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Gildan Activewear Inc. (NYSE:GIL)

Q3 2007 Earnings Call

December 06, 2007, 5:00 PM ET

Executives

Sophie Argiriou - Director of Investor Communications

Laurence G. Sellyn - EVP, CFO and Administrative Officer

Glenn J. Chamandy - President and CEO

Analysts

Anthony Zicha - Scotia Capital

Sara O'Brien - RBC Capital Markets

Jessy Hayem - Desjardins Securities

David Glick - Buckingham Research

Susan Sansbury - Miller Tabak

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2007 Gildan Activewear Earnings Conference Call. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session toward the end of today’s conference. [Operator Instructions].

I would like to turn the call over to Ms. Sophie Argiriou, Director of Investor Communications. Please proceed, ma'am.

Sophie Argiriou - Director of Investor Communications

Thank you, Jadie. Good evening, everyone and thank you for joining us for our fourth quarter 2007 results call today. With me here are Glenn Chamandy, our President and Chief Executive Officer; and Laurence Sellyn, our Executive Vice-President and Chief Financial and Administrative Officer.

Before we begin, I would like to remind everyone that certain statements included in this conference call may constitute forward-looking statements within the meaning of the U.S Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve unknown and known risks, uncertainties, and other factors which could actual results to differ materially from future results expressed or implied by such forward-looking statements. We refer you to the company's filing with the U.S Securities and Exchange Commission and Canadian Securities Regulatory Authorities that may affect the company's future results.

I would now like to turn the call over to Laurence. Laurence?

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

Good evening. We will first review our results for the fourth quarter of fiscal 2007 and then discuss expectations for fiscal 2008. EPS for the September quarter before restructuring charges was $0.38, the same as our prior guidance and up 26.7% from the fourth quarter of last year.

Although we achieved our projected EPS growth, EBITDA was lower than previously projected for three reasons. Firstly, activewear selling prices in the quarter were 1% more unfavorable than projected, due to higher annual growth incentives paid to wholesale distributors. Secondly, we were enable to fully capitalize in market demand for high value Hooded, Fleece and Golf Shirts as a result of temporary inventory constrains due to transitioning our Canadian textiles to Rio Nance 2 and the Dominican Republic. And thirdly, there was a one time unfavorable non-cash impact of $0.01 from revaluing our Canadian deferred tax liability due to the significant increase in the Canadian dollar in the fourth quarter.

The negative impact of these variances was offset by income tax recoveries which have not been reflected in our prior guidance.

A 26.7% increase in Q4 EPS compared with last year was due to manufacturing efficiencies and 8.9% increase in activewear unit volumes. Plus the impact of the tax recoveries, partially offset by the higher activewear selling price discount slightly higher cotton costs, higher SG&A and higher depreciation, and the impact of consuming higher cost socks contractor inventories.

Activewear unit sales volumes were up by 8.9% in the fourth quarter and unit sales of socks increased by 15.7% compared with the fourth quarter of last year. Industry unit shipments for all products combined from U.S wholesale distributors to screen printers increased by 2.4% in the quarter compared to last year. And in addition, Gildan continue to achieve market share increases in all product categories, even with short terms supply shortage in certain styles as we transitioned our Canadian textiles off shore. In addition, unit shipments in the screen print market in Canada in the quarter increased by approximately 20%. Unit shipments in Europe and other international markets outside North America increased by 21.4% in the fourth quarter.

Gross margins for activewear products increased to 35.2%, compared with 32.5% in the fourth quarter last year, primarily due to further manufacturing efficiencies, which more than offset the impact of higher selling price discounts, slightly higher cotton costs, and a foreign exchange impact of reevaluating the Canadian deferred tax liability. Sock margins were lower than last year due to the continuing consumption of higher cost inventories from outside contractors which were used to supply new programs which were priced based on the cost structure for the new Rio Nance facility.

SG&A was 10.9% of sales, compared with 10.1% of sales in the fourth quarter of last year. The increase was primarily due to higher distribution costs and increased administration and IT costs to support our continuing growth strategy.

The income tax recoveries reflected the $3.1 million tax benefit for the full year of losses incurred in fiscal 2007 by Kentucky Derby, as well as tax benefits of $1.9 million relating to a prior Gildan taxation year which became statute-barred during fiscal 2007. The Kentucky Derby losses for the first three quarters in the fiscal year have not been tax-effected due to an accounting requirement that there must be a likelihood of sufficient future profits against which to apply the tax losses. This tax was satisfied in the fourth quarter, and accordingly we were able to tax effect the Kentucky Derby losses for the full fiscal year.

We have reiterated our EPS guidance for fiscal 2008, at a $1.85 per share, up 43.4% from fiscal 2007. Although the selling price increase in the screen print channel is currently being successfully implemented, we have not increased our earnings guidance at this stage, until we have better visibility and the outlook in business climate for the coming year. Part of the increase will be required to offset the impact of higher than projected improved costs for energy, dyes an chemicals which together are expected to negatively impact EPS by approximately $0.08 per share, based on assuming close to $100 per barrel of oil throughout fiscal 2008.

We believe that we’re well positioned to achieve or exceed our EPS growth projections for fiscal 2008. Firstly, the US screen print market is continuing strong into the first quarter in 2008. Overall, industry Tee shirt shipments in the month of October increased by 7.3%, although overall demand in Fleece was weak due to warmer weather. Our largest customer has essentially completed its warehouse consolidation, and industry supply demand continues to be in very good balance.

Inventories in the US distributor channel at the end of October were down by 14.7% compared to October 2006. Consequently, inventories in the channel continued to need to be replenished and market conditions are currently supporting successful implementation of the announced selling price increase.

In addition, Gildan continues to have strong market share momentum in all categories in this channel. In particular, our share in the Fleece category, in the screen print channel reached 49% in the month of October. And unit sales of Gildan branded Fleece from US distributors to screen printers increased by 15.2% in October compared with 16.2% reduction in overall industry shipments.

On the retail side, we are very confident that our underwear test program will result in confirmation of our next important new mass retail program in the coming weeks for a potential shipment to the retailer in the spring of 2008. In addition, we are targeting further large mass market programs in fiscal 2008 to utilize additional capacity, which will be available from Rio Nance 2 in the second half of fiscal 2008.

We are also projecting strong growth in Europe, Mexico and Japan. We see Mexico as a large market opportunity where we have now established our presence and where we will continue to pursue aggressive growth in fiscal 2008. In addition, we presented at a screen point show in Beijing in September, and we believe that we have potential opportunities in China, which are not reflected in our fiscal 20087 guidance.

We also expect the Prewett acquisition to further enhance our overall retail platform and to be accretive to EPS in fiscal 2008. We do not anticipate transitional problems with Prewett such as we experienced in the first year of the Kentucky Derby acquisition, for two reasons. Firstly, Prewett is a stable and profitable company, and we will not be faced with the same challenges to implement an immediate restructuring of the sales, distribution and manufacturing operations of the business as we were with Kentucky Derby. Secondly, during fiscal 2007, we’ve established our business model and organizational structure to manage our retail division and service our retail customers. In addition, Prewett’s product makes it well aligned with Gildan’s business model and manufacturing capabilities.

However, the potential EPS impact from the Prewett acquisition of the first year will be mitigated by an accounting rule that requires that a portion of the margin on opening inventories must be capitalized as part of the acquisition purchased price.

Next. Both Rio Nance 2 and Rio Nance 3 are ramping up very well and are surpassing their cost performance objectives. Virtually all of our basic men’s and boy’s retail socks programs prior to the acquisition of Prewett as well as certain large basic Prewett sock programs are now being manufactured at Rio Nance. For the first quarter fiscal 2008 we are projecting a 50% increase in EPS to $0.21 per share compared to $0.14 per share in the first quarter fiscal 2007, due to the impact of higher activewear selling prices in the screen print channel, growth in activewear unit sales and projected accretions from our two sock acquisitions, partially offset by increased selling, general and administration and depreciation expenses.

This increase in EPS includes the impact of consuming high cost opening inventories for socks and for activewear that was produced in Canada prior to the closure of the Canadian textile operations. The impact in the first quarter of consuming higher cost previously manufactured textile and sock inventories is expected to amount to approximately $12 million compared with the targeted cost structures at Rio Nance 2 and Rio Nance 3 which will translate into further significant cost reduction potential in fiscal 2009 compared to fiscal 2008. Our projected Q1 EPS also includes the impact of the reevaluation of Gildan opening inventories.

Projected EPS growth in subsequent fiscal quarters in our guidance is primarily driven by cost reductions, acquisition integration and unit sales growth with potential upsides from pricing and further retail programs as previously integrated, plus the potential of the Prewett acquisition. We have reduced our capital expenditure forecast for fiscal 2008 due to a delay in the planned cogeneration project for Honduras, which will also result in significant further manufacturing cost savings beyond fiscal 2008, and lower spending for Rio Nance 2 where we have transferred certain equipment from our Canadian and textile facilities.

Capital expenditures in fiscal 2008 include completion of the manufacturing ramp up of Rio Nance 2 and 3 as well as our planned new sock factory.

During fiscal 2008 we will also be evaluating alternative sites for our next capacity expansion in activewear and underwear. We expect all of our existing textile capacity to be fully utilized in fiscal 2009 to support our growth in retail and our international expansion. So we will require new textile capacity to be built and in commercial operations by the end of fiscal 2009.

Due to the revised fiscal 2008 capital expending estimate combined with a projected $30 million reduction in inventory in fiscal 2008 as we consume the high level of opening inventories required to support our transition to offshore sock manufacturing, we now project to generate approximately $150 million of free cash flow in fiscal 2008 before the cost of the Prewett acquisition compared with our prior free cash flow forecast guidance of approximately $100 million.

In summary, we are comfortable at this time that we are well positioned to achieve or exceed our EPS guidance of over 40% of fiscal 2008, and that all the key elements are in place for us to achieve our objective a minimum 20% EPS growth beyond 2008.

So that completes our formal comments, and we will turn the call back to the operator to invite questions.

Question and Answer

Operator

[Operator Instructions].

Your first question will be from the line of Anthony Zicha of Scotia Capital.

Anthony Zicha - Scotia Capital

Hi, good afternoon, gentlemen. Laurence, could you give us an idea in terms of the retail sales, going forward, on the channel, and what do you expect them to be in terms of proportional?

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

We already said that we had approximately 1.5 million dozens of retail sales in our budget for 2008, and that over a three year period, not including socks, we were looking at 15 million dozens of retail sales.

Anthony Zicha - Scotia Capital

Okay. And if we look at in the Europe, what was the primary contributor to the improvement, and 20.9% increase in shipments. Was it new customers or was it increased market share? Was there anything unusual?

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

It’s a combination of allocating more inventory to the market in Europe, introducing new products to the European market, and one of our competitors in Europe, which is a major competitor repositioning itself in the market.

Glenn J. Chamandy - President and Chief Executive Officer

We expect also to have pretty big increases going forward into 2008 because of the fact of we have extensive product expansion in our line going forward into next year as well.

Anthony Zicha - Scotia Capital

Okay. And the last question, with reference to basic materials you mentioned that the energy cost and the inflation is going up. Are you able to increase the prices, like are they expecting the price increases?

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

While we are seeing our price increase that we had announced in the screen print channel being successfully implemented. That would be related not just to inflationary cost pressures, but also to the very favorable supply demand balance in the industry.

Anthony Zicha - Scotia Capital

And sorry, one last one, with reference to retail initiative, your strategy, have the competitors reacted accordingly of the reacted to your entrance?

Glenn J. Chamandy - President and Chief Executive Officer

I mean, we’re not here to talk about our competitors at this point of time, to be honest with you. I think that we were focused on ourselves and we believe in our strategy. And so far, it has been very successful and we are very encouraged about our opportunities, going forward into retail. And we are continuing to chip away at different types of programs, and this new program we talked about potentially in the underwear will be a significant opportunity for the company’s lever as we go forward. And also with the acquisition of Prewett, it is also giving us a much bigger platform in which to expand our whole retail strategy with an expansion of their sales force which we combine their sales force and our sales force together. So, we are very optimistic about our whole retail strategy.

And maybe just because I don’t get a whole lot of questions on retail, we can just make the point that in the wholesale market it took us almost six years to achieve sales of about $300 million. And in the last 50 months, we have repositioned ourselves in retail, so very close to that volume on a going forward basis. We are now the largest socks supplier to the mass market in the United States. And our objective is not just… is to leverage that into the other product categories such as underwear, sweatshirts and Golf shirts that these retailers are purchasing. So, we are positioned exactly where we need to be in terms of developing, I think, a retail strategy to allow the company to achieve significant sales growth over the years to come.

Anthony Zicha - Scotia Capital

Okay. Excellent, Glenn, congratulations. Thank you.

Glenn J. Chamandy - President and Chief Executive Officer

Thank you.

Operator

Your next question will be from the line of Sara O'Brien from RBC Capital Markets.

Sara O'Brien - RBC Capital Markets

Hi guys, just to talk a little bit more about the retail program. Soft margins based on sourcing, is that sort of an issue that’s behind you now, are you now fully producing everything you want to in Rio Nance that can be produced there?

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

We say in the… yes everything we want to… we say in the release that virtually all of the men’s and boy’s products to support our major retail programs plus certain Prewett high volume basic programs are being manufactured at Rio Nance. We are still producing some more specialty products that are remaining at Kentucky Derby facility in Virginia.

Sara O'Brien - RBC Capital Markets

Okay. And I guess I was a little surprised just in terms of rollout of the Rio Nance facilities, the second one for socks. Are you waiting for the tariff ruling by the Department of Commerce before rolling that out or are you going to produce in Honduras no matter what comes out in terms of tariff?

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

Right now we are paving the way to build this facility and our plans are to start construction in January.

Sara O'Brien - RBC Capital Markets

Okay. And even if that tariff does go through?

Glenn J. Chamandy - President and Chief Executive Officer

No, we are planning on the basis that the state tariffs won’t be implemented.

Sara O'Brien - RBC Capital Markets

Okay. And just wondered about, you talked, Laurence about EBITDA being below expectation and one of the reasons being your supply of hoodies and polo shirts. Is that all behind you now or could we see some of that, the Canadian production transition still affecting margins going into the next quarter?

Glenn J. Chamandy - President and Chief Executive Officer

That is all behind us right now and Rio Nance too is producing all of our Fleece products and we’ve relocated all of our golf shirts offshore and everything is running at a 100% and that is all behind us.

Sara O'Brien - RBC Capital Markets

Okay. And there is sort of pent up demand there, in terms of what I understand from on of your main distributors that there is some supply issues with your competitors as well. Would you say that demand for Fleece then is still high?

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

Our demand for Fleece is still high. And despite the fact that we have shortages, we still have record market share, just to give an idea, because we really got a lot of momentum behind us right now in Fleece, a we are capitalizing it as quick as we can. We’ve now caught up on most of our shipments in the first quarter, and that is why we see our market share continuing to grow in the months of October and November and December.

Glenn J. Chamandy - President and Chief Executive Officer

And just to remind you of October numbers, Sara, where we had our market share of 49% in Fleece, so we were able to take advantage of the opportunity in the marketplace.

Sara O'Brien - RBC Capital Markets

Okay. Great. I will circle back. Thank you.

Glenn J. Chamandy - President and Chief Executive Officer

Okay.

Operator

Your next question will be from the line of Jessy Hayem of Desjardins Securities.

Jessy Hayem - Desjardins Securities

Thank you. Just wanted to circle back on some of the comments you made, Laurence, with regards to… and if I heard correctly that you were not able to fully capitalize on Fleece demand during the quarter. How many dozens did you sort of leave on the table in the quarter.

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

Well, it had about a $0.02 impact on our EPS.

Jessy Hayem - Desjardins Securities

Okay. And is it fair to assume that this may still be an issue into the first quarter as you are still in the process of ramping up Rio Nance 2?

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

I think the previous analyst, Jessy, just asked the same question and that’s behind us now. We had a 49% share of Fleece in October. So we were able to fully capitalize on the opportunities in the market in the month of October.

Jessy Hayem - Desjardins Securities

Okay. Great. I missed that. And just another question on your… you mentioned that you had to give higher annual growth incentives in the quarter. Can you just give us some color on, I guess, why there was a need to do so, during the quarter?

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

It was just a function of the timing of incentives to individual customers and when they met their growth targets.

Jessy Hayem - Desjardins Securities

Okay. Fair enough. And regards to the Prewett accretion, you mentioned something with regards to the portions of the margin to be capitalized on the purchase price. What do you expect accretion to be in ’08 and if you can give us some more color on those comments, please?

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

Well, to give you more color on the comments. There is an accounting rule where the concept is that you apply both manufacturing margin and a sales margin to the inventory that’s included in an acquisition and the manufacturing component of the margin is assumed to be realized by the seller before the sale, so that’s capitalized to the value of the inventory, and you only flow through P&L, the sales portion of the margin. So I didn’t invent that accounting rule. But that’s the way it works. So what that potentially means is about $0.02 or $0.03 of potential accretion in Prewett will be capitalized in the value of the opening inventory.

So, we haven’t changed our assumptions and our guidance apart from… I would say that notwithstanding the bump, I’ll put it to you this way, notwithstanding the bump, we are still comfortable with a couple of cents that we had included in our previous guidance for Prewett, even with sorting this margin that will be capitalized in the inventory and there’s potential further upside.

Jessy Hayem - Desjardins Securities

Sounds good. And just one last one on cotton costs, which is a recurring subject of course, given their rise, we understand of course that within the wholesale channel you are able to pass through this cotton costs, as it is industry practice. But can you elaborate on your ability to do so within the retail segment?

Glenn J. Chamandy - President and Chief Executive Officer

We feel comfortable with our margin analysis, and we have a lot of room in retail, much more room in retail in terms of our pricing strategy. So we are going to fit in any additional cotton prices into our pricing assumptions, as we go forward.

Jessie-Unidentified Analyst

Fair enough. Thank you very much.

Operator

Your next question is from the line of Jay Solo [ph] of Morgan Stanley.

Unidentified Analyst

Hi, good afternoon.

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

Good afternoon.

Unidentified Analyst

Can you hear me, okay?

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

I can hear you very well.

Unidentified Analyst

Okay, great. I just wanted to step back for a second and talk about the big picture. Obviously the macro-economic environment is pretty difficult right now. When you look out of this business, three or four years down the road, where do you see this business developing because there is a lot of opportunity out there whether it is international wholesale, whether it is retail, whether it is acquiring consolidating on the private label makers, going to new categories perhaps. What’s your vision right now?

Glenn J. Chamandy - President and Chief Executive Officer

Our vision is quite simple. We have a four pronged growth strategy and one is to continue taking and achieving greater market share in our wholesale market in all three categories. We believe that there is still upside potential in market shares in the wholesale market, as well as we are going to continue to expand on our International sales, both in wholesale and potentially as we go forward into retail. To give you an idea, I would say that in a couple of years from now, I would say within three years, Asia will be probably our second largest market even in the wholesale market, and this is where we believe the opportunity is in China which is highly reflected in our long-term vision of wholesale. As well as, we are going to continue our retail strategy.

Like I said before, we are currently right now the largest supplier of socks into the mass market, and this is only after 15 months of us penetrating the marketplace and we built not only the largest but also have a significant advantage from a cost perspective as well. As we keep taking advantage of our leveraging, the relationships and the infrastructure that we put in place in socks and also leveraging the infrastructure that we have from a cost perspective in underwear, activewear, in sweat shirts, tee shirts for example, we believe there is significant upside in our whole retail strategy. We haven’t even got going yet but the point is, is that over the last 15 months we have now built a base and infrastructure to be able to take advantage of, we believe the opportunities of retail. And fourthly, we are going to continue to look at tuck-in type acquisitions that can complement our growth strategy, either at potential new markets, to accelerate our growth within a marketplace or potentially to accelerate the penetration within one of the segments in which we are selling in the North American market.

So, right now, the company is well positioned. We have a very conservative balance sheet with lots of capacity available to us. So we believe that we are positioned right now for the years to come. And we are not one dimensional, that we have growth strategies that will take the company in four different levels and we are very excited about the opportunities.

Unidentified Analyst

Okay. Sounds great. Thanks so much.

Operator

Your next question will be from the line of David Glick of Buckingham Research.

David Glick - Buckingham Research

Yes, good afternoon. My question is for Laurence. Laurence, you do such a good job of kind of walking us through from the EPS stand point. How you get from ’07 to ’08 and I was wondering if you could update us from that perspective you talking about the organic if it is possible to quantify the EPS from organic growth from the Kentucky Derby accretion and for ’08 accretion which we touched on. The manufacturing cost saving, closing the North American facilities, all those steps that you have taken us through in the past, if you kind of update us and of to that?

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

Well, I wouldn’t change the components that are driving our growth from the way that we have presented it to you before. Other than we’ve included some of the price increase to offset the increase in energy and chemical costs. Apart from that I would say that the drivers of our EPS growth are what they have been before.

David Glick - Buckingham Research

Okay. Essentially your talking about… you talked before about $0.20 possible upside from price increases and you are saying that you are assuming about $0.08 of that to offset the increase in chemical and energy cost.

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

Yes.

David Glick - Buckingham Research

Okay. Great. And you didn’t comment on the Fleece test. I wonder if you had any added thoughts there, Glenn.

Glenn J. Chamandy - President and Chief Executive Officer

We are very confident that we are going to be selling Fleece in the market as well for the fall season.

David Glick - Buckingham Research

Okay. So that would be reflected in your Q4 potentially next year and you might have, and I guess two quarters of benefit potentially for, if you were to get the underwear program as well.

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

The underwear programs will be more of a spring shipping. So it will be in May, I would say. But the point also I can make is that, we still have lots of other opportunities of programs, we just realigned our whole sales force between the Prewett and Gildan sales force. And we are going to be very actively going out and soliciting new retail program. So, we are in a position now that we believe that, we are working hard at developing other programs as well.

David Glick - Buckingham Research

And then just to clarify none of those potential programs are reflected in your $1.85 guidance?

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

The underwear program is reflected in our guidance.

David Glick - Buckingham Research

Underwear program is. Okay, and the Fleece would not be.

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

No.

David Glick - Buckingham Research

Okay. Thank you very much. Good luck.

Operator

Your next question is from the line of Susan Sansbury of Miller Tabak.

Susan Sansbury - Miller Tabak

Yes. Thanks very much. Following along, or behind David’s line of questioning, can you discuss sales revenue… organic revenue growth and the contribution from socks and some of these other new programs? Or give us an update because, just to make sure on the same wavelength?

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

We are looking next year probably to around close to $1.3 billion of sales, of which approximately $300 million is socks.

Susan Sansbury - Miller Tabak

Okay. And I won’t press. Just another quick two… one other, I guess, item. The tax rate, ex the tax items, just on the surface would appear to be very low, Laurence. Can you address that from me in the fourth quarter?

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

In the fourth quarter, it was about 1%. And for the full year it was just under 4%.

Susan Sansbury - Miller Tabak

Okay. Any change for fiscal ’08.

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

Noi, the same.

Susan Sansbury - Miller Tabak

I’m sorry, I didn’t hear you?

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

The same.

Susan Sansbury - Miller Tabak

The same. And then finally…

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

Same as before.

Susan Sansbury - Miller Tabak

Same as before. Okay. Finally, I just wanted to confirm what you said with respect to resolution of the tariff issue, are you waiting for the tariff issue or you are going to go ahead and start construction in January regardless of the tariff issue.

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

As Glenn said we have everything in place to start building the plant and we are thinking in terms of hopefully, there will be a favorable outcome to the tariff to ship.

Susan Sansbury - Miller Tabak

And if there isn’t? Is that one is way to construction or you are just going to resolve the tariff?

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

It is not going to related (ph) construction because we are still going to go forward about the building that we are going forward with, but we also have the contingently plan to reduce cost and mitigate the traditional duties as we go forward.

Susan Sansbury - Miller Tabak

Okay. Great. Thanks Laurence so much.

Opeartor

Your next question is from the line of Doug Cooper of Paradigm Capital.

Doug Cooper - Paradigm Capital

Hi Laurence so just to confirm that 185 guidance is based on 5% tax rate or 4% tax rate?

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

4%.

Doug Cooper - Paradigm Capital

4%. And the do you touch on I missed the beginning of the conference call, I apologize, but is there do you mentioned what unit volume was in the quarter?

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

No. I didn’t. We necessarily (inaudible) whether we just getting that happen.

Unidentified Speaker

Overall, volume navigate, our overall volume was not including sock was about …was just under 11 million dozen.

Unidentified Speaker

11 million dozen, not a (inaudible) socks.

Doug Cooper - Paradigm Capital

Okay. Great. Thank you.

Opeartor

Your next question is from the line of Margaret Whitfield of Sterne Agee.

Margaret Whitfield - Sterne Agee

Good afternoon everyone. I wondered if you could give us some thoughts modeling the New Year by quarter. The first quarter looks to be up according to your guidance more then the yearly guidance although you indicated that would be upset anything to factoring as we model out the quarters SG&A, depreciation, growth margin trends or any unusual things that might occur during the quarters?

Unidentified Speaker

I mean obviously, there will more and more impact of cost reduction as we consumer opening inventories and ramp up the new facilities that really the only thing other then that kind of normal seasonality of the quarters and cotton cost will be higher at the end of the year at the beginning of the year.

Margaret Whitfield - Sterne Agee

And the SG&A increasing Q4, do you expect continued pressure in the early part of this year.

Unidentified Speaker

Well I’m not sure that pressure will continue to require increase in SG&A to support our growth strategy and the increase in the…

Company.

Unidentified Analyst

Okay. Any estimates on depreciation and amortization.

Lawrence-Unidentified Company Representative

We are not looking at our SG&A increasing as a percentage of sales.

Unidentified Analyst

Okay. I take it gross margins should be favorable especially in the second half?

Lawrence-Unidentified Company Representative

If we are going to generate significant cost reductions and increased prices, obviously that augurs very well for margins.

Unidentified Analyst

And Kentucky Derby, what would be the accretion you might see in the first quarter in the year?

Lawrence-Unidentified Company Representative

In the first quarter, I mean I will take the two acquisitions together but in our guidance we are looking after absorbing the impact of the Pruitt venture evaluation which could be $0.03. we are looking at $0.02, sort of accretion built into our guidance.

Unidentified Analyst

From both socks companies in Q1?

Lawrence-Unidentified Company Representative

We are taking account of the effect…

Unidentified Analyst

Right, of the $0.03? And for the year?

Lawrence-Unidentified Company Representative

And for the year there is no change in the assumptions that we have used before.

Unidentified Analyst

I had $0.20 from…

Lawrence-Unidentified Company Representative

We haven’t provided any updates on that.

Unidentified Analyst

What was it if you could just recast it?

Lawrence-Unidentified Company Representative

$0.20.

Unidentified Analyst

$0.20? Okay. And China you talked earlier about a taskforce looking into manufacturing there beased on your comments that this could be a second best market for you in a few years. Hence what are your thoughts on opening up some production facilities there?

Unidentified Company Representative

We are evaluating as Laurence said before, we need to bring on additional production capacity by the end of 2009 to support our growth strategy so we are going to evaluate the next location where that capacity will be located. We haven’t decided at this point in time so that’s one point and as far as from the sales per sector. We are beginning to sell product into China right now, which we mentioned last year and we basically don’t really have any of that factored into our projections for this year so that will be all upside in terms of whatever we do so for the market but we are very optimistic of the future.

Unidentified Analyst

Okay. Thank you.

Operator

Your next question will be from the line of Richard Piticco of GIET World Markets.

Richard Piticco - CIBC World Markets

Hey guys. This is Richard Piticco from CIBC World Markets but just a quick follow up on guidance. I tend to be a bit confused. First of all just want to clarify on the topline assumption. Your previous conference call, you talked about the 185 including momentum from retail accounts formally but not including the mass so, Gwen you talked about underwear being included in your guidance is that still the case from the regional or you are also giving some sort of attribution from the mass accounts?

Unidentified Company Representative

I don’t believe Richard that we said before that is was only… that the growth year-over-year was only from regional accounts. We had also assumed

Giving some sort of contribution from the mass account.

Unidentified Company Speaker

I don’t believe what you said before that it was only that the growth year-over-year was only regional that also was some penetration of mass.

Unidentified Analyst

Okay. And secondly the with regards to the guidance with the cost saving initiatives that are going to be pushed out regarding CapEx into next year. I find you included in your quarterly guidance so considering your interviewing is something else going to offset that floor utilization?

Unidentified Company Speaker

Well, the method of that was really going to be NOA by the time the project was completely constructed.

Unidentified Analyst

Okay. And just couple about technical question [inaudible] on the EBITDA shortfall this quarter relations that presumably your required guidance have back again that we have vacation for North America to offshore so I get why the demand might been higher you could capitalize why do you cause the mix on your own expectation in the quarter.

Unidentified Company Speaker

Because the unit volume we achieved our overall unit volumes but the mix was different and we were not able to get offside of volume in terms of mix to turn out to be uncapable.

If we would achieve the demand for the we would actually seize our unit volumes.

Unidentified Analyst

Right. But EBITDA units I know there one was the pokers like EBITDA was short right what to your expectation? Were you expecting to have a higher allocation of squeeze in the quarter then realized.

Unidentified Company Speaker

Yes because we were not able to fully capitalize on to the demand in the quarter…

Unidentified Analyst

Because of the set longer

Unidentified Company Speaker

More demand then the shift. We didn’t forecast Richard that we wouldn’t be able to meet the demand it was some personal issue as we close the Canadian textile facilities and we got cut on offshore. And overall in light of the transition we made a huge constant report because the synergies for 2008 are quite elegant. So this is just a small part of really the bigger picture and opportunity as closer facilities we allocate in that production. Secondly the facility that is now running is running at equal cost, we do not see one ready at this point of time so we are optimism of transition.

Unidentified Analyst

Okay. Perfect then final a technical question I think you talked about lesgismitated [ph] but the impact with Q1 with the higher cost inventory that going to approve your Q1 results I mean its both the Canada issue as well as the stock issue was that the [inaudible] what’s the total impact of Q1 of the higher cost inventories.

Unidentified Company Speaker

$12 million relative to was the cost would be producing ……..

Total impact of Q1 of the higher cost of inventory.

Unidentified Company Representative

$12 million relative to what the costs would be if producing these products offshore.

Unidentified Company Representative

And that includes both the Canada as well as the [inaudible]

Unidentified Analyst

Okay. Perfect. Thanks a lot Guys.

Operator

Your next question will be from the line of Claude Proulx of BMO Capital.

Claude Proulx - BMO Capital Markets

Thank you. Good afternoon. One quick one. You mentioned that the cost of eight pennies, you're assuming a $100 per barrel oil the volatility I assume, I mean the price is well below that at this point we're below $90. Our material would be a $10 difference?

Unidentified Company Representative

It would mean that in a range $0.02 or $0.03.

Claude Proulx - BMO Capital Markets

Okay. Thank you.

Operator

Your next question will come from the line of Jim [inaudible]

Unidentified Analyst

Good afternoon. Just on the incentive compensation for distributors, it sounds like, is that a timing issue that just happened to hit in the fourth quarter this year?

Unidentified Company Representative

Well every distributor achieves their growth target at a different time and its really a question of more customer mix and when certain distributors achieve their targets.

Unidentified Analyst

So were you expecting them to achieve their targets in the first quarter of ’08 then. So is it a shift in gross margin dollars from first quarter to fourth quarter ?

Unidentified Company Representative

No I mean, I don’t want to get into the structure of our incentive in any great detail for competitive reasons. It just related to maybe a distributor not achieving targets or we haven’t anticipated by [inaudible].

Unidentified Analyst

Okay. Thank you.

Operator

Your next question is a follow up from the line of Sara O’Brien of RBC Capital Markets.

Sara O’Brien - RBC Capital Markets

Hi Guys. We've heard from some competitors that the retail environment even for basic Activewear, socks underwear bit a little snuggish. What are you seeing in those channels right now and do you expect that could have a negative impact going into the next year?

Unidentified Company Representative

On our products we're very optimistic, I mean most of our programs are doing quite well so we really haven’t felt that effect right now [inaudible] unplanned based on our forecast.

Sara O’Brien - RBC Capital Markets

Okay. And I wondered Glen If you could just expand on your brand versus Private Label differential in the retail channel. What your real strategy is on that front now?

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

Well our strategy hasn’t changed we're continuing to drive our [inaudible] down in our branch strategy which is been very successful on the placements that we do have right now and we are continuing with the

That more product line was trying to ship more underwear this retailers the one that bought this are buying stock and so forth so we are working on driving on this retailers that are [inaudible] rapidly as coline as possible.

Unidentified Analyst

You have swiss underwear and socks with Gilban printed on them.

Unidentified Company Speaker

Sometime yes.

Unidentified Analyst

Okay.

Unidentified Company Speaker

And you know continue to drive that strategy and just mind well people will borrow product sales if its strong and they are very optimistic [inaudible]. We are just going one at a time and time to revert some of the existing also customers that both the [inaudible].

Unidentified Analyst

Okay. I mean if you look at the split going forward you see yourselves at 75 brand or 25 branded or is there some kind of a spilt that you look to achieve at this point?

Unidentified Company Speaker

Well. I want to say right now because certain retailers do the volumes much more significantly. So I mean we are looking at more from a distribution point of view and retail allocation. So we hopefully have a lot more retailer selling our brand in the future but the volumes might differ depending on the size of the customers.

Unidentified Analyst

Okay. And margin wide is there difference at this point or you expect a difference on a margin?

Unidentified Company Speaker

We expect retail and general to be the same so so.

Unidentified Analyst

Okay. And lets make by F ’09 is that a current assumption. So I close it here.

Unidentified Company Speaker

Yes.

Unidentified Analyst

Thank you.

Operator

Your next question will come from the line of Dave Cooper Wachovia Capital Market.

Unidentified Analyst

Can we… I am sorry if I missed all that. Can we concentrate on the top line a little bit on the second page we have a GILDON unit growth small product to 16.1% and that’s in a wholesale market. But then the first page has a much lower number how do we justify this?

Unidentified Company Speaker

I think if you are referring to the table which shows sales out of the channels from distributors to script printers is the first number and second number still into the channel, which mean inventories have come down.

Unidentified Analyst

Yes. I understand that. did you find in you opinion is the topline in the fourth quarter did you find it weak?

Unidentified Company Speaker

Well, we started look at the fifth when you look at the rationalization at the inventory in the marketplace we think we are right we need to be right now we are seeing good demand in the first quarter good supply demand bounce and that were very optimistic…

Go forward in 2008.

Unidentified Analyst

Okay, thanks.

Operator

Your next question is a follow up from the line of Susan San of Miller Tam

Susan Sansbury - Miller Tabak

Hi. One quickie question for Laurence and then for Gwen if I may. The goodwill if you will, the… write-up of inventory, the current market value and the goodwill accounting is going to amount to how much in dollars? You said $0.02 or $0.03 but do you have a number in dollars?

Unidentified Company Representative

Sue, $2 million to $3 million, goodwill.

Susan Sansbury - Miller Tabak

Okay and that will be worked in the first quarter?

Unidentified Company Representative

Well that will be a departure of the accounting for Pruitt at the time of the acquisition at the beginning of the first quarter and we would expect that opening eventually to essentially flow through during the first quarter, yes till we get low, the opportunity cost would be in the first quarter.

Susan Sansbury - Miller Tabak

Okay and then Glen, qualitatively or quantitatively getting back to this… the topline assumptions for this year. Do you see any… when you are talking on the wholesale side when you are talking rates to distributors, are they really back to you any softness in any of their core markets like advertising and promotion, here in the United States and the second part of the question is have you qualitatively in your mind adjusted for any weakness in the United States and ergo [ph] reallocated units to Europe and other international markets.

Glenn-Unidentified Company Representative

Well, first of all I think that the momentum is still quite strong in the States as of now. Tee shirt sales were up 7% in the month of October and that’s after implementing a price increase so that’s really pretty good. Fleece was a little bit weaker but that was because of the weather that we believe that fleece has been strong all year and will continue to be strong and to the contrary when is starts getting cold as it is now and snow starts to fall we believe this will pick up significantly but so far we haven’t seen any indications of any weakness in the marketplace. And I think overall, our distributors are pretty optimistic and I think more importantly is that the supply/demand balance in the industry is very favorable and one of the things that I think is important to understand is that with the costs… with the inflationary costs that we are seeing in the industry right now with the raw materials going out and the big impact of

Raw materials, I think people are in general are going to be facing are going to be acting in January when the new crop comes out and higher prices start hitting peoples’ P&L. What’s going to happen, people are going to need to manage their inventories as they go forward into the next year because if you know cotton is continuing to go up and there is price pressure because of higher oil, people don’t want to be in the position that they are going to be producing excess inventories in the light that there is a switch in the cotton prices, but there is a downturn for arguments sake and it does come back down you don’t want to have high class inventory.

Susan Sansbury - Miller Tabak

Right.

Glenn- Unidentified Company Representative

Typically when cost pressures are going up people are managing their inventories a little bit closely so therefore we believe that the supply and demand balance will stay pretty good the whole year based on that which will allow obviously for potential price increases and a good spur in demand in the market.

Susan Sansbury - Miller Tabak

Okay. Have a wonderful holiday season. Thanks ever so much.

Glenn-Unidentified Company Representative

Thank you.

Operator

Your next question would be from the line of Monica Logani from Wall Street Access.

Monica Logani - Wall Street Access

I think you may have just answered my question. My question was with the likelihood of non-cotton based price increase would be now that you just said that, that’s possible?

Glenn-Unidentified Company Representative

Well I would say that… I don’t think… I think the price increase that we have obtained so far, I think likelihood of sticking is as I think is possible based on this price measures.

Unidentified Analyst

No.

Unidentified Company Speaker

All its depending on supply and demand bviously.

Unidentified Analyst

The other question I had was just on looking at your gross margins you said that gross margin was less then what it was in the fourth quarter a year ago which I think was pulling the mid-teen stand. So the first question is how much worse was it and secondly interest rate and share count I think everything is behind as we enter ’08. We tent we expect stock gross margin to get you.

Unidentified Company Speaker

Well there is a reason to the lower margins was because of consuming high cost contractual inventories as we transition to leaving aside proving as we transition to our Rio Nance cost structure we are looking at gross margin excess of 30% comparable with lower making funds.

Unidentified Company Speaker

So that I mean as I said earlier we are going to be consuming contractual inventories. We are not so producing with contractors but we so we going to be inventories for the first quarter.

Unidentified Analyst

Okay. So in the second quarter. Correct.

Unidentified Company Speaker

Those type of levels and by ’09 we are running at million [inaudible].

Unidentified Analyst

Okay. And….

And we build up to those type of levels and then by ‘09 will be running at really at that type of rate once we're fully wrapped up in [inaudible]

Unidentified Analyst

Okay. So that’s by ‘09. Okay. And just in terms of your SG&A I asked somebody there to kind of what's in your guidance for ’08 and you said there is no change. Just want to be clear. Does that mean kind of a 10.5% or an 11% type of number. As a percentage of sales for SG&A ?

Unidentified Company Representative

Well for this year including socks we're looking, below 11%

Unidentified Analyst

Below 11%. Okay. and just finally usually you give a breakdown of your gross margin in terms of contribution. Would you mind doing that?

Unidentified Company Representative

Well leaving aside the socks we went from 32.5% to just over 35% and manufacturing efficiencies contributed 5.5% to gross margin [inaudible] was negative 1.5% cotton was about 0.5% and the impact of the foreign exchange on the revaluing the balance sheet liabilities was reflected in the margin and reduced margins by 1%.

Unidentified Analyst

Okay. Great. Thanks.

Unidentified Company Representative

Yep.

Operator

Your next question is a follow up from the line of Richard Piticco, of CIBC World Markets.

Richard Piticco - CIBC World Markets

Hey guys just a quick follow up on the capacity. I think you said that you need a new facility in place by the end of ’09. Just wondering with your expectations of lead-time when we're going to hear an update in terms of geography size etcetera, etcerera?

Unidentified Company Representative

Well look we don’t want to jump the gun right now. But we're in the planning stages so obviously we need to work pretty quickly if we want to get something running by the end of ’09 to service and support our sales are going through ‘010 and that’s really real. We have enough capacity in place now but to achieve our sales growth for the year ’09 but we need to by the end of year ’09 for ‘010 have something in place for the future growth. So we still have time but it’s coming in the near future.

Richard Piticco - CIBC World Markets

Great Thanks.

Operator

And there are no more questions. I will turn the call back over to Ms. Sophie Argiriou for closing remarks.

Sophie Argiriou - Director of Investor Communications

Thank you once again we appreciate your interest and thank you for joining us this evening. We look forward to talking to you again at our next conference call. Good night.

Operator

Thank you for your participation in today’s conference. This concludes our presentation and you may now disconnect. Have a great day.

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Source: Gildan Activewear Inc. Q3 2007 Earnings Call Transcript
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