Hanesbrands Q3 2007 Earnings Call Transcript

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 |  About: Hanesbrands Inc. (HBI)
by: SA Transcripts

Hanesbrands Incorporated (NYSE:HBI)

Q3 2007 Earnings Call

October 25, 200710:00 am ET

Executives

Brian Lantz - IR

Rich Noll - CEO

Lee Wyatt - CFO

Analysts

Brian McGough - Morgan Stanley

Omar Saad - Credit Suisse

Eric Tracy - BB&T Capital Markets

Steve Riccio - Landmark Capital

Reade Kem - Merrill Lynch

Art Olac - Rivvar Capital

Kevin Yeates - Goldman Sachs

Ken Ajay - CIBC World Markets

Jay Sal - Morgan Stanley

Operator

I would like to welcome everyone to Hanesbrands Incorporatedthird quarter fiscal 2007 investor conference call. (Operator Instructions) Iwill now turn the call over to Mr. Brian Lantz, Vice President of InvestorRelations for Hanesbrands Incorporated. Sir, you may begin your conference.

Brian Lantz

Good morning, everyone and welcome to the Hanesbrands Inc.quarterly investor conference call and webcast. We are pleased to be here todayto provide an update on our progress after the third quarter of 2007. Hopefullyeveryone has had a chance to review the news release we issued earlier today.The release and the replay of the webcast of this call can be found in the investorsection of our Hanesbrands.com website.

Before we begin, I want to remind everyone that we may makeforward-looking statements on the call today either in our prepared remarks orin the associated question-and-answer session. These statements are based oncurrent expectations and are subject to certain risks and uncertainties that maycause actual results to differ materially. These risks are detailed in ourvarious filings with the SEC such as our most recent Forms 10-K and 10-Q aswell as our press releases and other communications. The company does notundertake to update or revise any forward-looking statements which speak onlyto the time at which they are made.

With me today on the call are Rich Noll, our Chief ExecutiveOfficer; and Lee Wyatt, our Chief Financial Officer. Rich will give the summaryof our business performance and trends for the third quarter, Lee will thenprovide further detail on the period and various aspects of our financialperformance. Following our prepared remarks, we will allow ample time toaddress any questions that you may have.

Now I would like to turn the call over to Rich.

Rich Noll

Thank you, Brian and thanks to all of you for joining ustoday. We now have successfully completed the third quarter of our first fullyear which is the foundation for achieving our long-term growth goals for sales,operating profits, and earnings per share. We delivered solid performance inthe quarter with increased sales in a mixed retail environment. We executedwell against our strategic initiatives of investing in our brands, reducingcosts, and generating cash. Our cash generation also allowed us to pre-pay long-termdebt and repurchase shares.

Let me touch in more detail on sales, margins, restructuringprogress, and then cash flow. Our sales for the third quarter and the firstnine months were positive compared to last year. For both the quarter andyear-to-date we saw a strong sales growth in the outerwear segment and salesdeclines in the innerwear segment.

Outerwear sales increases for the first nine months weredriven by the strong sales of Hanesbrands casualwear and Champion brandactivewear. The Hanesbrands sales were fueled by a return to basics this yearby mass retailers as well as new program placements. The Champion business hasseen strong performance for both Champion and C9 by Champion in the first threequarters of this year. In fact, our Champion business has seen eight straightquarters of double-digit growth.

It is also meaningful to note that our international segmentsales are higher year-to-date on the strength of our European casualwearbusiness with the Stedman and Hanesbrands that are sold in the screen print channel.We have experienced double-digit volume gains for nine consecutive quarters inour European business by expanding distribution, while focusing on coreproducts.

Innerwear sales for the first nine months were downslightly, primarily as a result of softness in kids' underwear as well assoftness in licensed male underwear in the department store channel whileintimate apparel and socks have remained strong, which has partially offset thedecline. We continue to work with our large retail partners to most effectivelyutilize our brands to drive additional consumer traffic and purchases in theirstores.

While we have experienced softness in the male underwearbottoms arena, we have seen increases for male underwear tops, especially sinceour new Hanes men's advertising began in July.

Turning to intimate apparel, the Balibrand sellthrough momentum continues, due in part to our advertising campaignsupporting Bali's Passion for Comfort bra. Balihas seen strong sales growth in both bras and panties this year. Baliwill build on the success with its largest launch to date, Bali Concealers.

Following on the heels of our success with Bali,we are now focusing our attention on the Playtex brand. On September 3rd,Playtex launched the new advertising and marketing campaign and Playtexadvertising addresses women's everyday bra fitting challenges. A video ofouttakes from the filming of the Playtex television commercial was watched bymore than 4.1 million visitors on YouTube, and it was one of the highest24-hour view rates ever recorded for an ad on the video website.

Our focus on investing in our brands is beginning to work asa evidenced by our overall sales increases for the third quarter andyear-to-date. However, it is important to note that we are operating in achallenging consumer environment. Many retailers have posted soft same-storesales figures for September due to unusually warm weather affecting traffic andimpacting demand for colder weather apparel items such as fleece.

The short-term impact of these various macro circumstanceson our business remains unclear. We will continue to invest in our largest,strongest brands in core categories to achieve our long-term growth goals.

Turning to profit, we are pleased with our 10% operatingmargin excluding actions for the first nine months of the year which is upslightly to last year. So far in 2007, our ability to control cost has allowedus to slightly exceed our goal of offsetting the increased investment in ourstrategic initiatives and the incremental standalone costs.

In the third quarter, we further consolidated ourorganization by completing the elimination of over 400 staff positions,primarily in the United States.These decisions are never easy but are critical for us to complete in a rapidlychanging environment. I would again like to acknowledge the many hardworkingemployees who continue to diligently perform their duties in the many areasaffected by our restructuring initiatives.

In the third quarter, we also continue to reach milestonesin our global supply chain strategy: to expand our manufacturing in lower laborcost countries; to more efficiently align our supply chain flows; and toconsolidate into fewer and bigger facilities.

In August, we acquired our second offshore textile plant,the 1,300 employee Duraflex textile manufacturing operations in El Salvador. The Duraflex operations hadoperated independently under a supply agreement for the past three years. Thisis an extremely strong operation with an outstanding management team and anoutstanding workforce who already are very familiar with our products and ourway of doing business. This acquisition provides a textile base in Central America from which to expand and leverage our large scale as wellas to feed our sewing network throughout Central America.

Separately, we have selected Nanjing, China as the site tobuild a textile production plant which will be our first company-owned textileproduction facility in Asia. The Nanjingtextile facility will be central to our Asian textile and sewing network andwill enable us to expand and leverage our production scale in Asiaas we balance our supply chain across hemispheres.

Lastly, our cash flow from operations in the quarter allowedus to prepay $75 million of debt and repurchase an additional $29 million worthof company stock to offset dilution.

In closing, we have had a very good start in our first fullyear of independence. We have increased sales, expanded our margins, andstrengthened our balance sheet. We have continued our sharp focus on executingour key strategies to increase investment in our strongest brands, to reducecosts, and to generate cash. This focus and our execution have positioned us tobegin delivering on our long-term growth goals and to continue to create valuefor our investors.

Now I would like to turn the call over to Lee Wyatt who willreview our financial performance.

Lee Wyatt

Thank you, Rich. Let me begin with sales. Sales for thethird quarter increased $35 million or 3% over the same quarter in 2006 to$1.15 billion. For the nine months, total sales increased $43 million or 1.3%to $3.32 billion.

The sales increase over the prior year quarter was driven bygains in the outerwear, hosiery, and international segments. As mentionedearlier, softness in the innerwear segment was mainly in the kid's underwear aswell as softness in licensed male underwear in the department store channel andwas partially offset by strong intimate apparel and socks sales.

Year-to-date, for our major reporting segments, outerwearsales are up 4.7% and international sales are up 2.6% while innerwear andhosiery sales are each down less than 1% compared to last year.

To review operating profit for the third quarter, I willbegin with GAAP operating profit which includes the impact of restructuring andspin-off related charges. Next I will discuss these restructuring charges; then,to better understand operating performance I will review operating profitexcluding actions as calculated on table 4(a) of the earnings release.

GAAP operating profit increased by 13% in the quarter to$106 million or 9.2% of sales, up $12 million from the same period last year.The increase was mainly the result of lower spin-off and related charges andincome generated from the separation of pension plan assets and liabilitiesfrom our former parent.

To reconcile GAAP operating profit to operating profitexcluding actions for the third quarter, we must consider the following items:

We incurred charges of $17 million primarily for plantclosures and staff reductions. These charges were partially offset by $7million gain related to this final separation of pension assets and liabilitiesand changes to our benefit plans. $13 million of the charges were plantclosures in the third quarter and were non-cash. Non-cash charges areaccelerated deprecation and are included in cost of sales which causesvolatility in our gross margin. Cash charges are primarily for severance andlease buyouts and are reported on a separate restructuring line on the incomestatement.

As stated during previous calls, we expect to incurapproximately $250 million in restructuring and related charges over thethree-year period following the spin-off. Since the spin-off, we've announced$120 million in restructuring and related charges and recognized $109 million.

Now I will review operating profit excluding actions for thethird quarter as calculated in Table 4(a) of the earnings release which was$115 million or 10% of sales versus 11.4% for the same period last year. Wemust review last year to better understand the quarterly comparison. Manyinitial standalone costs were not incurred until the fourth quarter last year,even though the spin-off occurred on September 6 in the third quarter.

Also for the two months prior to the spin-off, we receivedno cost allocations from our parent company. As a result, in the third quarterlast year, our operating profit excluding actions was 11.4% of sales higherthan it otherwise would have been.

Year-to-date operating profit margin, excluding actions, was10% of sales compared to 9.9% in the same period last year. Benefits from ourcost controls have more than offset incremental standalone cost of $11 millionand $17 million of investment in our strategic initiatives.

I mentioned on our last call that we had clear visibility tothe cost of cotton in our operating profit through the remainder of 2007. Morespecifically, I indicated that the average cost of cotton for the remainder of2007 would be $0.57 per pound. We now have further clarity on the impact of thecost of cotton on our operating profit through May of 2008. The cost of cottonreflected in our operating profit for the first five months of 2008 willaverage approximately $0.58 per pound, with the first quarter being lower andthe second quarter being higher.

Now Iwould like to turn to earnings per share. GAAP fully diluted earnings per sharewere lower in the quarter, $0.40 compared to $0.52 for the same period lastyear. Earnings per share, excluding actions, were $0.48 versus $0.75 a yearago. Earnings per share reflect higher operating profit, increased interestexpense, and a lower effective income tax rate when compared to the samequarter last year.

Interestexpense increased in the quarter to $49 million from $18 million a year ago, asa result of debt incurred as part of the spin-off. Remember, last year's thirdquarter reflected only one month of spin-off interest expense, but the fourthquarter of 2006 included a full quarter interest expense.

Theeffective tax rate for the third quarter was 30% which is lower than the 34%rate a year ago and the same for year-to-date 2007.

Now let me review the balance sheet and cash flow. TheSeptember 29th balance sheet reflects strong liquidity as we ended the periodwith $176 million of cash and our $500 million revolving credit facilityremained undrawn. We were in compliance with all debt agreement covenants.

Long-term debt at September 29th was $2.37 billion andreflects a pre-payment of $75 million in the third quarter. Year-to-date, wepaid down $128 million of long-term debt and over 70% of our debt remains at afixed or capped rate.

We repurchased just over 1 million shares of our stock at anaverage price of $28.35 during the third quarter, or approximately $29 million,as we continue to repurchase shares to offset share dilution. Year-to-date,we've repurchased $44 million of our company stock at an average price of $27.55,which is the maximum that we are able to repurchase for our covenants for 2007.

Also during the third quarter, we substantially completedthe separation of our pension plan assets and liabilities from our formerparent. The assets were higher than our original estimates and as a result weare now 97% funded across all of our pension plans. Our under-funded pensionliability is now reduced to an estimated $24 million which should result inminimal pension funding in the future.

Our cash flow statement reflects $236 million net cashprovided from operations on a year-to-date basis, which is $35 million higherthan the same period last year. Capital expenditures year-to-date in 2007 at$45 million were partially offset by proceeds of property sales of $13 millionand for the spin-off, we have closed on the sale of 14 properties and receivednearly $26 million in total proceeds.

As Rich mentioned, we acquired the Duraflex textilemanufacturing operations in El Salvadorin August. The net cash paid for the facility was $17 million in the thirdquarter with $27 million in notes payable over the next two quarters.

In summary, three quarters into 2007, sales have increased1.3% and our operating profit excluding actions continues to benefit from costreduction initiatives which are offsetting increased investment in ourstrategic initiatives and incremental standalone cost.

We are also seeing a more consistent pattern in ourquarterly operating margins as we established this baseline performance in2007.

From a financial perspective, since the spin-off, we paiddown $235 million of long-term debt, our pension is now 97% funded whichreflects $96 million in contributions. We have also repurchased $44 million instock and have $176 million in cash on the balance sheet. We have continued togenerate strong cash flow in the year since the spin-off.

I will now turn the call back to Brian.

Brian Lantz

Thanks Lee. Thatconcludes the recap of our financial performance for the most recent quarter.Before we begin taking questions, I want to take this opportunity to reiteratethat Hanesbrands will continue to follow a policy of not providing quarterly orannual guidance. However, it is our intent to continue to use these quarterlyconference calls to communicate our performance and help investors develop anunderstanding of our company.

Now we will begin taking your questions and we will continueas time allows. Since there may be a number of you who would like to ask aquestion, I will ask that you limit your questions to two to three at a time,so that as many of you as possible can get an opportunity to pose thosequestions.

I will now turn the call back over to the operator to beginthe question-and-answer session.

Question-and-AnswerSession

Operator

Your first question comes from Brian McGough - MorganStanley.

Brian McGough - Morgan Stanley

On the top line, specifically overall it was a lot betterthan what I would have thought. The innerwear portion, which was down, you hadnoted Rich that a lot of that softness is still really coming from yourdepartment store customers. If I do the math and assume to those guys are downmid single-digit, it implies that your mass business is probably closer to flatwhich is a better rate of change than we have seen from a lot of the otherbasics business who have put out earnings over the past week or two.

Am I in the ballpark there? Could you just elaborate more onthat mass business especially as it relates to any competition that you areseeing from private label? You hit on a point about weakness in male bottomsand also if you have any color on units versus ASP? Thanks.

Rich Noll

Overall we are very pleased with our sales results on ayear-to-date basis and we believe it validates the strategies that we areexecuting against. I think your math is actually pretty close on. We are verypleased with our mass business on a year-to-date basis even if you take out C9by Champion which is an exclusive arrangement we have we with Target, which isactually seeing extremely fast growth. We are still flat to slightly up acrossall those channels.

You are spot on, that a number of our customers who wereactually seeing declines on a year-to-date basis versus last year are in thehigher-end department stores, a couple of selected specialty channels and otheraccounts. So we are feeling pretty good about our initiatives.

Brian McGough - Morgan Stanley

Is there any reasonto think that more recently things have eroded at a more material rate?

Rich Noll

Let me just talk a little bit about the overall macroenvironment because I think that's at the heart of your question, I think weare hearing people talk about a potential weak holiday and things like that. AsI said, our sales results year-to-date validate our strategies, but for holidaywe may see some weakness given the macro environment.

Also let me comment on our mid-term 2008 outlook in terms oftrends because our outlook there remains unchanged. Let me go into little bitmore depth first on a holiday and then I will talk about 2008.

At holiday right now we are seeing lots of pluses andminuses out in the world at large and let me touch first on the minuses andthen the pluses. There is clearly a weak retail environment that's out therethat started in September and is continuing through early October and we mayhave some spillover effects of that into holiday.

The weather has been extremely warm and that actuallyimpacts our fleece business to a certain degree especially in retail and we arealso seeing a focus by retailers on inventory. They always focus on inventoriesgenerally after Christmas in that January timeframe, but we are seeing a broad-basedfocus on that where a lot of retailers want to come out of Christmas with theright inventory levels and that's a little earlier than normal.

On the plus side however, we have got an extremely strongpromotional offering against all of our retailers for holiday. We've added somenew January promotions to take advantage of the gift card traffic thatretailers are now consistently seeing after Christmas and we have also got the Bali'sConcealer launch that should ship in late December. So when you take all thattogether we see a little bit more downside risk than upside in the fourthquarter, but for us it is really too early to tell.

For mid-term 2008 though, when you look out another sixmonths or so, we are getting no sense whatsoever that there will be anycarryover impact. In fact if anything, retailers want to get more aggressive totry and overcome any potential problems they have at holiday and they are doingthat with return to apparel essential categories and wanting to drive strongnational brands. So our outlook remains solid.

Brian McGough - Morgan Stanley

That's great color, Rich. I think this does tie in there toa certain extent, on the gross margin, in the quarter it was down a little bitand I don't think cotton is impacting you yet and it doesn't sound like it willa whole lot at least through the first half of '08. I think FX should probably bemild benefit on the margin.

Should we be seeing your cost saves start to flow through onthe gross margin line or are there any other costs that you are incurring asyou are moving out of the U.S.and North America that would in some way mask the overallbenefits we are seeing from the restructuring?

Lee Wyatt

Brian, our gross margin in the third quarter declined from32.7% last year to 31.3%. There are really three items that are driving that;it is not cotton and it is not FX.

First of all we have higher accelerated depreciation fromthe restructuring which is included in our gross margin.

Secondly, we have a higher mix of outerwear in the thirdquarter than innerwear this year which the mix drives down the margin a littlebit.

And then in the quarter we had higher obsolescence cost oninventory. That's not alarming, it's more timing than anything because we arereturning to normal obsolescence cost this year so it's not a trend that we areconcerned about, it's just really more of a timing issue for the third quarter.

Operator

Your next question comes from Omar Saad - Credit Suisse.

Omar Saad - Credit Suisse

Iwanted to follow-up on the sales, the revenue line. By my calculations,I know you look at it probably a little bit more year-to-date, but this quarterwas probably your best revenue quarter I think in almost three years. So I wantedto dive in a little bit more.

I wanted to get thelicensed male underwear in the department store channel, what exactly that is? Also,have you talked a little bit more about the hosiery business which was actuallypretty surprising to me given a lot of the trends we are seeing, I don't ifthat's the tights that women seem to be picking up on a little bit morerecently, if that's what driving the upside there. Any more color you can givebehind a few of those items would be great.

Rich Noll

Sure, and I willstart by saying we are focused generally on year-to-date, I do want to statethat we do have volatility on the sales line from a quarter-to-quarter basis.So it's always best to look at us with a couple of quarters together for alonger-term trend, and you will hear me say that when its up 3%, you also hearme say it when it's down, so I want to be consistent there.

But let me hit those two items that you talked about indetail, first on the men's licensed business, that's really our Polo licenseand we have had that license for fairly long period of time and it's reallybeing impacted by about three things. Department store retail trends, especiallygiven the consolidation and door closures and things that were happening inthat channel impacted that Polo men's underwear business.

We also had a Chaps license with that business which weexited last year and that's the second factor.

Then the third factor was when we came into 2007, and werenewed the contract Polo put slightly more restrictions on the channels of theretailers in which we could sell, and that's impacting that business. So it'sreally a bunch of tactical issues that's impacting that.

It's having a substantial impact for the size of thebusiness. It is less than a $100 million of our total sales and it's probablyimpacting us around $10 million or so on a year-to-date basis.

In terms of hosiery we are beginning to reassess what areour long-term outlook is for that business. Historically that industry hasdeclined at double-digit rates; we have seen that for well over a decade. Weare seeing that decline start to slow and moderate, and we think that it may becloser to low single-digits to at most mid single-digit declines. So we stillsee a declining and therefore we will manage that business for cash, but wethink actually the trend may start to slow down a little bit.

Omar Saad - Credit Suisse

Can you explain what you think is happening in the category,why the trend might be changing a little bit?

Rich Noll

That business a long-time ago was huge. It has been in along, long-term decline. The big factor was that women used to wear, 15-yearsago, the biggest segment of the population was five-day a week hosiery wearersbecause they wore it to work. Today, I think the market is now the size whereit's more of a special occasion and it is starting to hit that sort of overallspecial use run rate. I still do think that it has some declines in front of itfor a couple of years, but I think that's the major trend.

You are seeing a few fashion trends change a little bit, butI think most of it is that the markets now are getting to a more sort of stablesize of repeat purchase for special occasion use.

Omar Saad - Credit Suisse

Your inventories looked extremely clean coming out of thequarter. I wanted to ask you what your sense is given the September trends at retailand month to-date October. Inventory levels in the channel, how you wouldexpect that to play out over the next few months based on weather, based onholiday, based on macro weakness? What happens to the inventory levels atretailers if they really are building up in the channel?

Rich Noll

So youare asking about retail inventory levels, not our inventory levels?

Omar Saad - Credit Suisse

Yes, that's right.

Rich Noll

As I was saying when I was answering Brian, retailers are alwaysfocused on bringing their inventories down post-Christmas especially in that Januarytimeframe, for a lot of them it's year-end. They want to make sure they are existingthe season as clean as possible. We are seeing a focus on inventories earlierthan we normally do and I think it's a reaction by retailers on saying, let'snot try and manage it with a sledge hammer at the end, let's try and be morethoughtful and graceful about it going into the holiday season. So I think theyare just trying to get outside in front of it.

The impact on our business really depends upon which segmentyou are talking about. Outerwear its very different than innerwear. Outerwearthey will do a buy, they figure out how much they are going to buy, it mightshift a little bit, if they are little bit nervous they will reduce the amountof that buy and that's that.

On the innerwear side, which is replenishment business,while they are going to manage inventory a little bit more tightly they stillmanage it to a weekly supply basis. If the sales are there they reorder and ourshipments will be there to support the business. So it's a little harder topredict exactly what that's going to mean, but I do think that they are goingto have their inventories down a little bit earlier this season than last.

Omar Saad - Credit Suisse

Do you have the ability to slow down production, push back alittle bit on the supply chain to manage that? How flexible can you be there?

Rich Noll

You know, that's oneof things that we are constantly doing, is always making sure that our supplychain is matched to our overall demand level. We don't make to order though, wemake to inventory and so we will try and smooth some of the impacts ofproduction through the inventory through billing inventories or taking themdown, but that's a small effect around our total inventory levels. You are notgoing to see huge swings in that on a percentage basis with the inventorylevels.

Omar Saad - Credit Suisse

The cost of being a standalone company, you spun offSeptember last year, should those costs be fully cycled for the fourth quarter?

Lee Wyatt

I think by the time we work through the fourth quarter wewill be fully annualized and it will be at full run rate.

Omar Saad - Credit Suisse

Okay, but not as ofthe third quarter but as of the end of the fourth quarter?

Lee Wyatt

Correct, fourthquarter.

Operator

Your next questioncomes from Eric Tracy - BB&T Capital Markets.

Eric Tracy - BB&T Capital Markets

Following up a little bit on the top line in terms of theoutlook both for holiday and as we look into '08 and if you could be just a bitmore specific in terms of the mass retailers. Specifically in Wal-Mart we'veseen some commentary out of them in terms of slowing of unit growth.

Can you just talk to how that impacts your business? Ifthere is any impact at all given we are looking for relatively low single-digitgrowth here. Also, they've got a new merchandising team in place, understandingthey are getting back to more basics which I would assume that benefits youall, but there has been some speculation out there that hopefully you couldprovide some color too, Rich?

Rich Noll

I think everybody is a little concerned about the overallmacro consumer environment, there is no question about it, but we also see sometrends to try and mitigate that and you mentioned a number of them. It is notjust Wal-Mart but it's a number of retailers when they feel that consumers aregoing to be a little more conservative with their spending, the retailers wantto focus on more of the essential items and make sure they're offering value tothose retailers than the more high-end luxury items.

I think you correctly point out that if we got the rightprograms in place which we believe we do, that can actually benefit us. At thesame time, we are also traffic dependent and if the consumer is a little bitmore conservative and they shop a little bit less, it's going to ultimatelyimpact the traffic and can impact our sales. So that's why it's a little hardfor us to know exactly what the impact is going to be.

Eric Tracy - BB&T Capital Markets

In terms of your visibility though to the programs as welook 12 months out, assuming that you are planning very much with those massretailers and I am getting to more of just their positioning both from abranded and private label perspective, any sense on your part that given theweaker environment they may try to push a little bit more on the private labelside?

Rich Noll

In our categories, especially in innerwear the pricedifferential between private label and brands is relatively small. For exampleon a 6 packet socks you might see private label around $4bucks and the brandsmay be anywhere from $0.25 to at most $0.75 more, so it's fairly small on boththe percentage and the dollar basis, as in some other categories where privatelabel has a huge differential, that's really not the focus of the retailers oreven that consumers to say, okay, I've got to save an extra quarter here andit's critical. So we don't expect any major shifts from that perspective.

In fact, what we see is a lot of retailers saying now what'simportant is providing value on strong national brands, and so I think that mayactually counter some of that trend.

Eric Tracy - BB&T Capital Markets

Turning to the supply chain, you announced the building of atextile facility in China,.Can you remind us of the plans in terms of either just outright acquiring oreither selling a textile facility versus building? The plan as we go forwardwith the restructuring?

Rich Noll

Our stated strategy for our supply chain globalization is tobe balanced across hemispheres equally between the Western Hemisphereand Asia. So selecting the Nanjingfacility for our first textile plant just is right in line with that long-termstrategy. Last year we actually purchased the sewing facility in Thailandwhich is part of that strategy and the idea would be to have a balanced networkof textiles and sewing throughout Southeast Asia and in Chinato help us to achieve that goal.

I will state that this is a very long-term strategy. We'vejust selected the site, we will start the building process and so the Nanjingfacility won't have any material impact on our P&L for a number of yearsyet to come, it's really our long-term strategy that we are focused on withthat initiative.

Eric Tracy - BB&T Capital Markets

Lee, on tax, do we expect that be 30% as well in Q4?

Lee Wyatt

We had a 30% rate in the first three quarters and we peggedour rate for the year between 30% and 35%, so it will be in that range, yes.

Operator

Your next question comes from Steve Riccio - LandmarkCapital.

Steve Riccio - Landmark Capital

A couple of things here. Obviously you guys did really wellon the top line and in your margins and I am assuming it's sustainable goingforward.

Rich Noll

We've stated that our first full year of independencecalendar year 2007 is our baseline performance and we've published long-termgrowth goals of 1% to 3% revenue growth. We believe with the cost reductionopportunities we have we can magnify that into 6% to 8% operating profit growthexcluding our restructuring actions and with our strong cash flow and abilityto pay down debt and repurchase shares, we can further magnify that intodouble-digit EPS growth. We believe that is sustainable for three to five yearsin the future.

Steve Riccio - Landmark Capital

Another question regarding cotton prices. I was recently ata Gildan presentation. They seem to be leaning towards pushing through somepricing increases because of the rise in cotton prices. Obviously you guys havelocked in your cotton prices through May, but I just wanted to get a sense asto what your thoughts are in terms of if we did see increased upside pressurein cotton prices, would that be something you guys would contemplate and howlikely do you think that you'll be able to push something through?

Rich Noll

Let me segment the market into the T-shirts and fleece soldthrough the imagewear channel which is sold to wholesalers and then ultimatelyscreen printers, separate from the traditional retail environment where thebulk of our sales are. The dynamics in each of those are very, very different.

Our sales of casualwear to the imagewear segment are lessthan 10% of our overall sales and the dynamics in that environment are pricingactually happens in that environment on a weekly basis.

In the retail environment it's much more of a consumer goodsbusiness where prices don't change very often, especially in the innerwearcategory the retailers will buy programs and you will tend to see a lot ofstickiness on the overall retail price. Similarly even with the casualwear soldat retail those programs aren't put up for bid very often, so you don't have awhole lot of dynamics of price change going on.

When it comes to cotton, pretty much the industry on theretail side, their long-term average of prices has been about $0.55, when itdips a little bit below that we pick up a little extra margin, when it dips upa little bit above that we can constrain our margins a little bit. So you arenot going to see retail prices change and fluctuate up and down with the priceof cotton.

Now if there was as systemic change that was large like ifcotton went over a $1 and it looked like it was going to stay there for a longperiod of time, clearly that would work its way through price even on theretail side; but you don't see a lot of price movements like you would in thatimagewear channel, both up and down.

Operator

Your next questioncomes from Reade Kem - Merrill Lynch.

Reade Kem - Merrill Lynch

I just wanted to follow up on the question about China, Iwas just curious if you could tell us a little bit more about what you plan toproduce there, and may be how much it will cost. It sounds like it's going tonot be actually up and running for quite sometime, maybe a little bit morespecifics on that?

Rich Noll

As I've said this is one major step in our long-termstrategy of balancing our supply chain across hemisphere so it is a long-termstrategy. These plants will cost anywhere from $75 million to $100 million. Itis a textile facility so it will make actually knit fabrics which go into awhole host of our products from underwear bottoms to fleece tops, so it'sreally a fabric plant; not really a full package, complete plant that makes thefinished product. That would go to the sewing networks that would either be in Southeast Asia or in some cases elsewhere in the world.

In terms of time, as I said, it takes awhile to build thesefacilities and then you start to ramp them up until they hit full production.You could be three years out.

Reade Kem - Merrill Lynch

The only other question I have was just on the integrationfront just if you could update us on what you're doing in terms of IT and howthat's going, and whether there are any milestones you passed on that front?

Lee Wyatt

From a systems perspective, we have a long-term process ofreally moving towards more of an SAP centralized approach. Now we don't havetime constraints to rush through that, and we clearly will never put thebusiness at risk in a large ERP conversion but we have started the order tocash process and we basically one month ago completed the first step of that.So we are feeling good, but it's very early and again our pace will be measuredand we will not put the business at risk as we go through that.

Operator

Your next question comes from Art [Olac] with [Rivvar] Capital.

Art Olac - RivvarCapital

I think Rich had been giving and interview in one of thelocal papers in early September and he had mentioned expanded distributionperhaps in Asia as a focus of international growth. Canyou comment on that a little bit more?

Rich Noll

Yes, from a long-term perspective, we believe that Asiaholds a lot of growth potential for us as we build our supply chain there andthere is no reason we shouldn't have a strong commercial business there. Todaywe already have about a $100 million business in Asia,it's mainly in Japan,we have been selling the Hanes and Champion brands in Japanfor two decades and we are doing quite well. We started selling Hanes andshortly thereafter Champion in China,and while that business is still fairly small, it's growing rapidly.

We also launched Hanes in Indiaa couple of years ago and again while it's small it's growing rapidly. So wefeel from a very long-term perspective very bullish on Asia,and I think overtime it will play a much more important role in our totalportfolio.

Art Olac - RivvarCapital

Is there any timingin terms of ramping up the expanded distribution in those areas or is thatsomething that you are continually working on?

Rich Noll

Well we are actually seeing very strong growth from thatarena, now it's on a $100 million base, so even strong growth from there itstill needs to build for quite a while for it to have a fairly substantialimpact on our total sales growth. So we have been aggressively expandingdistribution and growing that business for a couple of years, so we feel quitegood at we it is at.

In terms of very long term, can it much bigger? That couldbe an area as we continue to strengthen our balance sheet over the next coupleof years and begin to look at potential acquisitions, acquisitions andcommercial acquisitions in Asia could possibly makesense.

The demographics especially in Chinaand India arevery well suited for strong growth in our categories. Household incomes thereare very low and as they rise our types of products become a larger share ofpeople's expenditures and we can have not only the population growth drivingour sales but also the income growth.

Art Olac - RivvarCapital

Touching on one other point in that article, I believe youguys were terminating or cutting back some of the retiree medical benefits atthe end of the year. I was wondering if there was any way to quantity what costsavings that might drive in 2008?

Lee Wyatt

From the standpointof the changes in 2007 inthe fourth quarter we said we'll have roughly about a $30 million one-time gainfrom that program. So we'll see what that looks like in the fourth quarter. An ongoingrun rate, not material, it's basically included in our 6% to 8% operatingmargin growth goals.

Operator

Your next question comes from Kevin Yeates - Goldman Sachs.

Kevin Yeates - Goldman Sachs

I wanted to ask about your confidence in the first half nextyear and whether that's an indication that you either have channel gains orsome program gains with existing retailers?

Rich Noll

Overall when I talk about our outlook for the first half ofnext year remains unchanged, I want to be specific that we are not seeing any indicationof people's concern about the macro consumer environment that they do haveconcerns about for holiday spilling into next year and that's why it remainsunchanged. We do believe we've got the right brand investments going on, theright action plans in place to begin achieving our growth goals off of our 2007base.

Kevin Yeates - Goldman Sachs

You are saying then it's more just sort of the weather-relatedissues then the macro issues?

Rich Noll

I think that in the fourth quarter the concerned the peoplehave out there is a little broader than weather, and this is not just us. Ithink the overall retail environments are concerned that consumers are justfeeling a little bit more conservative with their spending, but nobody reallyknows how that's going to translate into actual sales at holidays, it reallyjust remains to be seen.

Kevin Yeates - Goldman Sachs

But it is reasonable to assume that if does happen that itcould spill over into the first half, is that right?

Rich Noll

What may happen, I can't really predict right now, itdoesn't look like it is spilling over, I think we just need to get throughChristmas and everybody will have a much better insight into what the futureholds.

Kevin Yeates - Goldman Sachs

I want to talk about the international number, is there anycurrency impact that's meaningful on your top line?

Lee Wyatt

Minimal, a little bit of positive but it's really minimal toour overall results.

Kevin Yeates - Goldman Sachs

In terms of cotton, you mentioned that price is sticky, atleast at retail. Is there any reason why you wouldn't want to hedge around thatto offset the volatility that could happen in your numbers?

Lee Wyatt

Our approach on cotton has been very consistent; our corestrategy isn't hedging cotton. Now we always buy it three to five months aheadat any given point, but right now we don't think that that's something we aregoing to change that policy, we are going to be consistent in what we do.

Kevin Yeates - Goldman Sachs

Lastly, if you could just comment on the decision to sort ofconsolidate the El Salvador plant, what you get out of having them in-house asopposed to as a third party supplier?

Rich Noll

Our facility in El Salvador we believe will provide a greatbase from which we can expand our operations in Central America.As a third party relationship our ability to do that would have been somewhatlimited. So it just fits in our overall strategy and it allows us to alsobetter control our entire supply chain. We believe that when it comes to owningversus sourcing that where we can gain a large-scale advantage in our basiccore categories and control that supply chain and ensure the integrity of thatsupply chain we are better off. Where we can't gain that scale advantage likefor niche products for example for Champion or C9 by Champion we will actuallysource.

Kevin Yeates - Goldman Sachs

Were they an exclusive supplier?

Lee Wyatt

The arrangementoriginally was not to be an exclusive supplier; as we got closer and closerworking together we became predominantly their sole customer and that's when itstarted to look like it made a lot of sense. The operation is doing great,outstanding workforce and management team that it would perform a great basefrom which we could further build and expand.

Operator

Your next questioncomes from Ken [Ajay ]- CIBC World Markets.

Rich Noll

Hi.

Ken Ajay - CIBC WorldMarkets

On your gross margins, I wonder if you can provide a bitmore color just by segment on that? Just circling back on that, to see if thereis any more color you could provide?

Rich Noll

We don't really givecolor on gross margin on a segment-by-segment basis or actually a category-by-categorybasis. I think as we move forward in the future we will be able to talk more aboutthat next year but this year, the first year out of the spin, it's just notsomething we talk on about.

Operator

Your final question comes from Jay Sal - Morgan Stanley.

Jay Sal - Morgan Stanley

I just wanted to ask another gross margin question. It lookslike we're about halfway through the $250 million of restructuring costs thatwe initially talked about around the spin, and since we're already halfwaythrough that, I want to know when we might see some impact to the gross marginline? So if you could talk about relative to how gross margin was down a littlebit this quarter, what we might see going forward? That would be great.

Rich Noll

On the restructuring, we've announced $120 million of the$250 million as you cited, so we are about halfway there and it's our goal tocontinue to accelerate that as quickly as possible. But a lot of thoseinvestments and those charges in the supply chain really take time as we buildfactories, as we move production offshore. So there is a little bit more of atime lag on those kind of benefits as to when they hit gross margin.

We are seeing some positives here; we are seeing somepurchasing consolidation, savings, things of that nature. So some of that isstarting to get in, but generally the supply chain piece really is somethingthat takes a little more time to come to fruition.

Operator

Ladies and gentlemen, we have reached our allotted time forquestions. I would now like to turn the call over to Brian Lantz for anyclosing remarks.

Brian Lantz

We would like to thank everyone for attending our quarterlycall today and appreciate your support and look forward to speaking with youafter the close of our next quarter. Thank you, everybody.

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