose Costa Rica, but I don’t want to get into all on the call right now. The fact is that we did a complete analysis, and obviously for us, it was the decision, right decision for us to be in Costa Rica.

The key things that Laurence mentioned, we’re levering our management additional port access. We’re selling in infrastructure at Nicaragua. I mean at the end of the day, it’s very close proximity to Nicaragua. So there’s all kinds of other requirements that need to be looked at in terms of building textile facilities, infrastructure, power, water availability. So based on everything that we saw Costa Rica was a better site for us and that’s what we’ve chosen.

And as far as our use of cash and I guess capital, one thing that we’re doing this year obviously is we have an extensive investment in capital. We’re investing $350 million, which will generate about $100 million in cost savings and that will flow through the next successful three years, 2015, 2016, 2017. That’s been really the key component to our success and one of the things that we’re going to continue to do. And as we go into 2015, you’ll see that we’re going to have another major capital expense year that will not just increase capacity, but we also have significant cost reductions that will add on to $100 million already committed to.

So we are going to continue to spend capital on our capacity expansion cost reductions and as well as we are looking to use part our cash flow to look at acquisitions that will continue to help our organic growth here as we like said before, new brands, new channels of distribution, products whatever it takes for us to continue to keep expanding and maximizing our penetration into those retail, wholesale and international markets.

Laurence G. Sellyn

If you are talking Chase about our priority for allocation of capital, clearly the first priority is to support the capacity expansion to support our organic growth. But even in a year like this year where we are spending $350 million of capital for our existing business, we are generating free cash flow. So we are going to continue to build up cash so and use our cash in our unused debt capacity to do acquisitions, we’ll complement our organic growth strategies.

Chase Bethel – Desjardins Securities, Inc.

That’s great, thanks. And just a follow up on Costa Rica, Glenn what sort of manufacturing footprint are you envisioning in terms of the land package that you acquire over there.

Glenn J. Chamandy

Well, we have enough space to drill three size Rio Nance facilities that’s what you’re asking for, so we have a big infrastructure, we are going to putting in Costa Rico that will allow us to grow our capacities centrally over time, so we are making major infrastructure in space and obviously opportunity to expand beyond the one facility.

Chase Bethel – Desjardins Securities, Inc.

Okay, thank you.

Operator

And our next question comes from David Glick from Buckingham Research. David, please go ahead.

David J. Glick – The Buckingham Research Group, Inc.

Thank you. Just a question about the operating margin of the business clearly you have really strong revenue momentum, a couple of factors that you alluded to at least near-term constrain in the gross margins and as I look at cotton you guys talked about high-80s, $0.90 obviously futures are little bit higher than that. You also have, you are growing your Branded Apparel business obviously at a faster rate at a lower margin, I’m just wondering, as you put all this together and you are obviously increasing your capital investments as well, how does this all wrap it into your ability to maintain or even expand your operating margin from the current levels.

Glenn J. Chamandy

Well, as I said before, look we are pretty comfortable with I said, overall pricing in the market today. Work price to get good returns on our products, we’ve always have certain factor of negative variances build into our momentum and buildup into our sales time because we are constantly growing, you know what I mean, so we never had a point in time where we got a level manufacturing capacity.

So I would say that there is definitely for us real positions and price in the marketplace to sell our products. We think that we can get a very good return on our pricing, and we are priced significantly below what we think our other products in the marketplace. So there is definitely, at the end of the day, we feel that in the short-term we are going to continue to keep our pricing aggressive, and we are going to lever the top line and the bottom line obviously to continue expanding our earnings, and we are comfortable with our position today. As we drive new incremental capacity and cost reductions these will increase our margins as we go forward on top of our existing base today.

So we have over $100 million of cost reductions coming in and a lot of these cost reductions that we will have as we flow through will support our branded division in terms of some of the yarn spinning initiatives that we have. So we think that we are in a good position today as we flow through these cost initiatives, our pricing and our momentum in the top line there. And I am pretty comfortable with our position right now.

Laurence G. Sellyn

And further to our planned segment, it’s in our full year guidance is that we will see margin expansion in the fourth quarter, compared to the third quarter, and strong margins for Branded Apparel as well as our Printwear, which is coming from new high value retail programs and from the initial impact of our cost reduction program.

Glenn J. Chamandy

And one thing I said also is important that I think is the mix is a bigger driver. So when you look at even the underwear space for example, there is lots of opportunity for us to continue adding products to our existing assortment. And as you add more products, you actually enhance your margins basically. So when that comes to maturity as you develop your brand strategy more just in the beginning stages. So we are the products that we actually have in the market are probably the most sensitive – price sensitive ones. And as we continue to add new product apply merchandizing our ourselves we’ll actually increase our margins.

David J. Glick – The Buckingham Research Group, Inc.

So what you’re saying is that these cost reductions and the top line momentum should enable you to sustain the operating margin increase that you’re projecting this year into the next couple of years.

Glenn J. Chamandy

Yes.

David J. Glick – The Buckingham Research Group, Inc.

Okay, thank you.

Operator

And our next question comes from Sabahat Khan from RBC Capital Markets. Please go ahead.

Sabahat Khan – RBC Capital Markets LLC

All right, thank you and good morning. Are you able to comment on whether you’re seeing cotton futures trend for fiscal 2015 versus your cost that you realize in 2014?

Glenn J. Chamandy

Sales of cotton futures is looking to – you can see what the free future curve is right now and obviously cotton is trading at in the 80s, I’d say for example, for next crop year. It’s early days to see exactly where it will end up. There is always puts and takes, but I would suggest that and look at all from a long range perspective. I mean what Laurence said earlier is that cotton being in the high 80s, low 90s were sort of ended up this year. I think it’s a pretty good look at what a potential could be for next year. So we don’t really have a view today. And that’s’ and just where the market is now.

Sabahat Khan – RBC Capital Markets LLC

Okay, thank you. And you called off some wins on the Mossy Oak programs. Are you able to maybe quantify how big those might be or maybe how big you expect that brand to get eventually?

Glenn J. Chamandy

Well we definitely think that the brand is going to achieve and exceed our expectations, that is for sure. We place them activewear and we are going to be placing some underwear products this year. And we think that there is a big opportunity here to expand into 2015. I prefer not to say, how big we think we can get, but it’s much bigger than we thought originally when we took the license.

Sabahat Khan – RBC Capital Markets LLC

Thank you.

Operator

And our next question comes from Derek Dley from Canaccord Genuity. Please go ahead.

Derek Dley – Canaccord Genuity Corp.

Hi, good morning. I was just wondering, if you guys could give us a little bit more color on some of these inefficiencies you guys are experiencing in your Q2, Q3 and will they essentially be cycled through by the time we get to Q4?

Glenn J. Chamandy

The answer is, is that, the inefficiencies right now are probably, I guess, three pieces of inefficiencies, one is, the modernization of our Anvil facility with the new technology we’ve put into that plant as we did that for our global lifestyle brands and that resulted in lower volumes et cetera. We also had experienced continued variances in socks that was primarily, we continue installation of higher value products and equipment to support them, and the higher assets, if some of the boarding equipment as we invested heavily in steam boarding which we – I said earlier which is about $0.04 cash charge, and also the ramp up of our underwear business in terms of training all of the operators required to double our capacity. And that comes from two-fold, one is to externally go out and make textiles, just the knitting of the textiles until we get the equipment in Rio Nance 1 which we’ve ordered, and the second is to massively train people, when we train people we used to train in the modernized manner.

So we can train so many people, but we are training exponentially. So that’s an incremental expense for us in a very short period of time. Some of these – most of these costs will be running through Q3, but there are some costs that will go into Q4.

Derek Dley – Canaccord Genuity Corp.

Okay. That was great. Very helpful. And then, I was just wondering, if could just remind us, in September, when you guys are running at 100% capacity, what will be sort of your exit rate capacity at that point both overall and in terms of underwear?

Glenn J. Chamandy

Well. I’d rather not say, we don’t give the actual dozens down now at this point in time obviously, because we don't want to get into that, but and also the dozens are so impacted by product mix, we can’t really talk about dozens anymore.

Laurence G. Sellyn

So but I would say that, we’re going to plan a substantial increase in obviously sales for next year and once we’re running at full capacity, we should be able to support ourselves.

Derek Dley – Canaccord Genuity Corp.

Okay. That’s great.

Operator

And our next question comes from Jim Duffy from Stifel. Please go ahead.

Jim V. Duffy – Stifel, Nicolaus & Co., Inc.

Thanks, good morning everyone. Mostly at the return on invested capital over the last…

Laurence G. Sellyn

Sorry, Jim, we can’t hear you. I’m afraid.

Jim V. Duffy – Stifel, Nicolaus & Co., Inc.

Is that better Laurence?

Laurence G. Sellyn

Yes. That is.

Jim V. Duffy – Stifel, Nicolaus & Co., Inc.

Okay great. Well, good morning. Hope you are well?

Laurence G. Sellyn

Good morning.

Jim V. Duffy – Stifel, Nicolaus & Co., Inc.

My question, I’m looking at return on invested capital over the past 10 years. It seems acquisitions in growth in Branded Apparel have been dilutive to that. Is that a metric of focus for you and if so I guess that brings me to the operating margins for the Branded Apparel business? Can you speak to the expected trajectory of the margins there and any targets you might have for operating margins in branded apparel?

Glenn J. Chamandy

Definitely, if you take all the acquisitions and you look at our branded businesses that have been diluted, but the objective for us is to build this business three-fold from where it is today. So when you look at the acquisitions we did make, they were very strategic in the developments of our retail strategy so, based on the current level of earnings, yes they are. But if you project those in the future, where we think our sales and momentum in earnings power will be, we will be getting significantly good returns on these investments that we made and that’s really, this is behind the acquisitions.

So well, you’ll see continued growth in earnings, both from top-line and bottom-line in branded. And we were pretty excited about our positioning as we go forward and what we stated in the past is that, the objective in our brand business is to have the same type of earnings power in Branded, as we have in the Printwear business.

Laurence G. Sellyn

And also the operating margins for Branded will improve as we leverage our SG&A infrastructure with low volume which is already happening, but we have the infrastructure in place as Glenn said, build-up much on printwear business. So as we drive lower volume, lower SG&A as a percentage of sales so continue to come down.

Jim V. Duffy – Stifel, Nicolaus & Co., Inc.

Is there anything, you can say to put a timeline to that, what the shape of the curve of that improvement may look like?

Glenn J. Chamandy

I think we’ll provide guidance each year as we go along and that won’t go long so we are providing our outlook for 2015.

Jim V. Duffy – Stifel, Nicolaus & Co., Inc.

Very good thank you.

Glenn J. Chamandy

Thank you.

Operator

And our next question comes from Mark Petrie from CIBC. Please go ahead.

Mark Petrie – CIBC World Markets, Inc.

Hey good morning, I just want to ask about the performance of the Gildan Branded T’s in the mass merchant channel and your level of satisfaction with the growth there? And how you’re thinking about that going forward?

Glenn J. Chamandy

Now, where we have our brand placed is always so fantastic, so the question for us is this continued to drive our placement there, we’ve always outperformed every time we place Gildan to being a T-shirt or sport shirt. So we areour big challenging, also in a big opportunity at the same time is looking to get expanded distribution of our activewear product.

So we are pretty comfortable that we will and as we lever our overall brand positioning within the Oak mass department and the specialty channels, there’s huge opportunity for us to gain share in activewear type products.

Mark Petrie – CIBC World Markets, Inc.

Glenn, you previously talked about $100 million in retail accounts, is that a number that you can update?

Glenn J. Chamandy

Yes, well I mean the number is probably closer to like $125 million because we’ve increased our guidance level, so we’ve expanded beyond and probably that like I said earlier that’s probably because of our sell-through is meeting our expectations and we’ve also got new placement in almost five new retailers in underwear, which we’ll be shipping towards the back-end of this year.

I think the most important thing is that the headwind for next year based on the existing momentum we have, those new programs, and new shelf space, new product expansion really is going to give us a huge headwind into on a year-over-year basis, and that’s what sort of, if you look at last year what we said is that lot of programs that we’ve got in 2013 give us the headwind for 2014. Well, 2015 will be a bigger headwind as we go forward

Laurence G. Sellyn

Tell him.

Glenn J. Chamandy

I didn’t tell him, that's why I told him. As we go forward, we’re positioned perfectly in terms of driving sales into next year.

Mark Petrie – CIBC World Markets, Inc.

Okay that’s helpful. Thanks very much.

Glenn J. Chamandy

Thanks.

Operator

And our next question comes from David Hartley from Credit Suisse. Please go ahead.

David Hartley – Credit Suisse

Thanks and thanks for taking my questions. First, I just want I didn’t see it in the release anywhere. Your SG&A as a percentage of sales that you’re guiding towards about 12% for the year down for 13% last year. Could you expect that number to actually even lower than that given some your updated guidance here?

Glenn J. Chamandy

You’re taking about for this year.

David Hartley – Credit Suisse

Yes.

Glenn J. Chamandy

It will be slightly down as a result of the increased sales.

David Hartley – Credit Suisse

Okay. Just want to be clarify that. Anything just on the manufacturing side and the capacity constrains et cetera, when you look into Q3, Q4 and you’ll be very tight in terms of your production and capacity utilization. Have you ever seen a situation like this as tight as this is in previous years, and if you’ve had any challenges or opportunities with that?

Glenn J. Chamandy

Throughout our entire history, even though we have been the only company, the industry always making significant capability investments to capacity expansion as much as we brought on new capacity we’ve always wanted 100% capacity utilization and needed more capacity to continue to support our goal.

Laurence G. Sellyn

And with that I will say that one of the strategies we have right now in terms of building our Costa Rican facility. We’re going to have much infrastructure there to putting three real type facilities out. So once the first plant is up and running we can actually incrementally add capacity relative to support our future needs because at the end of the day I mean that’s our goals. We’re getting bigger and with tranches of capacity we need to add are going to bigger at the same time as we maximize our sales growth.

So we’re in a position right now that we’re continuing to run at 100%. We’re going to bring on incremental capacity for sure, before our Costa Rica comes online and then once Costa Rica comes in line, we’ll be in a position that we can add additional capacity if required within that hub that we’re building.

David Hartley – Credit Suisse

Great. That’s helpful. Thank you very much.

Glenn J. Chamandy

Thank you.

Operator

And our last question comes from Brian Morrison from TD Securities. Please go ahead.

Brian Morrison – TD Securities

Thanks very much. I appreciate all the color in the call has been very helpful. I have two follow-up questions. First one, did you quantify the amount of the manufacturing inefficiencies in the quarter and I heard you correct that it’s $0.15 for the third quarter.

And the second question I have is, with all the success from retail and global lifestyle that in terms of volumes is there any reasons that branded margins shouldn’t get to where printwear margins are with heightened volumes overtime?

Laurence G. Sellyn

If I heard you, your voice was faint, but I think you asked for the impact of manufacturing efficiencies in Q3 is.

Brian Morrison – TD Securities

Yes.

Laurence G. Sellyn

The total amount of year-over-year negative impact in EPS of manufacturing inefficiencies and inflation goes together is close to $0.15.

Brian Morrison – TD Securities

And for Q2?

Laurence G. Sellyn

And for Q2, it was a smaller number about $0.03, which is mainly in Branded Apparel. Overall our manufacturing efficiencies were slightly positive in Q2 because of the textile manufacturing efficiencies and the other factor also impacting Q3 is higher year-over-year cotton which negatively impact EPS as I said by about $0.10 per share.

Brian Morrison – TD Securities

Sure.

Laurence G. Sellyn

Later part of your question is that I like I said earlier, that our objective in branded is to have the same type of margins in returns as we do in the printwear business in the long run.

Brian Morrison – TD Securities

Very helpful. Thank you very much.

Operator

We’ve no further questions at this time. I’d like to turn the call back to Sophie for closing remarks.

Sophie Argiriou

Thank you. Once again I’d like to thank everyone for joining us this morning and we look forward speaking to you soon. Have a great day.

Operator

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

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