Gildan Activewear Inc.

Ladies and gentlemen, thank you for standing by and welcome to the Q1 2020 Gildan Act-Aware Earnings Conference Call. At this time, all participants are in a listen-only mode. After this presentation, there'll be a question and answer session. To ask a question during the session, you'll need to press star one. Please be advised that today's conference is being recorded. If you require any further assistance, please press star then zero. I would now like to hand the conference over To Sophie Aguirre, please go ahead.

Thank you, Denetia. Good afternoon, everyone, and thank you for joining us. Earlier, we issued a press release announcing our earnings results for the first quarter of 2020. We also issued our interim shareholder report containing management, 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 the company's corporate website. On the call today, we have Glenn Shimandi, our President and Chief Executive Officer, and Rod Harries, our Executive Vice President and Chief Financial and Administrative Officer. In a moment, Rod will take you through the results for the quarter and our business outlook, and a Q&A session will follow. Before we begin, please take note 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 with the Canadian Securities Regulatory Authority. And with that, I'll turn the call over to Rod. Rod, go ahead.

Thank you, Sophie, and good afternoon to all, and thank you for joining the call. We hope everyone is staying safe and keeping as well as possible during this unprecedented time. Before we get to the results for the quarter, let's start with an update on the COVID-19-related actions the company has taken since March 23rd when we last talked with you. From the outset, as the whole situation has developed, our first priority has been and remains the health and welfare of our employees, customers, suppliers, and other partners, as we ensure the continuity of our business. In this regard, we are very pleased that our production of face masks and isolation gowns is now underway. We are currently sewing masks in some of our facilities in Central America to support local government requirements, as well as on behalf of a cooperative consortium of North American apparel and textile companies. supplying non-medical masks to the healthcare sector. We're also producing non-medical masks and isolation gowns for various retailers to be distributed to healthcare organizations. In total, we have current plans to produce over 150 million masks and gowns under this effort, and we'll continue to provide as much supply of product as we can as we move through the pandemic. In order to support production of masks and gowns, we have limited manufacturing activity currently underway, operating with stringent safety processes and protocols in place. Far and away, the majority of our manufacturing capacity around the world remains idle after we extended the shutdown of our operations following mid-April to respect government directives and to manage our inventory levels given the significant downturn in demand caused by the pandemic. Our distribution centers, which have strong inventory levels, mostly remain open to service with appropriate safety measures in place for our employees, but at much reduced operating levels. In parallel with this reduced operating activity, we have moved quickly and decisively to control all costs, defer non-critical capital investments, and to manage our working capital. In this regard, on March 30th, we implemented a number of workforce measures. The Gildan Board of Directors, Glenn, myself, and the rest of the executive team agreed to forego 50% of our salaries, and we have implemented pay reductions ranging from 20% to 35% across all senior management levels. Further, much of our salaried workforce is now operating on a four-day work week. Finally, given the uncertain duration of this crisis and the related economic impacts, we have moved forward with major additional actions to strengthen our balance sheet and liquidity positions. In our March update, we indicated that after drawing down the remaining available portion of our revolving long-term bank credit facility, we stood with just over $500 million of cash and over $50 million of available credit lines. On April 6th, we secured an additional $400 million of long-term debt, providing us with liquidity of over $950 million, and we are currently operating with just over $650 million of cash on hand and $300 million of available credit lines. Further, in addition to suspending our share repurchases, which we did in early March, today we announced that we will be suspending our quarterly dividends starting with the first quarter. While returning capital to shareholders is a key priority for Gildan, and we remain fully committed to doing so when the environment normalizes, we have taken these actions to ensure that we are extremely well positioned to move through this evolving, challenging, and highly uncertain environment. Now moving on to our first quarter results. We generated $459 million in sales, down 26.4% over the prior year quarter, mainly due to lower sales volumes. Although our initial expectations called for lower volumes in the first quarter, the overall volume declines in the quarter were meaningfully higher than we anticipated, given significantly weaker demand in March. During the first two months of the quarter, our sales performance in North America for imprintables was relatively untracked It fell off considerably in March, typically the biggest sales month of the first quarter, as the spread of the pandemic started to heighten in North America. Further, our retail sales were also impacted, although less severely in the mass and online channels. Overall, these year-over-year volume declines in the quarter were partly offset by positive product mix and slightly higher net selling prices due to lower discounting. Activeware sales of approximately $373 million fell 24.5% during the quarter, driven in imprintables by double-digit volume declines in both North America and international, as well as due to a $6 million sales return allowance related to our SKU rationalization initiative. In retail, activeware sales were down due to store closures and lower demand caused by the pandemic, although the decline was less severe than we saw in imprintables. In the hosiery and underwear category, we generated 86.5 million in sales in the first quarter, down 34% compared to last year, as the downturn in demand related to store closures drove lower sales. In addition, as we highlighted in February when we reported our 2019 fourth quarter results, the decline in hosiery this quarter also reflected the impact from the exit of a sock program in mass and the year-over-year impact of the initial rollout of a new private brand sock program which launched in the first quarter last year. In underwear, overall sales were down due to the current challenging demand environment and the year-over-year impact of fully exiting a branded underwear program in mass at the end of the first quarter of 2019, partly offset by increased sales of private brand men's underwear in the mass channel. Gross margin in the first quarter was 23.2%. An adjusted gross margin was 24.6%. after excluding an $8 million charge related to discontinued and printable SKUs. Although adjusted gross margin was down 120 basis points over the first quarter of 2019, it is important to highlight that the year-over-year variance included 340 basis points of negative variance related to manufacturing idling and other COVID-19-related costs. Without these costs, adjusted gross margin would have been 28%. 220 basis points above the prior year level. Accordingly, COVID-19 costs more than offset favorable product mix related to our underwear business, lower raw material costs, and most notably, the benefit of an improving cost structure for manufacturing optimization initiatives under our back-to-basics strategy. Moving on to SG&A expenses. For the first quarter, SG&A expenses totaled $74 million, down $19 million over last year, primarily resulting from reductions in compensation expenses, lower volume-driven distribution expenses, and from tightly managing all our costs, including eliminating all discretionary expenses as we move through the back part of the quarter. Now let me highlight certain impairment charges taken in the quarter in light of the impact of the COVID-19 situation. During the first quarter, although we did not incur any significant customer-specific accounts receivable write-offs, we increased our allowance for expected credit losses to reflect heightened credit risk in this environment. As you would expect, some of our customers are working to navigate through this challenging period and have requested extended payment terms on their account balances as they closely manage their operations and working capital positions. While we are working with these customers and fully expect payment, we are nonetheless required to assign an element of risk to these receivables and adjust our allowance for credit losses accordingly. In addition, this quarter we recorded an impairment charge of $94 million relating to goodwill and intangible assets acquired in previous SOC and hosiery business acquisitions after conducting an impairment review of our hosiery cash generating unit. While the longer-term outlook for this part of our business remains unchanged, and we believe that we are well-positioned from a competitive perspective, the impairment was triggered by the broad impact of COVID-19 on market valuations, including for Gildan. Finally, in the first quarter, we recorded $10 million of anticipated restructuring and acquisition-related costs, largely associated with the relocation of our Mexican operations and costs related to the completion of the exit of our ship-to-the-piece activities. Adding up all these elements, our operating loss in the quarter totaled $92 million compared to operating income of $33 million in the prior year, Before reflecting charges associated with restructuring and acquisition-related costs to goodwill and intangible asset impairment and discontinued imprintable SQs, we generated adjusted operating income of $20 million in the quarter compared to $43 million in 2019. The net loss for the quarter was $0.50 per share, while adjusted EPS was $0.06, down from $0.16 last year, reflecting the sales and operating margin decline including $0.08 of manufacturing idling and COVID-related costs. Turning to free cash flow, we consumed $235 million of free cash flow in the first quarter of 2020, compared to $128 million consumed last year for this period. The change was mainly due to the decrease in earnings in the quarter and higher working capital from increased finished goods inventory due to a planned inventory build in the first part of the quarter. Our capital expenditures in the first quarter were approximately $26 million, primarily for textile and yarn operations. We expect lower levels of capital spending going forward as we defer non-critical capital expenditures in the near term. Finally, under our 2019 share repurchase program, we bought back just over 843,000 shares in the first two months of 2020 for a total cost of $23.2 million. At quarter end, we had net debt of just over $1.1 billion, and a net debt leverage ratio of 2.2 times trailing 12 months adjusted EBITDA. Now, a few words on the outlook. Visibility regarding the duration and extent of the impact of the pandemic remains extremely low, and as you are already aware, on March 23rd, we withdrew our quarterly and annual guidance. However, to provide further context, we thought it would be helpful to update you on the demand trends we have seen thus far in April. In the Imprintables channel, when we last talked during the third week of March, POS was down approximately 50%, and we expected further weakness. This played out at the end of March, and in April, we have seen POS trending down 75% versus prior year levels. Turning to our international Imprintables channels, POS in Europe is tracking at similar levels as North America, while Asia is slightly better, with POS down 65% from last year's levels. POS in retail channels has also decelerated in April, as more and more retailers closed their doors in response to shelter-in-place and non-essential business closure directives. Overall, POS in the retail channel is down 45% in April. In this regard, our branded and licensed sock business and our global lifestyle private brand business has experienced weaker levels of POS, given a high exposure to department, sporting, and specialty store channels, as well as large sporting-related events. On the other hand, we are very encouraged by the strong performance of our private brand underwear business in mass stores and our e-commerce sales, particularly as online retailers are starting to include our basic apparel product categories as priority shipments along with essentials. At this juncture, it is unclear how these trends will evolve as different actions are enacted in various jurisdictions to adjust to the ongoing phases of the pandemic. However, Given what we have seen thus far in April, and given broader economic expectations, we do expect a significant decline in POS and shipments for the second quarter of 2020. Accordingly, this sales outlook, combined with the impact of fixed cost absorption while our manufacturing facilities remain idle, will likely lead to a significant earnings loss in the second quarter of 2020. In closing, despite this outlook, the actions we have taken positions Guilden well to navigate through this challenging environment. As I highlighted earlier, our primary focus is the health and well-being of our people and the continuity and long-term success of the business. We are very proud of how our whole organization has adapted to deal with the current environment, including responding to help alleviate global PPE shortages. We have taken the steps to reduce our fixed costs, and expect to continue to lower our expenses as we move forward and adjust to a weak demand outlook, which could extend through the remainder of the year. We have good inventory levels in all product categories to service our customers, and we have strong liquidity overall. Further, our back-to-basics strategy, which we have been implementing over the last two years to simplify and lower our cost structure, has put us in a better position to deal with these events. We have successfully navigated through challenging environments in the past, but we are confident that our strong business model, financial position, and resilience will allow us to emerge successfully from this global crisis positioned well for the long term. With that, thank you, and I'll turn the call back over to Sophie.