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Edited Transcript of GIL.TO earnings conference call or presentation 3-Aug-17 12:30pm GMT

Thomson Reuters StreetEvents

Q2 2017 Gildan Activewear Inc Earnings Call

MONTREAL Aug 13, 2017 (Thomson StreetEvents) -- Edited Transcript of Gildan Activewear Inc earnings conference call or presentation Thursday, August 3, 2017 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Glenn J. Chamandy

Gildan Activewear Inc. - Founder, President, CEO & Non-Independent Director

* Rhodri J. Harries

Gildan Activewear Inc. - Executive VP and Chief Financial & Administrative Officer

* Sophie Argiriou

Gildan Activewear Inc. - VP of Investor Communications

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Conference Call Participants

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* Andrew Shuler Burns

D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst

* Brian Morrison

TD Securities Equity Research - Research Analyst

* Derek Dley

Canaccord Genuity Limited, Research Division - MD and Consumer Products Analyst

* Jim Duffy

Stifel, Nicolaus & Company, Incorporated, Research Division - MD

* Kate McShane

Citigroup Inc, Research Division - MD, Head of the U.S. Discretionary and U.S. Apparel and Retail Analyst

* Keith Howlett

Desjardins Securities Inc., Research Division - VP, Consumer Products & Merchandising Analyst and Retail Analyst

* Kenric Saen Tyghe

Raymond James Ltd., Research Division - SVP

* Mark Robert Petrie

CIBC World Markets Inc., Research Division - Research Analyst

* Martin Landry

GMP Securities L.P., Research Division - MD Equity Research & Equity Research Analyst

* Sabahat Khan

RBC Capital Markets, LLC, Research Division - Analyst

* Stephen MacLeod

BMO Capital Markets Equity Research - Analyst

* Tal Woolley

Eight Capital, Research Division - MD of Equity Research

* Vishal Shreedhar

National Bank Financial, Inc., Research Division - Analyst

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Presentation

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Operator [1]

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Welcome to the Q2 2017 Gildan Activewear Earnings Conference Call. My name is Nicole, and I'll be your operator for today's call. (Operator Instructions) Please note that this conference is being recorded. I would now like to turn the call over to Sophie Argiriou. You may begin.

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Sophie Argiriou, Gildan Activewear Inc. - VP of Investor Communications [2]

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Thank you, Nicole. Good morning to all, and thank you for joining us. Earlier this morning, we issued our second quarter press release announcing our earnings results. We also issued our interim shareholder report containing management's discussion and analysis and consolidated financial statements. These documents will be filed with the Canadian Securities and Regulatory Authorities and the U.S. Securities Commission and are available on our website at www.gildan.com.

On the call today, I'm joined by Glenn Chamandy, our President and Chief Executive Officer; and Rhodri Harries, Gildan's Executive Vice President and Chief Financial and Administrative Officer.

The conference call will begin with Rhod taking you through the results of the quarter and our business outlook for the year, after which a Q&A session will follow.

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

And with that, Rhod, I will turn the call over to you.

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Rhodri J. Harries, Gildan Activewear Inc. - Executive VP and Chief Financial & Administrative Officer [3]

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Thank you, Sophie. Good morning, everyone, and thank you for joining the call. We are pleased to report this morning another strong quarter of EPS growth and strong free cash flow. More importantly, we are well on track to meet our objectives for the year and expect to come in at the high end of our earnings guidance range and above our initial free cash flow target, both of which we communicated to you in February. We reported adjusted EPS of $0.49, up 20% over the last year on sales of $750 million in the quarter or 4% higher than the prior year, with strong operating margins, up 200 basis points.

We generated record free cash flow for the quarter of just over $162 million, which reflected our strong growth in earnings, our continuing focus on managing working capital and lower CapEx. To date, we have generated $200 million in free cash flow and expect to generate over $425 million for the full year.

Turning to our segmented results. Sales in Printwear for the quarter totaled $480 million, up approximately 2% over last year, reflecting the contribution from the acquisition of Alstyle and our most recent American Apparel acquisition, which together added incremental sales of approximately $29 million in the second quarter. In addition, we continue to benefit from strong momentum in growth areas in Printwear with further penetration in Fashion Basics, which continued to deliver double-digit growth, and from solid sales performance in international markets, particularly strong POS in Asia and Europe. We also benefited from higher net selling prices, reflecting price increases put in place earlier this year as we responded to the rise in raw material prices. These positive factors were offset in part by unfavorable foreign currency exchange and lower unit sales volumes of fleece which will come in later this year.

Printwear operating income of approximately $122 million in the quarter increased 10%, while operating margins increased by 190 basis points over the same period last year, driven by the net benefit from net selling prices in manufacturing and raw material cost, partly offset by unfavorable foreign exchange and SG&A expenses, which reflected the impact of acquisitions. In the Brand Apparel segment, sales in the quarter totaled approximately $235 million, up 8% from $218 million last year. The Peds acquisition contributed approximately $17 million, and sales of the Gildan Branded men's underwear were up, driven by POS growth in excess of 30%, significantly outpacing flattish overall market growth in this category.

During the quarter, we were particularly pleased as we gained better in-store placements for Gildan men's underwear, which we expect will drive further market share gains in the back half of the year. Based on the latest data points from MPD, the unit market share for Gildan Branded men's underwear for the month of May was 11.7%, up 288 basis points year-over-year. Stronger placements within stores and our growing market share penetration in this category is a reflection of our attractive value proposition, which is resonating with consumers and driving strong sell-through for our customers. While this is a very strong story for us, the growth in underwear was largely offset during the quarter by weakness in the soft sock category, in particular, lower global lifestyle and GIL branded sock sales impacted by continuous softness at department stores and national chains.

Operating income in branded apparel in the quarter was approximately $26 million, up 52% from a year-ago. Branded apparel operating margins increased by 320 basis points over last year, reaching 11% for the quarter. The operating margin improvements was driven by the favorable impact from manufacturing cost savings and raw material costs as well as SG&A leverage, partly offset by mix. With respect to Gildan's free cash flow performance, we generated $162 million of free cash flow in the quarter, more than $30 million higher than the prior year. This strong free cash flow generation reflected our earnings performance, working capital improvements, including tighter inventory management as well as lower CapEx.

On CapEx, during the second quarter we spent $18 million, primarily in the same areas where we've been spending since the start of the year, in textile capacity projects and in garment dying and distribution investments, with our spending coming in lower than anticipated as we continue to leverage capacity we picked up from the Alstyle acquisition. Turning to other investments. While we have wound down most of our spending in yarn with the completion of the ramp-up of the Mocksville facility at the end of last year, shortly after the quarter, in July, we completed the acquisition of Swift Yarn Spinning for $13 million. The company was already one of our U.S. yarn suppliers, producing combed and carded ring-spun yarn in 2 facilities in Columbus, Georgia. This acquisition, which is expected to provide strong returns, will help support growth of our Fashion Basics brands like Anvil, American Apparel and Comfort Colors, as requirements for high-end yarn continues to increase.

Moving to capital return. During the second quarter, we continued to progress on our planned share repurchase program for the year. We bought back another 2.5 million common shares under our NCIB program at a total cost of $68 million, bringing our year-to-date repurchases to 68 million common shares. We ended the quarter with net debt of $658 million or 1.1x adjusted EBITDA, at the low end of our target leverage range.

Now let me give you a quick update on our progress integrating the American Apparel acquisition. We are pleased with how this brand is ramping up in Printwear. And from a consumer perspective, we are making good progress on the e-commerce front. We have built up resources to support marketing and e-commerce efforts for the brand, and we're gearing up for our targeted relaunch of the American Apparel direct-to-consumer e-commerce site. This will occur in the next 2 weeks, and we will be offering a wide assortment products to end consumers. Overall, there is significant work going on related to this acquisition. And we continue to be excited about the North American and international opportunity for this brand over the next few years.

Turning to the outlook for the rest of the year. Given the company's strong performance in the first half of the year, we feel well positioned to achieve the high end of our guidance range of adjusted EPS of $1.60 to $1.70 on sales growth in the high single-digit range, as we initially projected at the start of the year. In the second half of the year, we will anniversary the Alstyle and Peds acquisitions. And consistent with our original guidance, we expect to see headwinds from higher raw material costs impacting our numbers. As with earnings, we expect adjusted EBITDA for the year to come in at the high end of our original guidance range of $555 million to $585 million. We've also adjusted our expectations for capital expenditures and now feel that we will come in around the $100 million level, down from $125 million which we initially estimated. Free cash flow is now expected to be in excess of $425 million, up from our previous guidance.

So in summary, we're pleased with the company's financial performance in the first half of 2017, which puts us well on track to meet the targets we set up at the beginning of the year. More importantly, we continue to feel good about our long-term growth prospects and the way our strategy is unfolding. Our competitive positioning is strong. Our large-scale, low-cost manufacturing remains the backbone of our business where we've been investing heavily over the last 2 decades, expanding capacity and enhancing our capabilities. This infrastructure is allowing us to offer a strong value proposition to our customers and to end users who benefit from high-value, quality products at attractive prices. With our strong brand portfolio, which we have built both organically and through acquisitions completed at attractive valuations, we're well positioned to continue to further penetrate the fast-growing fashion performance basic segments in Printwear and increase our position in international markets.

In Branded Apparel, the addressable opportunity is large. And while Gildan has become the leading men's sock brand in the U.S. and the third largest men underwear brand, there's still a long runway ahead. In this business, we remain focused on driving market share penetration, expanding our placements with a richer mix of products and expanding our operating margins each year. On a consolidated level, free cash flow generation is getting stronger, and our balance sheet remains one of the strongest in the industry. This will allow us to continue to pursue acquisitions that can add value and accelerate our organic strategy, while at the same time returning capital to shareholders through dividends and share buybacks. We remain committed to driving growth and strong returns on invested capital and delivering long-term value to our shareholders.

With that, I will open the call back over to Sophie.

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Sophie Argiriou, Gildan Activewear Inc. - VP of Investor Communications [4]

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Thank you, Rhod. That concludes our formal remarks. (Operator Instructions) I will now ask our operator to begin the question-and-answer session. Nicole?

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Operator [5]

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(Operator Instructions) And our first question comes from Kate McShane from Citi Research.

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Kate McShane, Citigroup Inc, Research Division - MD, Head of the U.S. Discretionary and U.S. Apparel and Retail Analyst [6]

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I was wondering if you could help us understand how the raw material environment is changing and what the ASP response will be both in the short term and the long term as a result?

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Glenn J. Chamandy, Gildan Activewear Inc. - Founder, President, CEO & Non-Independent Director [7]

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Well, I guess, the answer to your question that in our business, basically, we manage our raw material cost. And as we see raw material prices going up, we've taken appropriate price increases to support the future price of raw materials. So right now, we think we're in good balance between our price increases on our raw material as we go forward into the balance of this year.

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Kate McShane, Citigroup Inc, Research Division - MD, Head of the U.S. Discretionary and U.S. Apparel and Retail Analyst [8]

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Okay. And then my second question. I just wondered if you could comment at all about the acquisition environment, if you're seeing any kind of change in that dynamic or competitive dynamic for acquisitions?

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Glenn J. Chamandy, Gildan Activewear Inc. - Founder, President, CEO & Non-Independent Director [9]

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Well, we're continually looking for acquisitions. Obviously, it's been stated and we've acquired quite a few companies over the last couple of years. But right now, we're focusing, obviously, on integrating the American Apparel, which is our newest acquisition which we acquired in February. And that will be our focus for the balance of this year. But at the same time, looking in this environment with all the instability in the market, obviously, it creates opportunity for potentially other acquisitions, which hopefully we can continue momentum and acquire companies that can continue to add value. Our acquisition criteria is either a product, brands, distribution channels, I mean, we set forth to investors, and I think we've been pretty consistent with our discipline in looking at acquisitions.

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Operator [10]

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And our next question comes from Kenric Tyghe from Raymond James.

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Kenric Saen Tyghe, Raymond James Ltd., Research Division - SVP [11]

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Glenn, underwear's performance is clearly the highlight on the quarter. Could you just remind us how much that was shelf space versus new program driven? And perhaps also give a little bit of context with respect to which channels the gains were most pronounced in the quarter just given the overall market dynamics?

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Glenn J. Chamandy, Gildan Activewear Inc. - Founder, President, CEO & Non-Independent Director [12]

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Okay. Well, first of all, yes, I think we did very well in our underwear and pretty consistent somewhat with last quarter. As we set product last year in '16, that drove market share gains which we see today. And the good news is, is as we continue to get more shelf space, which we set in May, beginning of June, we'll see continued growth in share and POS as we go through the balance of the year and into '18. So I think we have good momentum with our placement. We're expanding our distribution. We're expanding our product within the category. And we've got good momentum.

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Kenric Saen Tyghe, Raymond James Ltd., Research Division - SVP [13]

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And then just a follow-up there. Just by way of the -- by channel there, sort of where your gains were most pronounced?

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Glenn J. Chamandy, Gildan Activewear Inc. - Founder, President, CEO & Non-Independent Director [14]

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It was mostly in mass, I would say, is primarily where our gains in underwear, which also represents the lion's share of all the volume in the market.

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Kenric Saen Tyghe, Raymond James Ltd., Research Division - SVP [15]

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Sure. And then just secondly, switching gears to fleece. How much of the fleece performance in quarter is timing related, and you'd expect to recoup that? And could you just speak to fleece performance more generally in the quarter?

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Glenn J. Chamandy, Gildan Activewear Inc. - Founder, President, CEO & Non-Independent Director [16]

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Well, fleece generally has performed well. Over the last 2 seasons though I mean fleece has been relatively tough. So what happened is we anticipated based on -- because what we do typically is we have programs to purchase fleece before the season really occurs. So typically, our customers will buy fleece in the June quarter and the second quarter and the third quarter. And really the height of the season is in Q4. So our customers -- we anticipated because we obviously forecast with our customers how we see fleece in the year, pre-year and then -- so basically, our prebooks this year were less than they were last year. And we'll see that come in as the actual season occurs in Q4. So the answer is it's strictly timing. Our POS as a percentage is actually up, doing quite well. So this is just really a timing issue into Q4.

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Operator [17]

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And our next question comes from Sabahat Khan from RBC Capital .

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Sabahat Khan, RBC Capital Markets, LLC, Research Division - Analyst [18]

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So you called out the strength at POS in the underwear category. And there's some weakness in the national and department stores. Can you maybe talk about is there a difference between performance at mass versus the national or the department store chains? Or is it more of a category thing that socks maybe aren't performing well?

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Glenn J. Chamandy, Gildan Activewear Inc. - Founder, President, CEO & Non-Independent Director [19]

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Well, socks for us didn't perform well, overall I would say. I mean it was slightly down. The lion's share -- or disappointment I would say in socks was department's specialty through our GLB and Gold Toe. We did have a little bit of negative sock comps, as we reset our floor. And when you go into one of our largest customers, you'll see that we've made a big improvement on our sock quality. We've done 2 things. We've taken our product out of the bags. We've improved the quality of our sock and leveraging our ring-spun capacity. So you look at our Gildan sock today is now primarily ring-spun, and it is going to be sold at little higher price point. So we had a little bit of timing I think setback in terms of -- as we reset the floor, but basically, we're very optimistic that we'll continue our momentum as we go forward. We had a slight -- the market was down in general in socks too at the same time. So we don't -- we had a slight decrease in market share, but we would expect that to improve as we go forward in the back half of the year.

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Sabahat Khan, RBC Capital Markets, LLC, Research Division - Analyst [20]

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And then on the underwear POS that you mentioned earlier, is that kind of in line with your expectations? And then I guess how is ship-in tracking relative to the ship or the sell-through?

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Glenn J. Chamandy, Gildan Activewear Inc. - Founder, President, CEO & Non-Independent Director [21]

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Well, definitely in line with our expectations. We're pretty excited with our performance. And like I said earlier, as we reset our floor and gain shelf space and placement in the month of May, we'll see continued market share gains and POS gains on a year-over-year basis as we get into the second half of the year and into '18.

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Operator [22]

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And our next question comes from Mark Petrie from CIBC.

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Mark Robert Petrie, CIBC World Markets Inc., Research Division - Research Analyst [23]

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Wanted to just follow up on your comments on American Apparel and hoping you can just update us on your current thinking as it relates to sort of relaunching that brand. You mentioned the direct-to-consumer e-commerce platform in the next 2 weeks. But maybe just how should we think about that brand as it relates to potentially in stores?

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Glenn J. Chamandy, Gildan Activewear Inc. - Founder, President, CEO & Non-Independent Director [24]

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Okay. Well, just to recap what's I think for American Apparel and I think maybe even to look at the strategy of the company as we go forward. I mean we've -- we purchased this asset at -- for $88 million. And really what we bought is a brand. We didn't buy any of the manufacturing capacity. We had virtually $10 million of inventory we purchased. But what we've done is we basically integrated and purchased this brand and from a standing start, basically, geared up our manufacturing. We create all the tech packs, the patterns, set forth and being able to really drive the brand. And I think it's an important point because one would say is this just an acquisition? Or is this an organic sale? Because at the end of the day, the way we approached American Apparel was almost like we licensed the product. We started from nothing, and we basically -- we just happened to buy the asset instead of licensing the asset. And then we had to really from ground zero start to build the production, which we've done successfully. My first focus was to really get back into an inventory position and continue to sell product to the distribution market, which we've done. It's still being rolled out as we speak because obviously it was a big task to gear up all the production and different styles.

And then secondly, what we've done is, we are launching a direct-to-consumer. And we have about 100 styles of products that are going to the distribution market which are typical screen printed type products, T-shirts and so forth. But in our direct-to-consumer products, you'll see that we'll have a wide range of consumer appealing products, like denim jeans and things that American Apparel had historically sold. So not only did we gear up the product to basically support our [strength in] channel, but we also at the same time we're gearing up to support retail-ready product and leveraging really the success of our supply chain to service the consumer as well. We also at the same time have built complete distribution capacity to service direct-to-consumer. Like I said in my last call, one of our focuses are to build our direct-to-consumer distribution capacity at the same time so we can service these consumers, which is now ready to go. So we -- we're planning to launch the site and the sales of the site in the couple of weeks. And our next step is really to evaluate the retail opportunity. We've already done a lot of work on it. We're looking at opportunities. I mean, what's important for us is to make sure the brand is relevant with consumers as well as our wholesale customers. And probably, you'll also see we're going to reenergize the brand. One of the -- part of the acquisitions is we looked at is the talent they had, and we really picked a very limited amount of talent, but we picked up the cream of the crop in the advertising and the marketing side of it, which are going help us, which are still in L.A. because we want to keep DNA of brand in L.A. And they're going to help us to drive the look and the feel but at the same time drive the consumer reenergization from the branding perspective. And you'll see we'll be putting some money together on the brand side to reenergize the brand with consumers.

So as we go forward, we're going to continue to focus on our distribution. We're going to focus on our direct-to-consumer. We're going to expand internationally. All of these things will happen in '18. So we're really excited about the opportunity. We think this could be quite big as we go forward. I mean, we don't want to say how big, but I think I would say that optimistically we're very positive in American Apparel. And one thing I'd like to say, I guess, from the company's perspective is that we're reshaping the way we allocate our capital. Historically, the company has built capacity and used price as a weapon to basically drive market share. Right now, we're in a position where we've basically built capacity. We have a lot of capacity coming on between Alstyle and Rio Nance VI. And now the only difference is, is we're being very tactical of how we fill that capacity up. So this is a good example of an acquisition that basically will allow us to use our capacity but also to allow us to increase margins basically relative to historical level. So this is going to be something I think that will continue to drive future earnings growth as we go. And you'll see that a little bit in our margin expansion as we go forward. We're going to continue to expand on margins as we look and leverage these acquisitions. And American Apparel, which is the one that I explained, but Alstyle was also another one where we just basically bought a manufacturing asset that would have cost us $150 million to build. And we picked up $76 million of working capital in inventory. And we did that for $110 million. We also picked up some revenue, but the revenue was only valued because we can add value by lowering the cost structure of that revenue basically and allowing us to increase the margins of that product and leverage the infrastructure that we picked up.

And we did the same thing with Peds, where we repurchased shelf space in Peds. But the reality is that if you look at our SG&A in branded on a year-over-year basis, we actually are reducing our SG&A basically. And we think there's going to be another reduction even in 2018 as we finalize the year-over-year integration of Peds. And we also have taken even some of that Peds business and converted it to Gildan brand where appropriate. So we're managing our capacity build and our capital allocation effectively. And even with Comfort Colors, to make the point, is Comfort Colors was a company that we actually sold all of the basic T-shirts to. When we bought Comfort Colors, all we did is -- we already had the business. We just basically took that business and built a garment-dying facility in Honduras and expanded the margins on the product that we were already producing to them. So all of these things really are relatively important because we're -- in buying asset, we're purchasing them at very low cost. They're generating very high returns, as you'll see margin expansion as we go forward. And we also are buying these assets at very little risk. So in and all, I would say that we're very diligent on making sure that we continue to focus on capital allocation, growing our top line and making sure that we're expanding the bottom line as we go forward into the future.

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Mark Robert Petrie, CIBC World Markets Inc., Research Division - Research Analyst [25]

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I guess, one follow-up. In terms of the American Apparel product, the manufacturing of it, how much of it is being manufactured in your own facilities? And how much of it is through third party? I assume select part of that direct-to-consumer business is manufactured third party?

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Glenn J. Chamandy, Gildan Activewear Inc. - Founder, President, CEO & Non-Independent Director [26]

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Yes. Some of the third party will be the direct-to-consumer. All of the -- of core Printwear business is being manufactured in our facilities.

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Mark Robert Petrie, CIBC World Markets Inc., Research Division - Research Analyst [27]

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Okay. Sorry, just on the Printwear business, could you just comment broadly about the health of the Printwear channel? And then I know the Fashion Basics category is growing, or you mentioned that it's been growing nicely? How about the Basics part of the business?

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Glenn J. Chamandy, Gildan Activewear Inc. - Founder, President, CEO & Non-Independent Director [28]

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Well, the Basics are flattish, I would say, this year. But the Fashion Basics are very strong. And one thing I think maybe to point out on the Fashion Basics side is that we're tackling the Fashion Basics with 4 brands basically right now. We got a Fashion Basics brand in Gildan, which is really the OPP price leader. We have Anvil, which has been growing at really, really, really strong. We've got Comfort Colors, which is the high end of our Fashion Basics. And we've got now American Apparel. But one thing I think as part of our capital allocation, again just going back to it, is that the Fashion Basics has really been supported by our major investments we put into ring-spun yarns. I mean, of the $400 million that we spent in our yarn allocation, 50% of that was really focused on building our ring-spun capacity and most recently with the purchase of Swift. And Swift, we're going to use really to take it to the next level. Because in the fashion segment, there is not just core yarn, but there's also viscose and rayon and all kinds of other things that we're going to be bringing to market basically that will continue to drive that segment. So we're continuing to invest where -- we are very tactical to grow sales. And we're also investing in our brand strategy to make sure that we fulfill the opportunity and demand of the market. We have a much lower share in fashion than we do, obviously, and the [Basics thing] that we're going to really have a good runway on developing sales in that segment.

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Operator [29]

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And our next question comes from Martin Landry from GMP Securities.

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Martin Landry, GMP Securities L.P., Research Division - MD Equity Research & Equity Research Analyst [30]

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You had a very good boost in your operating profit margin in the Branded apparel. You did talk about manufacturing savings, raw materials, but you don't specify price increases. And if I do recall in the last quarter you did mention that you took some price increases in Branded apparel. Just wondering how much of a contributor that was to your margin expansion?

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Rhodri J. Harries, Gildan Activewear Inc. - Executive VP and Chief Financial & Administrative Officer [31]

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Yes, Martin, if you look at -- the way our margins unfolded for the quarter and the way they are really unfolding for the full year in Branded. We saw a little bit of benefit from pricing increase in the second quarter. But what we've seen through the first half is the benefit of manufacturing cost savings, the benefit of raw materials pricing coming through but also SG&A leverage, right. I think that is very important because we are really starting to scale up, and we see the benefit on SG&A. So with a little bit of price and then as we go through the year, we've given guidance that we expect to see growth in operating margins in Branded on a full year basis. And we continue to expect to see that, as we effectively balance out probably gross margin for the year but obviously that SG&A leverage really coming through. So I think we're pleased with the progress on margins in Branded.

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Martin Landry, GMP Securities L.P., Research Division - MD Equity Research & Equity Research Analyst [32]

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Good. And maybe if you can talk a little bit about your pipeline of programs that you're bidding on for 2018, Glenn. Any color on pricing, volume, outlook and amount of programs you're looking at now would be helpful?

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Glenn J. Chamandy, Gildan Activewear Inc. - Founder, President, CEO & Non-Independent Director [33]

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Well, I would say that -- look, I can't really discuss our strategy, obviously, for 2018. But what I can say is that as we set the floor and the new products in the second half of '17, just like last year basically, we're going to see momentum in our sales pickup. And that will carry obviously to the first half of '18. And then any new additional shelf space to Gildan will come in the second half of '18 and continue our momentum. So that's a good way to look at it. But, look, we're working really diligently to make sure that we're expanding our brand and our strategy and focusing on making sure that we're relevant with our customers. So we're excited about our positioning, and we're excited about our share gains. And we're looking forward to 2018.

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Operator [34]

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And our next question comes from Vishal Shreedhar from National Bank.

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Vishal Shreedhar, National Bank Financial, Inc., Research Division - Analyst [35]

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I was hoping to get an update on the CapEx, a little bit lower, which is nice. In prior calls I believe management indicated that the $125 million range was a good proxy for future years. Just wondering if you can update us there?

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Glenn J. Chamandy, Gildan Activewear Inc. - Founder, President, CEO & Non-Independent Director [36]

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Well, look, the -- it's somewhat a little bit of a timing thing I think in terms of how the money is being spent. The main thrust of our capital is obviously Rio Nance VI, but we also spent some money this year in our ex-Anvil facility to expand that as well. So overall, we're leveraging Alstyle basically, which has been a big asset to us. We purchased that facility. The Alstyle facility is larger than any one of our Gildan's plants we have in Honduras. So we're going to continue to manage our capital allocation basically -- obviously. But the capacity that we have installed is definitely to support the $1 billion-plus sales that we have. So I mean we have all the capacity. We just happened to obtain it with a lesser, I think, cost structure than we anticipated partly. But also the difference this year was a little bit of timing. So we're still focusing on all the projects. And we're still bringing on the capacity as planned.

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Vishal Shreedhar, National Bank Financial, Inc., Research Division - Analyst [37]

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Okay. So it's not really a change in management's view on how to allocate the capital more efficiently?

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Glenn J. Chamandy, Gildan Activewear Inc. - Founder, President, CEO & Non-Independent Director [38]

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No. And when you look at -- look, for example, like the yarn acquisition, I mean, we basically -- we bought $13 million. I mean, if you just take that allocation, we might have had some projects also in yarn spinning that we needed too because just obviously we need to keep increasing our ring-spun commitment basically. So we purchased a better building. The cost of the purchase was also a lot less expensive than building. So again, just managing our capital structure basically and yielding the best return for our shareholders. I think you just look at that in light of also the capital as well.

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Vishal Shreedhar, National Bank Financial, Inc., Research Division - Analyst [39]

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Okay. The license accounts and lifestyle -- global lifestyle brands, Gildan used to talk a bit more about that, call it a couple of years ago. Wondering if that's still a focus for you guys to get those kind of programs? Haven't heard too much about it, so maybe -- lately. So maybe you can update us?

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Glenn J. Chamandy, Gildan Activewear Inc. - Founder, President, CEO & Non-Independent Director [40]

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Well, look, it's part of our business. It's grown nicely. Obviously, it's limited to really strategic partners. And the only thing with that business where we had a little bit shortfall in some of it this year, it's not necessary -- there's a disconnect a little bit from actual POS relatively because, obviously, we sell product to those customers that store the product that we sell to their customers. So partly -- this quarter we had probably an inventory balancing at their really that could affected sales. But overall, I think we're pretty excited, and we have good momentum in that category.

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Derek Dley, Canaccord Genuity Limited, Research Division - MD and Consumer Products Analyst [41]

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So you're going to continue -- should we expect Gildan continue to build licensed new brands?

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Glenn J. Chamandy, Gildan Activewear Inc. - Founder, President, CEO & Non-Independent Director [42]

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Yes. We're going to build with the existing customers that we have, I would say. We're not looking really to expand our customer base. It's -- less is more for us. And we have very few customers, I think, that could be strategic partners to us as we go forward.

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Vishal Shreedhar, National Bank Financial, Inc., Research Division - Analyst [43]

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Okay. And in the past you commented that FX was negative, call it a year, a bit ago. FX seems to have reversed. Just wondering what -- if there's any updates there?

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Rhodri J. Harries, Gildan Activewear Inc. - Executive VP and Chief Financial & Administrative Officer [44]

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No. I mean, if you look at the FX, I mean we had a little bit of headwind from FX in the quarter. Obviously, the -- some of our international currencies are strengthening. But as we go through the year, we'll probably see little bit of benefit from it. But it's still, when you look big picture, FX was quite a headwind to us last year. And I would say it's just a bit of a headwind to us this year as we move through the year.

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Vishal Shreedhar, National Bank Financial, Inc., Research Division - Analyst [45]

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Okay. And that'll turn to benefit as we go towards the end of the year and potentially next year?

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Glenn J. Chamandy, Gildan Activewear Inc. - Founder, President, CEO & Non-Independent Director [46]

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We'll see how it plays out, but yes.

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Vishal Shreedhar, National Bank Financial, Inc., Research Division - Analyst [47]

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And you don't have FX hedging in place, right?

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Rhodri J. Harries, Gildan Activewear Inc. - Executive VP and Chief Financial & Administrative Officer [48]

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No. I mean, look, we got -- we -- with our foreign currency, we do the things that you might naturally expect to do near term in order to manage our overall international business. But for the most part, we're managing that in the markets with pricing as we manage our overall business.

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Glenn J. Chamandy, Gildan Activewear Inc. - Founder, President, CEO & Non-Independent Director [49]

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It's all short term though.

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Operator [50]

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And our next question comes from Tal Woolley from Eight Capital.

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Tal Woolley, Eight Capital, Research Division - MD of Equity Research [51]

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Just wanted to ask about your organic growth outlook in the second half. A lot of the industry players seem to agree that they expect overall the industry should perform a lot better in the second half, stronger than it has in the first. I guess, can you talk about -- I think you guys are in that camp too as well. Could you just talk about what are some of the factors you see driving that sort of improved optimism for the second half?

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Glenn J. Chamandy, Gildan Activewear Inc. - Founder, President, CEO & Non-Independent Director [52]

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Well, you're going to get really the -- our organic growth in second half will be driven from fleece and Printwear, obviously, which is a big factor. And the gain in the underwear space and shipments in the second half. I mean, those will be the 2 main drivers, I would say, of our growth. We've also got a very cautious outlook on the market. I would say that we're not projecting robust sales. So if that happens, I mean that would be maybe potentially upside to our forecast in the second half. However, we've still got the same view that we had in the beginning of the year, where we have a lackluster type of environment in both divisions.

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Tal Woolley, Eight Capital, Research Division - MD of Equity Research [53]

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Okay. And then one other question I wanted to ask about too is just given your plans for building the American Apparel brand, there's sort of a unique competitor out there that's emerged, Los Angeles Apparel. Any concerns about the impact or -- that, that may have if that building sort of grows -- that business grows and emerges, what impact it might have on the American Apparel brand going forward?

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Glenn J. Chamandy, Gildan Activewear Inc. - Founder, President, CEO & Non-Independent Director [54]

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Well, look, I don't want to talk about our competitor. But good luck to him. But at the end of the day, I think that we're well positioned. We have a significant investment and capital able to support our brand. We're the low-cost manufacturer. We've invested $215 million now in yarn spinning to support this segment. We think we've obtained the best talent in the market from a marketing perspective to keep the brand alive and resonating with consumers. We have an effective sourcing and supply chain. So you know what, at the end of the day, we're very excited. We have a lot of demand for it. We already have a lot of commitment to expand the brand into 2018. We've put in all the infrastructure and the investments to go direct to the consumer. So look, I mean, at the end of the day, we will do very well with this brand. This will, hopefully, be one of the best acquisitions that the company has ever made in terms of returns on investment, so we're very excited about it.

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Operator [55]

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

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Stephen MacLeod, BMO Capital Markets Equity Research - Analyst [56]

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A follow-up on the branded business. Specifically, on underwear, obviously, some good market share gains in the quarter. And one of things that you cited was broader distribution of products. I'm wondering if you can talk a little bit about some of the new products that you've been offering into the market?

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Glenn J. Chamandy, Gildan Activewear Inc. - Founder, President, CEO & Non-Independent Director [57]

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Okay. What we've done is, look, we're expanding obviously our product in different channels, e-commerce channels as well as our mass channels, number one; secondly, we're expanding our product into different categories. Our newest, I think, product is the stretch underwear, which is more of a performance stretch. It's been very well received with consumers. And we're looking at ways to leverage that in the future as we go forward.

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Stephen MacLeod, BMO Capital Markets Equity Research - Analyst [58]

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Okay. That's great. And would the stretch product have a higher price point?

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Glenn J. Chamandy, Gildan Activewear Inc. - Founder, President, CEO & Non-Independent Director [59]

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Yes. And also -- we also have 2 -- actually, we have 2 different products. We have one that's in poly and also one that's in cotton, which are supported in different packaging and so forth.

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Stephen MacLeod, BMO Capital Markets Equity Research - Analyst [60]

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Okay. And those are all mass?

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Glenn J. Chamandy, Gildan Activewear Inc. - Founder, President, CEO & Non-Independent Director [61]

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Yes.

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Stephen MacLeod, BMO Capital Markets Equity Research - Analyst [62]

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And then just turning to socks. I mean, sounded like a bit of a challenging quarter in Q2, but you cited some confidence in the back half of the year. And I'm just curious what some of the drivers are? And what gives you confidence in improved performance? Like are you seeing better traffic? Or is it just an improvement based on shelf space or something like that?

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Glenn J. Chamandy, Gildan Activewear Inc. - Founder, President, CEO & Non-Independent Director [63]

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Well, look, the big area where we had a little bit of miss was in our GLB and our Gold Toe. Our GLB I think is just timing because of it's -- as -- because that's not POS driven, like I said in the earlier question. So that will come back. And the Gold Toe. We've seen already better sell-through in Gold Toe so far in the month of July. So we think that sort of we have a good plateau now in terms of where we're going because, obviously, we've lost -- we haven't lost market share. Our market share is slightly equal to what it was. But the overall consumer base that's -- or retail base that's buying that has stabilized now. So therefore, we think that those sales should stabilize. And in the mass, we reset our floor basically. So we had a disconnect with the new -- old product going out and new product coming in. But our new product basically is positioned, we think, really well. We're leveraging our ring-spun capabilities. We have a -- we're going to an open pack, much better quality sock, softer and a little bit higher price point. So all of those things combined, we think we're very comfortably positioned for the back half of the year.

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Operator [64]

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And our next question comes from Jim Duffy from Stifel.

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Jim Duffy, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [65]

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Most of my questions have been answered. Maybe one direction I'll go. With the second quarter, the contribution of the acquired businesses was lower than I had expected. That may very well have been analyst error. But can you talk about, particularly for American Apparel, how you expect the shape of the revenue contribution over the back half of the year?

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Rhodri J. Harries, Gildan Activewear Inc. - Executive VP and Chief Financial & Administrative Officer [66]

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Yes, I mean, if you look at the way that American Apparel is rolling through, effectively we had said for the full year we thought $50 million to $75 million is the effective -- would be the contribution for the full year. And then it has been building, right? It builds every quarter, so in the first quarter about $8 million contribution, the second quarter about a $10 million contribution. And then that will grow from there in the third quarter and fourth quarter, continuing to almost double each quarter. So it builds as we've been filling the pipeline, as we get our e-commerce business off the ground, I mean all of that will contribute to the $50 million to $75 million. And our run rate at the end of the year, obviously, we expect to be quite strong.

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Jim Duffy, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [67]

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Okay. And then Rhod, on the CapEx -- moderated guidance for CapEx, is that simply a timing issue? Or is there some reallocation of budgets. What are the thoughts there?

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Rhodri J. Harries, Gildan Activewear Inc. - Executive VP and Chief Financial & Administrative Officer [68]

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As we said in our remarks, right, as we've gone through the year, we've been really leveraging the Alstyle acquisition. We've done some things in a different way, as Glen mentioned, with respect to the acquisition of Swift, which comes not in the CapEx line. So really we're doing all the things that we said we were going to do in order to make sure that we have the capacity and the capabilities in place on a go-forward basis.

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Operator [69]

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And our next question comes from Keith Howlett from Desjardins Securities.

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Keith Howlett, Desjardins Securities Inc., Research Division - VP, Consumer Products & Merchandising Analyst and Retail Analyst [70]

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Yes, you spoke about the American Apparel online strategy. But I'm wondering if you could speak more broadly about your percentage of branded sales online and your strategy and efforts there on the online side?

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Glenn J. Chamandy, Gildan Activewear Inc. - Founder, President, CEO & Non-Independent Director [71]

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Well, what we've said is that our e-commerce business is roughly about 5% of our revenues of branded. And we're continuing to, obviously, drive that as well. We just launched a new Gold Toe website and Gildan website. And we're building that business both -- from internal supported. We're looking at pure play, obviously, our omnichannel customers and Gildan Direct. So we basically are continuing to drive as best as possible. But the one thing I think is important to do -- to maybe look at is that with the investments we're making with American Apparel are really probably going to lever future opportunities for us even on our own e-commerce because we're putting in a different level of commitment through American Apparel, through the distribution side of it as well as the marketing and everything else. So we're focusing on all different energies, but that's going to be really I think the catalyst to somewhat support the future e-commerce in the company. So we're making quite a significant investment this year in our SG&A to make sure that we continue the momentum and capture the opportunity.

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Keith Howlett, Desjardins Securities Inc., Research Division - VP, Consumer Products & Merchandising Analyst and Retail Analyst [72]

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And then just in respect of the textiles that are going into your products, what sort of is the proportion of cotton versus synthetic? And how quickly is the shift between -- over to man-made fabrics occurring?

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Glenn J. Chamandy, Gildan Activewear Inc. - Founder, President, CEO & Non-Independent Director [73]

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Well, it's probably 80-20 maybe is a good number to use. Polyester is not as relevant in the print market as it is in the retail because it's not as easy to screen print as a cotton T-shirt. And most of the products are -- 100% of all the products we sell through Printwear get screen printed. So it's definitely changing though. I mean people are finding techniques and ways to use digital printing, et cetera. And -- but it's still an 80-20 split.

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Operator [74]

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

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Andrew Shuler Burns, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [75]

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Wanted to ask a high-level question about your ring-spun yarn investments, as you continue to invest in this front. Now that you have significant capacity in place, how do you think consumers are responding to this point of differentiation for your product? Is there opportunity to further highlight that differentiation via marketing? And is there room to further optimize with the product mix and pricing structure of those product?

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Glenn J. Chamandy, Gildan Activewear Inc. - Founder, President, CEO & Non-Independent Director [76]

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Well, the answer is yes. I mean, look we -- 2 years ago, we never made any ring-spun at all, right? So today we're one of the largest producers of ring-spun in this hemisphere, right? So we've gone from 0 to being very large in this category. And Gildan is somewhat of a category leader. So we're changing the market dynamics by making these capital investments, and I think that's an important part. Because if you're not investing capital, you're not able to keep up with the change. So we're the only company that's investing heavily in manufacturing. And as we make these manufacturing investments, we're leveraging them to grow our top line but really to gain market share in all the categories in which we sell. So that's one great thing about our positioning is that our competitors aren't investing capital and haven't got the same cost position and capabilities that we do. So we think that we're well positioned. We still have more investments to make. I mean, the reason why we bought Swift is because we were at capacity. And in fact, we needed more capacity based on where our sales are going because the Fashion Basics, some of the products that we're bringing into the retail basically, are continuing to consume ring-spun yarn. So it's a great position to be in because we're -- everyone else will be on catch-up mode as we're continuing to drive share.

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Operator [77]

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Our next question comes from Brian Morrison from TD Securities.

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Brian Morrison, TD Securities Equity Research - Research Analyst [78]

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I just wanted to follow up on the Printwear top line. So it looks like you're down about 4% organically this quarter. And then if I x out acquisitions, the second half it actually looks a little bit positive. So I'm just trying to get a better handle on your organic weakness. Was this all fleece and FX? And then is it just those 2 that are going to turn in the second half to have organic growth?

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Glenn J. Chamandy, Gildan Activewear Inc. - Founder, President, CEO & Non-Independent Director [79]

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The answer to that is, yes.

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Brian Morrison, TD Securities Equity Research - Research Analyst [80]

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Okay. And no further strengthening in Fashion Basics? Or it's going to continue as it is?

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Glenn J. Chamandy, Gildan Activewear Inc. - Founder, President, CEO & Non-Independent Director [81]

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Well, the Fashion Basics, look, they're growing really strong off a smaller base. And we've got flattish type business in our Basics. So I think that's where we're positioned. But look, going back to what I said earlier. We've -- we're putting all of our energy really on driving all of these brands that we have now in Printwear, which is now American Apparel, Alstyle, Comfort Color. So we're continuing to leverage these brands, but also at the same time, you're going to see margin expansion too. So part of our strategy is to make sure that we're maximizing our top line, but we're also maximizing our bottom line. So we're very comfortable in our positioning as we go into the back half of this year but even more excited about how we move into '18.

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Brian Morrison, TD Securities Equity Research - Research Analyst [82]

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And that margin expansion is simply a higher percentage of Fashion Basics, correct?

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Rhodri J. Harries, Gildan Activewear Inc. - Executive VP and Chief Financial & Administrative Officer [83]

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It's higher percentage of Fashion Basics. It's -- and if you look at where our business is growing now, it's American -- it's all American Apparel and Alstyle and Comfort Color. I mean these are all -- and they're fashion -- and building our Gildan Fashion Basics. These are all margin-up products for us basically as we forward.

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Brian Morrison, TD Securities Equity Research - Research Analyst [84]

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Just one housekeeping item. With the acquisition of Swift, how much of your yarn needs are being satisfied internally now? And are there more opportunities or interest on this front to access to high-end yarn?

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Glenn J. Chamandy, Gildan Activewear Inc. - Founder, President, CEO & Non-Independent Director [85]

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Well, Look, we've internalized a big portion of our -- of our overall yarn, we've only internalized probably about 70% maybe, 65% to 70%. So we're still buying quite a bit of yarn on the outside market. As far as our investment strategy though, we're investing in ring-spun heavily because those yarns aren't available in the outside market at, a, competitive prices or available at all. So to give an example, like one of the fastest-selling styles we have in our Anvil and our American Apparel brand are basically a viscose, which is tri-blends which are poly cotton, cotton, rayon basically. So these type of things are typically imported from Asia, or the few domestic guys that make them, our cost structure is so high that you can't -- we couldn't compete. So we're making the investments that are going to continue to drive the earnings profile for the company but really drives sales where we think that we can. So everything we have is -- I think is pretty well thought out in terms of how we're going to maximize all of our yarns and all of our sales as we go forward. And we'll continue to invest as we see fit and continue to drive sales.

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Operator [86]

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And our last question comes from Keith Howlett from Desjardins Securities.

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Keith Howlett, Desjardins Securities Inc., Research Division - VP, Consumer Products & Merchandising Analyst and Retail Analyst [87]

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Wondering if you could just say to what you've heard on the free trade negotiations between Mexico, U.S. and Canada and how it might affect the apparel business?

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Glenn J. Chamandy, Gildan Activewear Inc. - Founder, President, CEO & Non-Independent Director [88]

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Well, all I can tell you is, look, we haven't heard a lot because we hear what you hear. But I think that the one point maybe in reference to a free trade and NAFTA with Mexico is that the trade balance is pro-U. S. on textiles in that category. So the U.S. doesn't have any issues in terms of textiles, obviously, because they're selling more goods and services to Mexico than Mexico is shipping back into the United States. Some we don't know what will happen, but we're [agnostic], to be honest with you, with our supply chain. We feel very comfortable with our positioning.

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Keith Howlett, Desjardins Securities Inc., Research Division - VP, Consumer Products & Merchandising Analyst and Retail Analyst [89]

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And just one last question on the performance category in the Printwear business. Is it still a growth category? And how do you feel your position in it?

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Glenn J. Chamandy, Gildan Activewear Inc. - Founder, President, CEO & Non-Independent Director [90]

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Well, we're positioned very well. This year we rolled out quite a few new products. We have a polyester tech fleece that's been well received. We have expanded in our T-shirts and our polos. So look, we're expanding the -- our polyester portfolio quite rapidly. With the caveat saying that, look, in Printwear, there's also everything gets screen printed, like I said earlier. So it's not rolling at the same rate as it is in retail because everything in lifestyle retail has actually gone to polyester. But we think that's going to change because technology is changing it. So the big part of our investment strategy in Rio Nance VI is really to develop and continue to develop performance-type quality products and actually take it to the next level. So we're continuing to make all of our investments in higher-end, value-added type products that will close higher returns in the future and continue to drive top line sales.

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Operator [91]

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We have no further questions at this time. I'd like to turn the call back over to Sophie Argiriou.

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Sophie Argiriou, Gildan Activewear Inc. - VP of Investor Communications [92]

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Thank you, Nicole. This concludes our call. Again, thank you for joining us this morning, and we look forward to speaking to you soon. Have a great day.

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Operator [93]

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