Gildan Activewear Inc.

Ladies and gentlemen, thank you for standing by. And welcome to the Q2 2020 Gildan ActiveWare Earnings Conference Call. 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, please press star 1 on your telephone keypad. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Sophie Argyriou, Vice President of Investor Communications. Please go ahead.

Thank you, Diana. Good morning to all and thank you for joining us. Earlier, we issued a press release announcing our earnings results for the second quarter of 2020. We also issued our interim shareholder report containing management's discussion and analysis of 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 Schimandy, our President and Chief Executive Officer, and Rod Harris, our Executive Vice President and Chief Financial and Administrative Officer. In a moment, Rod will take you through the results for the quarter, 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 Canadian Securities Regulatory Authorities that may affect the company's future results. I will now turn the call over to Rod.

Thank you. Thank you, Sophie, and good morning to all, and thank you for joining. We hope everyone is continuing to stay safe and is keeping well. This morning, we reported our second quarter results, and as we expected back in April when we last reported, we incurred a significant earnings loss in the quarter tied to the impacts that COVID-19 is having on economic activity and, in turn, our business. However, despite the loss in the quarter, we maintained a strong focus on our key priorities, taking business decisions and actions to strengthen our competitive positioning for the long term by accelerating our efforts under our back-to-basics strategy to simplify our product portfolios, remove complexity and cost from our business, better support our customers, and drive long-term market share growth, all of which I will cover shortly. Moreover, by tightly managing our business, we generated strong free cash flow of $177 million in the quarter, more than offsetting the impact of the earnings loss and improving our liquidity position, which stood at $1.2 billion at the end of June. Further, during the quarter, in order to increase our financial flexibility as we move through this global health crisis, we negotiated a 12-month covenant amendment to our existing credit agreements. The amendment provides that our leverage covenant now excludes the impact of our financial results for the second quarter from the leverage ratio calculation through the first quarter of 2021. At the same time, we also negotiated higher covenant levels, and the combination of these two factors gives us ample flexibility to navigate through the duration of the pandemic. Finally, in line with improving demand trends, we started to resume production at various operating levels across the majority of our facilities, implementing comprehensive biosecurity protocols to prioritize the health and safety of our employees returning to work. These measures, led by our medical and human resources staff, cover testing and monitoring, safe transportation, reconfiguring the floor space in facilities to ensure appropriate physical distancing, and the provision of personal protective equipment for all employees. Overall, we are proud and grateful for the way the Gildan team, both manufacturing and non-manufacturing employees, have stepped up to new challenges and have come together during this crisis. Turning to our sales and earnings results for the quarter. Not surprisingly, the effect of the lockdowns that started in March and continued through April and May significantly impacted sales and earnings in the quarter. We generated sales of $230 million this quarter after reflecting a sales discount accrual of $25 million. Sales were down 71% from a year ago, with activewear sales of $132 million down 80%, and sales of hosiery and underwear of $98 million down 28% compared to last year. The decline in our overall sales was primarily driven by volume declines resulting from the significant demand downturn in the quarter and inventory destocking, as well as negative product mix impacts and higher promotional discounting. Moving to demand trends in activewear. With shutdowns in effect during the quarter, imprintables distributors closed warehouses and retailers shut their doors, causing significant sell-through declines in our channels of distribution. In the U.S. imprintables channel, we saw POS decline to loads of 80% in April before starting to pick up in May as reopenings occurred, averaging down approximately 50% for the month and then ending the quarter in June down in the 20% range compared to last year. Although for the quarter, average POS was down 50%, trends improved sequentially on a monthly basis, and we were ahead of our expectations. And in some categories, like fleece and fashion basics, POS turned to positive growth in the month of June. Having said that, we have seen some pullback in POS in the printables channel during the latter part of July, which I'll cover a little later. In our international markets where the COVID-19 impact hit earlier than in North America, we saw POS declines continue to decelerate during the second quarter and trended better than we expected, particularly in Europe, which was down approximately 30% for the quarter. The impact on our sales from these lower sell-through levels was also compounded by high levels of destocking as distributors mostly serviced end customer demand from their own inventories. Consequently, inventories in the distributor channel at the end of the quarter were and continue to be significantly below prior year levels as our customers have adjusted to lower levels of demand. Our sales in the active work category also reflected the impact of higher promotional incentives in imprintables, which we initiated in June and subsequently extended through July and August. These incentives are aimed at driving the ongoing sell-through of our products from distributors to screen printers, and as a result, we recorded a sales discount accrual of $25 million during the quarter. This pricing initiative is directly linked to our back-to-basics strategy, where we are leveraging our low-cost position to reinforce market leadership, drive further market share gains, and grab available demand in what we know is a difficult market environment. We know this playbook well, and though it is still early days, we are very pleased with the results of this initiative in all three categories where we are running the promotions, basics, fashion basics, and fleece. Finally, in the retail channel, sales of activewear were also down due to the widespread closure of retail stores, most notably impacting our business with department stores, national chains, sports specialty retailers, and global lifestyle brand customers. partly offset by better sell-through in the mass and online channels. Moving toward our hosiery and underwear sales, the overall decline in this category was due to lower stock sales, partly offset by strong performance in underwear sales, where we saw a 23.5% increase in sales during the quarter compared to last year. Lower stock sales reflected the overall industry demand decline in this category, as well as the impact of retailer inventory destocking. Conversely, we were very pleased by double-digit sales growth performance related to our underwear programs, despite a decline in overall industry demand in this category. Driven by sales of private brand underwear and masks and underwear products sold through online platforms. With our private brand men's underwear program now rolled out in all stores, our largest mass retail customer in a new display format, we have seen sell-through trends accelerate meaningfully and are very encouraged by the significant gains in market share related to this program. This covers our sales performance, and now let's move to earnings, where I will talk about the $224 million of gap charges that we took in the quarter, $130 million of COVID-related charges, and $93 million in accelerated back-to-basics initiatives that are simplifying our business, lowering our cost structure, and positioning us for the future. So starting with the COVID-related charges, the bulk of these costs primarily related to unabsorbed manufacturing labor and overhead costs. incurred in the quarter while our facilities were idle or operating at low-capacity levels. These cash and non-cash costs, which amounted to $86 million, would have normally been absorbed into inventory if our facilities had been running at normal levels. However, as we kept most of our facilities closed for the second quarter to manage and align our operations and inventory levels, these costs were treated as period costs, which flowed through our cost of sales in the quarter. In addition to the manufacturing idling costs, we recorded a $25 million charge related to the unwinding of commodity positions due to lower production requirements during the second quarter and through the remainder of the year. During the quarter, we also made a very difficult decision to further reduce our global workforce with reductions of approximately 6,000 people in manufacturing and 380 people in SG&A positions. This decision allows us to adjust our manufacturing, sales, and administrative support infrastructure with the current business impact of COVID-19 and provides us with good flexibility as we move into the back half of the year. Charges associated with the workforce reductions amounted to approximately $8 million for the second quarter. While you would expect higher charges related to these headcount reductions, most manufacturing employee severance costs are based on statutory requirements and are accrued on an ongoing basis from date of employment. Annual cost savings related to these employee reductions and the yarn spinning closure, which I will talk about as part of our Back to Basics initiatives, are projected to be approximately $46 million. Finally, as a result of the current environment, we took an inventory reserve of $14 million related to the decline in the net realizable value of certain retail end-of-line products. While we incurred significant COVID-related costs in the quarter, we also recorded $93 million in charges tied to actions related to our back-to-basics strategy. Managing our business through the effects of the pandemic led to decisions and actions to significantly accelerate initiatives tied to our strategy of simplifying our business and optimizing operations, which in turn we expect will materialize in further cost reductions and better position us for market recovery. Consequently, we incurred additional inventory charges of $26 million related to our Imprintable SKU rationalization initiative and $16 million related to our retail product line inventory management initiative. While the work we've done to optimize our Imprintable's product offering is now complete, we will continue to review our retail product line offering for further potential improvements as we move through the back half of this year. We also recorded restructuring charges of $29 million in the quarter primarily related to the planned closure of a smaller specialty yarn spinning facility in the U.S. Lastly, charges related to our back-to-basics strategy also included the $25 million impact of the strategic pricing action and imprintables taken in the quarter covered in the sales discussion. So putting this all together, we reported a gross loss in the quarter of $148 million or $122 million on an adjusted basis after adding back the skew rationalization charge of $26 million. A significant decline compared to last year was due to the combination of lower sales, manufacturing idling costs, inventory provisions, and the impact of unwinding the excess commodity commitments. On a gross margin basis, we reported a negative gap margin of 64.6% and 52.2% on an adjusted basis, mainly as a result of the COVID-related and back-to-basics charges just discussed. Of these charges, 196 million impacted the gross loss, and 170 million impacted the adjusted gross loss for the quarter. Excluding these charges would have resulted in an adjusted gross margin of 18% in the quarter, down primarily due to the impact of negative product mix and discounting. We expect the gross margin will revert back to more normal levels as our sales recover. Further, we remain committed to driving towards our long-term gross margin and SG&A margin targets which we have previously outlined under our back-to-basics strategy. SG&A expenses for the quarter of $65 million were down $27 million, or close to 30% compared to last year, reflecting the impact of lower compensation, lower distribution costs, driven by lower sales volumes, and cost containment efforts. Separately, during the quarter, we reported a recovery on the impairment of trades accounts receivables line of $6 million this due to strong collections in the quarter, which has led to lower expected credit losses. Summing all these elements up, we reported an operating loss of $236 million and an adjusted operating loss of $180 million during the quarter. And after financial expenses of $60 million, which were up $6 million over last year due to fees incurred in connection with the Covenant Amendment and higher average borrowing levels, the overall net loss for the quarter totaled $250 million, or $1.26 per dollar each year, and $197 million, or 99 cents, for diluted share on an adjusted basis. Normally, I would close with a discussion of our guidance. However, having suspended our annual guidance in March due to the uncertain COVID-19 impacted environment, let me instead give you some color in terms of what we're currently seeing in the marketplace. As we've moved into July, we were initially encouraged to see further improvement in imprintables POS in the U.S. from quarter-end levels. However, we have now seen some retraction in POS during the latter part of July, and POS is now down in the 15 to 20% range as reopenings have slowed or reversed in certain states in the U.S. On the retail side, we're encouraged by our sales so far in the third quarter, which through July months to date are tracking slightly ahead of prior year levels. Although overall we have seen further POS improvements in July, POS is mixed in retail depending on the channel. Sell-through in mass and online channels continues to perform strongly, up in the double-digit range, while POS in the mid-tier and sports specialty channels, although better than what we saw in the second quarter, is still being impacted by weak traffic trends and continues to show declines in the 20 to 30 percent range. That finishes our update, and in closing, while the trajectory of the pandemic remains uncertain, we continue to focus on strengthening our competitive positioning and driving market share gains. We believe we have acted swiftly and executed on important initiatives to provide us with the necessary financial and operating flexibility to take us through this challenging environment, and which will allow us to emerge as a stronger company for the long term. And with that, I will turn it back over to Sophie.