Gildan Activewear, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the Q2 2024 Gildan ActiveAware earnings conference call. Please be advised that today's conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. I would now like to hand the conference over to Jessie Hayham, Vice President, Head of Investor Relations. Please go ahead.

Thank you, Jeannie. Good morning, everyone. Earlier, we issued a press release announcing our results for the second quarter of 2024, along with our interim shareholder report containing management's discussion and analysis, as well as consolidated financial statements. These documents are expected to be filed with the Canadian Securities and Regulatory Authorities and the U.S. Securities Commission today. and they'll also be available on our corporate website. Joining me on the call today are Glenn Shimandy, President and CEO of Gildan, Rod Harries, Executive Vice President and Chief Financial and Administrative Officer, and Chuck Ward, President Sales, Marketing, and Distribution. This morning, we'll take you through the results for the quarter, and then a question and answer session will follow. Before we begin, please take note that certain statements included in this conference call may constitute forward-looking statements which 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. During this call, we will also discuss certain non-GAAP financial measures, Reconciliations to the most directly comparable IFRS measures are provided in today's earnings release, as well as our MDNA. And now, I'm very happy to turn the call over to Glenn.

Thank you, Jessie, and good morning, everybody. First, I'd like to take a moment to sincerely thank all of our employees, shareholders, and customers, and our new board of directors for their incredible support to the company and to myself personally over the past several months. I'm very proud to be here today celebrating Gildan's 40th anniversary with our dedicated team. Last fall, I communicated to shareholders that Gildan's positioning had never been stronger, with the largest pipeline of innovation in the company's history rolling out this year. Today, I can confirm that everything is on track, and we're continuing to widen our competitive advantage. We continue to execute on Gildan's sustainable growth strategy. We're delivering on each of our three pillars where we've seen significant progress to date. On capacity growth, our Bangladesh ramp-up is on track. We'll be at 75% exit capacity at the end of this year. On innovation, our soft cotton technology is performing well, where we're starting to see good results in market, in the market with positive POS on basics in Q2. On ESG, we just launched our 20th anniversary ESG report focusing on our accomplishments of which we're very proud of. We reported Q2 results that were strong and in line with our expectations with solid top line and strong adjusted operating margins. We also announced in our press release that we're reconfirming our full year 2024 guidance and we're providing our three year outlook. We're capitalizing on our GSG strategy where we're well positioned to deliver top line growth in the mid single digit range, adjusted diluted EPS growth in the mid teen range over 2025 through 2027 period in line with our supercharge plan. I'm looking forward to answering your questions after Rod's formal remarks, and thank you again.

Thank you, Glenn, and good morning, everyone. And thank you for joining us today to discuss our second quarter results. I'll start by going over the specifics of the quarter. I'll talk briefly about our new NCIB program, and then I will comment on our outlook and guidance for 2024 before recapping our outlook for the 2025 to 2027 period. So let's get started. As Glenn mentioned in his remarks, the quarter unfolded largely as we anticipated. We reported sales of $862 million, up $22 million, or 3%, at the higher end of our guidance for the quarter of flat to low single-digit growth. If we exclude the impact of the phase-out of Under Armour, net sales for the quarter are up mid-single digits year over year. This was driven by a strong performance in activewear, up 45 million or 6%, where we saw increased activewear shipments reflecting positive POS trends across all channels and geographies, as well as favorable mix, which was driven by higher replenishment of fleece by North American distributors ahead of our peak selling season. Strong activewear sales in the quarter were further reinforced by continued market share gains in fleece and ring-spun products, which are key growth categories. We were also pleased to see a positive market response to products that we recently introduced, which feature key innovations such as our soft cotton technology. Finally, in international markets, we performed well in the quarter, with sales up by 7%. Turning to hosiery and underwear, as expected, this category was down 16% versus the prior year, mainly owing to the phase-out of the Under Armour business and to a lesser extent, to unfavorable mix and continued broader market weakness in innerwear. That said, if we were to exclude the impact of the Under Armour phase-out, our hosiery and underwear sales would have been up mid-single digits year over year. Turning our focus to margins for the quarter, our gross margin was 30.4% versus 25.8% in the prior year, a 460 basis point improvement primarily due, as anticipated, to lower raw material and manufacturing input costs. Moving to SG&A, expenses were $124 million in the quarter and included significant charges related to the proxy contest and related matters, which totaled $57 million in the quarter. These charges are detailed fully in our press release and our MD&A and impact gap numbers. Excluding these charges, Adjusted SG&A expenses were down 15% to $66 million, or 7.7% of net sales versus 9.3% for the same period last year. The reduction reflected the significant positive benefit of the jobs credit introduced by Barbados as part of their economic policies, which was retroactive to January 1, 2024, and which totaled $17 million in the quarter. Note that SG&A would have been approximately 9% of net sales if we had reflected the benefit of the jobs credit only for the second quarter as opposed to a retroactive impact. Putting these elements together and adjusting for proxy contest matters, we generated an operating margin of 22.7%, up 620 basis points compared to the prior year, coming in above the high end of our 18% to 20% target range, and in line with our previously provided guidance. With the retroactive enactment of global minimum tax in Canada and Barbados, income tax expenses increased significantly year over year in the second quarter. In fact, the company's adjusted effective income tax rate for the quarter was 27% compared to 4.8% last year. bringing the year-to-date adjusted tax rate to approximately 18% in line with our expectations. Reflecting higher net financial and income tax expenses and our lower outstanding share base, we reported gap EPS of $0.35. Adjusting for the charges related to the proxy contest matters, second quarter adjusted earnings per share were $0.74 versus $0.63 in the prior year, a 17% increase. Moving on to cash flow and balance sheet items. After absorbing a cash impact of 40 million from the proxy contest, cash flow from operating activities was 140 million compared to 182 million in the prior year, which included the net positive effect of a 74 million insurance gain. After capex of 36 million, company generated free cash flow of approximately 104 million in the second quarter. Finally, Reflecting our strong commitment to returning capital to shareholders, we resumed share repurchases in the final month of the quarter, repurchasing approximately 3 million shares and returning 182 million in capital to shareholders in the second quarter, including dividends. With the current NCIB program approaching expiry this month, our board of directors approved a new program to repurchase up to 10% of the company's public float over the next 12 months. We ended the quarter with net debt of $1.24 billion and a net debt to EBITDA leverage ratio of 1.6 times. Turning to our strategy and outlook. As Glenn mentioned earlier, we continue to progress on the three pillars of our GSG strategy, which includes capacity-driven growth, innovation, and ESG. On the first pillar, we're very pleased with the progressive ramp-up of our new manufacturing complex in Bangladesh, which is ramping up fully as planned. On the innovation front, thanks to proprietary cotton technology, we continue to improve fabric softness, all while improving printability. We have announced the release of numerous new products incorporating this and other technologies across various product lines, and the reception has been positive. Touching briefly on ESG, we're proud of our 20th ESG report issued mid-June. which highlights Gildan's continued progress against key targets two years into the implementation of our next generation ESG strategy. In this regard, we're also proud of the recognition that we've recently received. In fact, for the third consecutive year, we were recognized as one of the best 50 corporate citizens in Canada by Corporate Knights, and we're the only company in the textiles and clothing manufacturing peer group to have received this recognition. Furthermore, Gildan was one of only 12 Canadian companies to have been included in the recent inaugural edition of Time's World's Most Sustainable Companies. So all in all, a strong recognition for the important work we are doing on the ESG front for all stakeholders. So this brings us to our 2024 outlook. While we are encouraged by the positive demand trends for our products in all our channels in the first half of 2024, the macroeconomic backdrop remains mixed globally, driving a generally cautious consumer spending outlook. Nonetheless, we are reiterating our previously provided 2024 guidance, underscoring our confidence in our continued execution against our GSG strategy. So, recapping our guidance for 2024. We still expect revenue growth for the full year to be flat to up low single digits, noting that if we were to exclude the impact of the Under Armour License Agreement, 2024 full-year revenue growth would be in the low to mid single-digit range. We continue to expect adjusted operating margin to be slightly above the high end of our 18 to 20 percent target range for 2024. This takes into account the benefit of the refundable jobs credit recently introduced by Barbados, as described earlier, which will reduce our SG&A in 2024. We've also incorporated the estimated impact of the recently enacted GMT legislation in Canada and Barbados on our effective tax rate, retroactive to January 1, 2024. The company's adjusted effective income tax rate is expected to be approximately 18% for the full year. Our adjusted diluted EPS is expected to be in the range of $2.92 to $3.07 up significantly between 13.5% and 18.5% year over year. We expect CapEx to come in at approximately 5% of sales, and even after absorbing the cash impact for the proxy contest and related matters, we still expect free cash flow to be above 2023 levels. Finally, given the strength of our balance sheet, our expected strong free cash flow, and the renewed NCIB program, we plan to continue share repurchases in the second half of 2024 with a revised leverage framework of 1.5 to 2.5 times net debt to adjusted EBITDA. Now, providing some color on our expectations for Q3, net sales are expected to be flat to up low single digits year over year, and adjusted operating margin is expected to come in above the high end of our 18% to 20% target range for 2024 after reflecting the positive benefit of the refundable jobs credit. As Glenn mentioned earlier today, we are also providing our three-year outlook for the 2025 to 2027 period, and we expect the following. Net sales growth at a compound annual growth rate in the mid-single-digit range. Annual adjusted operating margin to further improve over the three-year period as compared to 2024. CapEx as a percentage of sales of about 5% per year on average to support long-term growth and vertical integration. We expect to continue our share of purchases in line with a leverage framework of 1.5 to 2.5 times, and we expect adjusted diluted EPS growth at a compound annual growth rate in the mid-teen range. Assuming no deterioration in the current macroeconomic environment, we're confident that our targeted priorities will position the company to continue to drive market share gains in key product categories and unlock further opportunities in target markets. As such, as we further capitalize on the GSG strategy and pursue our disciplined approach to returning capital to shareholders, we believe that the company is well positioned to deliver strong value for shareholders over the long term. So that's all I wanted to cover from a financial perspective. While we acknowledge that there is a lot going on with our numbers this quarter, with the phase out of the Under Armour license, the retroactive impact of the global minimum tax and jobs credits, and unfortunately the impact of significant proxy-related costs, we are overall pleased with our results and enthusiastic about our outlook. In short, we believe that our cost structure remains well under control, our balance sheet is strong, and we are encouraged by our performance relative to peers as we continue to gain market share in a somewhat mixed environment. So in closing, we want to thank you all for joining us today and for your patience and support during the last several months. We are proud to say that our team has remained very engaged, staying focused on our key pillars and working diligently to create long-term shareholder value. And with that, I'll now turn it back over to Jessie.

Thank you, Rod. This concludes our prepared remarks, and now we'll be taking your questions. Before moving to the Q&A session, as usual, I'd like to remind you to limit your questions to two, and then we'll circle back for a second round if time permits. Jeannie, you may begin the Q&A session, please.

Thank you. The floor is now open for questions. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star 1 again. If you are called upon to ask your question and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Again, press star 1 to join the queue. And your first question comes from the line of Paul LeJouet with Citi. Please go ahead.

Hey, thanks guys. I'm curious if you could talk about where you saw the strongest and weakest POS trends during the quarter and what POS has looked like in the third quarter to date. Curious if you've seen any changes that are influencing your outlook and then Second, can you just talk about the competitive landscape in both active wear and hosiery? You've got some weak competitors out there, I think you would say, and I'm curious how that might be impacting the pricing environment, if at all.

Okay, well, why don't we start off with the competitive landscape, and then maybe Chuck can cover the POS. Look, Ed, I mean, we're continuing to strive and, you know, invest and innovate in our market. And look, we're developing a competitive advantage. We've widened the gap, we think, against a lot of our competitors. You can see some of our competitors have, you know, Delta has actually filed for Chapter 11. And we think other companies in industry are not doing well as well. So, you know, we're very optimistic that that's an opportunity for us to continue to execute particularly in the areas of growth, which is, you know, the fashion t-shirt category and fleece, where we have a dominant position. So we're very excited, and we think that the landscape is weak, and we're keeping widening the gap on our competitive positioning.

And, Paul, regarding the POS, I mean, as we progress through the quarter, you know, we saw improving POS through the quarter overall, with June ending mid-single digits, you know, First part of July started off a little slower, but it's improved as we've gone through the month to where we're ending July kind of flat to slightly down. But overall, the strength continues to be in the fleece and the ring spun categories where we're doing very well and we're taking share. If you look at the market overall, the market was down a bit, but we were up. So we're continuing to see strength in our fleece and ring spun categories. And then overall on the retail side, I would say the underwear market has been kind of mixed overall. But again, we think we're continuing to perform well there. Then on the international front, we're actually seeing great improvement on the international side with international up high single digits. Kind of still some mix between the UK and continental Europe, you know, with continental Europe being higher, but overall good positive performance. growth there in the international markets.

Have you seen a change in the pricing environment with the Delta situation? Are you doing anything different to take advantage of market share?

Well, look, I mean, early in the season, obviously, they were liquidating a lot of inventory, so it put a little bit of price pressure, particularly in our national count segment. But that inventory has dried up pretty quickly, and as we go forward, that would be an upside in terms of stabilization in that segment. And also, look, Delta's revenues in this segment were roughly around close to $400 million, and that's an opportunity for us as we move into next year, and we continue to focus on driving our national account business, which is where they had, I think, their largest sales penetration.

Great. Thank you.

Welcome. And just one last point, and pricing is stable in the market.

Thank you.

Your next question comes from the line of Mark Petrie with CIBC. Please go ahead.

Yeah, thanks. Good morning. I wanted to just follow up on the comment with regards to fleece. you called out growth, but then Chuck, I think you were saying that the category was softer. Could you just clarify that? And when it comes to Gildan's performance specifically, how much of that would be market share gains versus the restocking that you called out?

Well, maybe just to start with is that, you know, we think that the overall market was down probably around, you know, mid single digits basically for the quarter. And You know, what Chuck alluded to is like we've done really well, really, because if you look at our POS in Q2, you know, it started off slow. But in June, we had positive, you know, 4% POS in a somewhat down market. So we're gaining share. And all that share gain is coming out of fashion basics and fleece. So, you know, we are performing really well. We're taking share. The category is growing. We've seen very, very strong sales in fleece. and we have a huge order book in place for Q3 and Q4 already, and we're well positioned to execute on our guidance for 24.

Okay, and could you comment specifically on the inventory levels, both retail and distributor? How would you characterize that versus something you would call normalized and that sort of an opportunity or a risk in the coming 6 to 12 months in your view?

I would say overall, inventory is in line and in balance. As we look at it, you have some accounts that are a little bit better stocked than others, and others may be a little short, but overall, I would say it's well in balance. That includes retail distributors. On the international side, I would say there's areas where it's a little light, but with the Bangladesh ramp-up that both Glenn and Rod talked about earlier, we should see that resolved in Q4 so that we're seeing better inventory positions in international by that point. So again, overall imbalance.

Okay. So not expecting inventory to be a positive or a negative other than the Bangladesh, the impact of the Bangladesh ramp up giving you some opportunity in international. Yes, that's correct. Yeah. Okay. Appreciate the comments guys. All the best.

Your next question comes from line of Brian Morrison with TD Cowan. Please go ahead.

Thank you. Good morning, and nice to see you back in the chair, Glenn. Can you maybe just talk about the current capacity utilization at Bangladesh today? I realize you're going to be at 75% at your end. The impact from the recent civil unrest. Glenn, have you visited the site, and where are we with respect to moving forward with Phase 2?

Okay, well, I would say that, look, everything's on track with Bangladesh, and maybe just to take a step backwards here, And you look at Gildan's whole manufacturing system today, you know, we have a lot of room for optimization and continued improvement. And, you know, one of the things I think that we've underwent a couple years ago, which is our yarn, you know, modernization plan, which is still being completed. So we fully haven't optimized our cost structure of all of our yarn facilities. And another point of reference, I think, for us would be is that we've pointed out that we're only running around 85% capacity. And that's also another big opportunity for the company as we move into the future where we continue to look at filling up our capacity with a much more optimized level. And then as far as Bangladesh is concerned, we're ramping up the facility. We believe we'll be at 75% of our exit capacity of the facility by the end of this year. And that ramp up is coming also at a cost. So all these big three initiatives are important because these are, I think, initiatives that will continue to give us some upward momentum in our operating margins as we move forward, as we continue to optimize our manufacturing and manufacturing. And, you know, I think we're in a good position. We're looking at phase two right now. We, you know, we believe within the three-year period in terms of our guided CapEx, about the 5%, that would include actually the development of that facility in our CapEx. And one thing that's happened is that with the growth of fleece, and fleece takes a lot more fabric, than t-shirts. I mean, three times the amount of material to make a sweatshirt than a t-shirt. So our mix is changing, so we're utilizing our textiles at a much greater extent, which will allow us to bring on additional textile capacity probably earlier than we originally anticipated and fully utilize our system and bring our costs in a better equilibrium. So everything I think is working. I did go out and visit all of our facilities since I've been back. I am planning to, with our team, inaugurate our facility in Q4 in Bangladesh, which I will be visiting. And we're excited about... We continue to execute on our strategy.

That's great. Can I just follow up on that? Is there any impact from the recent civil unrest? And did I understand correctly that it was margin dilutive in Q2, the Bangladesh facility?

Well, I'd say that you look at... I mean, in our... Look, in the point I'm trying to make, if you look at the operating margin that we're delivering today... embedded in those operating margins are the startup of Bangladesh, are the inefficiencies of not running our facilities at 100%, and we haven't really optimized our yarn spinning to its fullest. So as we continue to execute and deliver and build these three areas, that will allow us to actually increase our operating margins as we move forward. So we've already got really good operating margins, and the point is that we've got negative efficiencies embedded in them And as we move forward, and that's what we guide it to, is that we will have continued improvement in our operating margins. And regarding the civil unrest, look, we were down for a couple of days. I mean, nothing happened to our facilities. It was not material to us. And we're running full and business like usual. And we're all back working right now.

That's excellent. My follow-up question, maybe, Rod, I appreciate the operating margin leverage guidance. especially the SG&A call out for the quarter. What do you think is a sustainable level of SG&A inclusive of the Barbados tax credit in our forward outlook?

Yeah, Brian, so we try to give you as much guidance as we could on SG&A and I think we believe we're performing very well, right? SG&A has been a big focus, was a big focus under Back to Basic and as we've moved into the GSG strategy, we really are delivering on it. So if you look at the call out for the quarter, effectively 7.7% is very low, but we do have the benefit. I indicated that in my remarks that if you adjust for the retroactive impact, we're basically, or it would have been around 9%. And I think if you move forward, we're probably going to be, I would say near term in that nine, nine and a half percent range, right? That's the way to, to think about it as we move through the year and as we move into 2025. But look, bottom line on SG&A, we can leverage it as we go forward. We can get leverage off SG&A. And I think one of the things that we are excited about, and we call that out for the three-year outlook, that we can improve our operating margin going forward. Some of that's going to come on the gross margin line and some of that's going to come on the SG&A line. But we're in great shape really to deliver margins on a go-forward basis as we grow at the higher rates as we start 2025. Thank you very much.

Your next question comes from the line of Vishal Sridhar with National Bank Financial. Please go ahead.

Hi, thanks for taking my questions. Rod, just following up on the comment that you gave us about the expansion in gross margin, What would be driving that? Is that mix or is that pricing? How should we think about it?

So if you look at expansion in the quarter, a lot of the expansion came from improvement in raw material costs and on the manufacturing side. Now, we've been flagging that for a long time, Vishal, as you will recall, and we've seen the benefit of that with respect to improved raw material costs as we moved into the fourth quarter of last year, and then it was moved into the first quarter of this year, second quarter. We'll continue to see some of that as we move forward, but it'll abate, right? Because obviously on a wraparound basis, you won't get the level of improvement on a go-forward basis. But the margins are performing very well. And as Glenn said, we still have not really seen the full impact of our manufacturing structure with 85% capacity utilization in Central America, the ramp-up of Bangladesh still coming through, I would say we're excited about what we see with respect to the margin evolution. So I would say overall, if you look at the cost side of the business, we're running very well. And then if you go to the top line, I would think all the things that we're very excited about on market share gains with Fleece, with RingSpun, With product innovation, product innovation in our basics, which I think is very exciting. The new products, some of our brands are doing very, very well. We haven't talked that much about Comfort Colors, but Comfort Colors is a very strong brand and it's flying and that provides support to margins overall. So I would say, again, we've given a three-year outlook and we feel good about all of the different areas that are driving margin both from the top line and on the cost structure.

Okay, so should I take from your answer that in the three-year outlook, it's a little bit of everything, the mix, the manufacturing efficiency, the top line leverage. Is that a fair comment or is there any in particular that you'd point out?

No, it is. All of the different areas we're focusing is firing, right? So if you actually look at the three-year outlook, Our ActiveWare business is running very well and if you look at the numbers the past few quarters from a growth perspective, as you look on a go-forward basis, ActiveWare is running very well and it's related to all the things that we've talked about. Market share gains, innovation, new programs, international growth, they're all driving the growth as we go forward. On the activewear side, you can think of that as a high single-digit type growth business. On the interwear side, it's lower. It's more like a low single-digit type growth business. But I would say we are really doing very well across all of the different product categories and channels that we're focusing on, and that is driving that strong, I would say, view of the growth that then ultimately will benefit from that as we bring all of our capacity online and really drive, I would say, a really good outlook in that mid-teen EPS compound growth rate over the next three years.

Okay. Thank you for that. With respect to the transition to softer cottons, can you talk about the impact of that on the cost side and if that's going to help drive pricing higher in the industry as you make those transitions or as you move transition, the prices of the products will be similar?

No, we're pricing the products similarly. We haven't changed our prices and the costs will be absorbed by other manufacturing efficiencies within our system.

Okay. And are you seeing higher demand as a result of this transition?

Well, we're starting to see, look, for the first time in Q2, we've actually seen positive POS and basics. And it's just being rolled out. So we have I think it's, you know, people who've tried the product, they love it. It prints better. It's softer. It feels better. I mean, you know, so when you're offering a better quality at the same price and better printability, I think it's a home run. And, you know, we think that this is actually going to be really, really strong for us. Okay. Thank you.

Your next question comes from the line of Martin Landry with Stifel. Please go ahead.

Hi, good morning everyone. And Glenn, it's great to have you back in the seat. So my first question is on the three-year outlook. I was wondering right now if we look at your position in the US printware industry, you've talked a lot about market share gains. Would you be able to give us your best assumption of where you are in terms of market share gains when we look at all your products in aggregate?

Well, look, I mean, the market in 23, I think, was down, you know, probably a little higher than mid-single digits, and we outperformed the market. I think we're outperforming the market again this year, so I think we're in a good position. We keep taking market share, particularly in the categories of fashion and fleece. But as we look forward, what we've done is we've taken a modest view of the market where we think the market's going to be flat to low single digits. And what we think we're going to continue to do is gain share in the fashion segment, continue driving in growth of fleece products, You know, we're going to benefit from our innovation and our basics. And, you know, like we saw in Q2 that we've actually, for the first quarter, saw positive POS. Comfort Colors that Rod mentioned before is actually doing really well. I mean, this is a very strong brand with lots of runway. And we have a lot of runway with American Apparel as well, which we're continuing to spend against and look at driving that product line as well. And we have a lot of new programs in our pipeline. I mean, our GLB business is strong. We're working with our retail customer partners. Our international growth has been weak over the last three years and is starting to rebound. Chuck mentioned that we've seen good growth, and we believe that we're on a roll back to driving international again into good growth levels. And, you know, as we move forward, I think importantly, and, you know, as we move forward into 2025, we've got good visibility on all of these factors. So, you know, I think we feel very comfortable. We also feel very comfortable on the operating margin side because, look, we're performing well. At the same time, we have tons of opportunity. I mean, between our yarn spinning, our capacity, our Bangladesh ramp-up, our SG&A leverage. I mean, all these things working together, I think that we've guided... with confidence that we can deliver over the next three years.

Okay. You've answered part of my follow-up. I was trying to see what are your market share assumptions embedded in your three-year guidance. And if I understand correctly, I think you're expecting the US printware market to be flat to up slightly over the next three years. a flat market share in fleece and T-shirts and maybe market share in fashion? Is that fair?

No, I would say that the market's going to be flat to low single digits, our assumption for the market. Obviously, we're projecting to grow with the market plus take share in the distributor market, so that's only one part of our business. And then at the same time, we're also going to be taking new programs in retail, GLB, international, So we add all that together, you know, the mid-single digit is our growth rate.

Okay. It'd be great at some point to get, you know, a more clear picture of your market share in the distributor segment, just to get a sense of what more share gains you have ahead of you guys.

Well, look, we said before that, look, just maybe to answer your question, we have a large share in the basic segment, and what we've been saying recently you know, over the last couple of years is that, you know, the area for growth for us in the distributor market is in the fashion basic segment, which we're continuing to take share. So that's the area that we're going to gain, you know, the most share. Fleece as a category, you know, we have a large share of fleece, but fleece is growing as a category and it's growing high single digits basically every year because people and consumers are wearing more sweatshirts and we're benefiting from that. And, you know, the area that, you know, we've seen, you know, negative growth has been in basics, basically, and we've actually, with our innovation, you know, we hope to reverse that trend and get people, you know, buying more of our shirts. So, you know, I think overall, you know, in the distributor business, you know, we're comfortable as well as Comfort Colors is growing. And then, you know, the point here is that it's not one-dimensional. You know, that's still half of our business. The other half of our business, which is, our national account business, our GLB, our retail, our international, you know, they're all doing well as well. So, you know, the sum of the whole will deliver that mid-single-digit growth, and I think that's what you need to focus on.

And, Martin, just to add, I think, to be clear, we do see fleece market share gain as we go forward, right? We don't, as Glenn said, we have a big share, but we still see more opportunity on the printware side. We see opportunity in retail. we see opportunity in international as well. So you made the comment around flat market share there. We're growing market share in fleece. We're growing it in ring spun. And these are really important drivers because they drive volume, they drive mix, they drive price. They really, I would say, are big drivers along with all the other areas that we've talked about. So just to be clear, we're growing share everywhere.

Okay, super. Thank you and best of luck. Thank you.

Your next question comes from the line of J Sol with UBS. Please go ahead.

Great. Thank you so much. A couple of questions. Number one is that, you know, just given the unusual kind of time period that just went, that just, you know, played out, if you had some time away from the business, you could just talk about any, you know, insights you had just maybe from just having different perspective, looking at the business from, from where you were, you know, versus, you know, from before. And then secondly, just on the raising the leverage, what's the timeframe you expect to raise the leverage to, you know, two, two and a half, whatever it is. And would you expect to immediately buy back stock as you increase the leverage? Thank you.

I'll talk about the first part and Rod will second the answer to the leverage part. But I would say to you, look, looking back, I mean, like I said in my comments earlier is that in the fall, I've never, you know, thought the company had been in better position on a go forward basis. I mean, everything was firing on all cylinders. You know, we were prepared. We invested in Bangladesh where we knew that that was going to be a key to the success of our fashion basics and also offsetting some of the trends of inflation in Central America. We've developed the largest innovation pipeline on every single product. We keep mentioning basics, but it's including fleece has been totally revamped. our Comfort Colors brand, we've got a lot of new technology there as well. So, you know, we've spent two years developing all this. So like, you know, we were, and I would say that in the fall, we were in a breakout mode of really, you know, I think, you know, firing on all these cylinders and taking a step backwards, I was saying to myself, I was like, you know, like, you know, this was just, it was a little bit crazy to be honest with you. And, you know, now that, you know, I'm back, I can see that, you know, everything is intact. You know, I think that, you know, nothing has changed. All those opportunities are still here. I think one thing that I think is important is I think that the team internally, the management team, the employees, all the ranks and file basically are motivated more than ever. And I think that that's the one, I think, positive about this whole outcome is that the management team, the company, there's a resurgence of energy, motivation, So it's great, and we're really excited, and we're looking forward to over the next few years and delivering great results and creating shareholder value.

And Jay, on the share buyback, so we finished the end of the second quarter with leverage 1.6 times. You can tell we're excited about the strength of the business on a go-forward basis, and you can also see that our free cash flow will be very strong as we move through the back half of the year. So as we effectively move through Q3, Q4, we do expect to continue to repurchase shares. And ultimately, we're going to drive towards two times leverage at the end of the year. So we've got a lot of firepower as we move through the back half. And obviously, we've increased our NCIB by 10% to give us the flexibility to do that. So again, in parallel with the way that the business is effectively running and the strength of the business, we feel very good about returning capital to shareholders. And we plan to do that. And as we move now to the really a midpoint two times in the middle of our one and a half to two and a half times leverage, we expect to continue to buy back at a high rate as we move through the end of the year. And then as we go into 25 and 26 and 27, again, the strength of the business, return of capital will effectively be a I would say a meaningful part of our capital allocation strategy as we ultimately combine that with the fundamentals to drive the strong EPS growth. Understood. Thank you so much.

Your next question comes from the line of Stephen McLeod with BMO Capital Markets. Please go ahead.

Thank you. Good morning, everyone. Morning, guys. just a couple of questions I had about, uh, industry performance through the quarter. I was just wondering if you could give the PLS for, um, fleece and fashion basics, um, I guess as well as basics for the industry and, and, and for, uh, for Gildan's performance as well, just to see how you're comparing, um, when you're driving those market share gains.

Sure. Um, Thanks, Stephen. I think overall, I mean, we saw good performance in POS across the board. I mean, as we talked about, it started, you know, at the quarter a little slower, but it continued to progress each month. You know, as Glenn mentioned about the basics, we did see positive POS in the basics EOE for the first time in a while, you know, and it's really driven by our innovation. You know, we talked about our soft cotton technology, and it's been well received by the markets. and I think it's having an impact. And so I think we're outperforming the market in that segment as well. You know, when we look at the ring spun, I mean, if we look at it, we were up mid to high single digits in ring spun in the quarter as well. And, again, as we look at some of the competitors, you know, they were in the negative range. So we continue to gain share across that. And then on fleece, you know, we're looking at fleece, and we were – low to mid on the lease and then had the ability to continue to take share from them as well. So, you know, I think we're performing well across the markets in each category.

Okay, that's great, Keller. Thanks, Chuck. And then just on the gross margin, I mean, we've talked a little about the SG&A and how that's expected to evolve in sort of a longer-term target. I'm just wondering if you can do the same for gross margin. How should we expect that to evolve through the year? I know eventually you'll be up against some of the tougher comps as you roll into next year. So just how can we think about gross margin, I guess, for the balance of this year as well as into that three-year margin expansion target that you're highlighting?

Yeah, Stephen, look, we expect strong gross margin, right, as we continue to move through the year. If you If you look at what we've guided from an operating profit margin perspective, I made some comments earlier about SG&A. You can see the gross margin will stay strong as we move through Q3, Q4. And again, all the drivers are in place in order to deliver on that. And then we do expect operating margin growth as we go from 25 to 27, driven by all the things that we've talked about. So I would say we do believe that we have now moved our growth margin really, I would say, a bit higher versus where we've historically run. And that, combined with SG&A leverage, gives us strong confidence on our ability to take, I would say, what will be a very good operating margin when we finish the end of 2024 and continue to drive that over the next three years.

That's great. Thanks, Rod. And then maybe just one more, if I could, just on the fleece business. I know you talked about strong replenishment in the quarter. With the warm weather we've been having, have you seen any initial signs of maybe sell-through weakness, or has that not really materialized?

Well, look, I mean, POS in the beginning of July was, like we said, was down, and that was pretty much across the board, but that's – That's a function of burl, basically, that went through most of the United States, the hot weather, also 4th of July holiday. So it's come back. We've seen already our POS come back. I mean, fleece in Q2 up until this period is really not the largest POS sell-through when you look at it as a percentage of sales. So distributors bring in you know, their inventory, basically, and then it's their large POS timeframe is really as we move into, you know, the fall season and into Q4 when you actually get the height of the POS. But the one thing maybe to point out is that, look, we have a huge order book on fleece. You know, we're at strong sales in Q2. We have strong demand in Q3 and in Q4. We're actually... you know, chasing fleece as we speak today. So, you know, we probably won't be able even to deliver all of our commitments in Q3 that may spill into Q4 because, you know, back in the fall, you know, we closed down one of our sewing factories and part of our optimization of our sewing strut and cost, and we relocated that to Nicaragua. And that ramp up is just taking a little bit longer than we anticipated. So we're a little bit, behind, I would say, in terms of where we want to go in terms of fleece, but we will be towards the end of Q3 and Q4, we'll be back on track. So demand is strong. We have all the orders pretty much in-house to continue driving good growth in fleece, and we're pushing as hard as we can to fulfill our orders.

That's great. Thanks so much, Glenn. Nice to have you back.

Thank you. Thank you. Thanks so much.

Your next question comes from the line of Chris Lee with Desjardins. Please go ahead.

Oh, thank you. Good morning, everyone. Just maybe a first question on cotton. I know that it's been gradually pulling back through the year, and I'm just wondering what you think the impact could potentially be on your margin for next year. Do you think it's going to be neutral or positive? Just some high-level comments would be great.

Well, look, I think just taking cotton in general, cotton, you know, has come down. But if you look at cotton and our overall cost, you know, it's around 25%, right? So as you go forward, I would say that there's other inflationary items like labor, transportation, energy costs. You know, labor, you know, is going up, particularly in Central America. So, you know, I would say that in a typical... inflationary environment that we are in today where you have labor, transportation, energy going up, normally you would see price increases to support those inflationary costs. And I think that the cotton will basically give us a little bit of runway to maintain probably pricing flat as we move into next year and be able to support some of the inflationary areas. So I would say that the whole cotton market inflationary impact will be neutral to us as we move forward into 25.

Okay, that's great. And second question, Glenn, maybe just on M&A, just wondering, you know, where does it rank in your capital allocation? I just ask because, as you mentioned, some of your competitors are weakening. I'm wondering if there are any potentially attractive opportunities that you think would be a good use of capital?

Well, look, I think we called out that we've just increased our NCIB, so our focus is to return capital to shareholders. We're very comfortable with our organic strategy, delivering to mid-single digits, strong and improving operating margins. And obviously, it translates into strong EPS, which will obviously give us a good return. So I think that's our priority. Some of the competitors that are in trouble today are weak. There's not a lot of value associated with them and their equipment because we've got capacity available to us today. And I think we can get all those sales organically. So As far as we're concerned, I think we're in a really good position. We're widening our competitive advantage. We've got a large wave of innovation across all segments of the company. We're firing on all four cylinders. So we're going to stay focused right now and continue to deliver on our strategy that we just called out over the next three years.

Great to hear, and welcome back.

Thank you.

That concludes our Q&A session. I will now turn the conference back over to Jessie Hayham for closing remarks.

Thank you, Jean. Once again, we'd like to thank everyone for joining us and attending our call today, and we look forward to speaking with you soon. Have a great day.

This does conclude today's call. You may now disconnect.