Gildan Activewear Inc.

Ladies and gentlemen, thank you for standing by and welcome to the Q4 2020 Gilding Activewear Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. To ask a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Ms. Sophie Ajiru. Thank you. Please go ahead.

Thank you, Polly. Good morning to everyone, and thank you for joining us. Earlier this morning, we issued a press release announcing our results for the fourth quarter and full year of 2020. The company's management discussion and analysis and consolidated financial statements are expected to be filed with the Canadian Securities and Regulatory Authorities and the U.S. Securities Commission tomorrow, Friday, the 26th of February, and will be available on our website. With me on the call today, we have Glenn Chimambi, our President and Chief Executive Officer, and Rob Harris, our Executive Vice President and Chief Financial and Administrative Officer. Shortly, Rob will be providing commentary on our results for this quarter, after which a Q&A session will follow. Today's conference call includes certain statements that 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 of the U.S. Securities and Exchange Commission. and Canadian security's regulatory authorities that may affect the company's future results. And with that, I will turn the call over to Rod.

Thank you, Sophie. Good morning, everyone. Thank you for joining us on our fourth quarter call. And as always, we hope everyone is staying healthy and safe. We are pleased to end 2020 with a strong finish, despite the ongoing pandemic and having to successfully navigate through unexpected weather-related headwinds in the quarter. And we are extremely proud of our teams, who throughout the year have delivered exceptional operational execution. From the beginning of the pandemic, we acted swiftly, putting our people first while maintaining a strong focus on our key priorities. We took the necessary business decisions and actions to strengthen our competitive positioning for the long term and accelerated our efforts under our back-to-basics strategy. The work we have done this year gives us great confidence that we are entering 2021 as fundamentally a stronger company. Our first quarter performance showed a strong sequential recovery from the previous quarter and compared to last year. We grew sales 5%, increased adjusted operating margin by 120 basis points, delivered adjusted EPS growth of 10%, generated record-free cash flow of $278 million, and concluded the year with a strong liquidity position of approximately $1.6 billion. We also continued to push forward with our back-to-basics strategy during the quarter, with further focus on rationalizing our product portfolio. Specifically, in line with what we previously communicated we were planning to do when we reported our third quarter results, during the fourth quarter, we conducted a detailed strategic review of our retail product offering and took the decision to rationalize part of our SKU base, which resulted in an inventory charge in the quarter of $26 million. At the same time, we also took a small charge of $6 million associated with the discontinuance of PPE SKUs. With the streamlining of our portfolio products, including an approximate 60% reduction of our printable SKU base, which we announced previously, and now a 70% reduction in our retail SKUs, we are confident the resulting benefits of eliminating redundancy and complexity in our product offering will drive efficiencies in manufacturing and distribution, which in turn will drive lower costs, inventory productivity, improved service and product availability, and drive more profitable growth, all key objectives of our back-to-basics strategy. So overall, we are pleased with what we have achieved in the quarter, particularly given the circumstances of having to deal with unexpected weather-related events. As many of you heard in the news, in November, two back-to-back hurricanes severely impacted countries across Central America, forcing us to suspend production temporarily at our Rio Nancy complex and at other locations in Honduras and Nicaragua. Facilities at certain locations remain closed for most of November and part of December, as we dealt with the impact of the hurricanes, before starting to reopen and ramp production back up in December. Our manufacturing team has done an incredible job, both by stepping in to provide much needed humanitarian aid to those impacted by the hurricanes, and at the same time bringing back our operations. As we manage through this disruption, we continue to service our customers during the fourth quarter, from existing inventories, production from other regions, and products manufactured early in the quarter in Central America. Now moving on to the details of our fourth quarter results. We generated net sales of 690 million, up 4.8% from last year. Sales of activewear totaled 538 million, up 11.3% compared to the prior year quarter. The increase in activewear sales was largely due to higher overall unit sales volumes, and strong imprintables product mix, which more than offset lower net selling prices of imprintables. The non-recurrence of distributor destocking that occurred in the fourth quarter in 2019 helped drive the increase in unit sales from printables sold in North America, which was partly offset by lower POS on a year-over-year basis due to the COVID-related demand environment, which also affected international markets. Although imprintables POS in North America was down compared to last year, we were pleased to see that sell-through trends improved sequentially. You may recall POS was down year-over-year 15% to 20% on average during the third quarter of 2020. In the fourth quarter, in principle, POS fared better, down on average just under 10% compared to last year. Activewear products sold in retail, particularly through online and other channels, were also up over last year. Overall hosiery and underwear sales in the quarter totaled $152 million, down 13%, over the prior year quarter. Strong sell-through of our underwear products continued, with sales up 20% in the quarter, significantly outpacing industry demand, as we continue to grow sales of private label and our own branded offering products. Where we continue to see weakness in retail sales within the hosiery category, which has been more heavily impacted by the current pandemic environment, particularly within national chains and department stores and sports specialty stores. Now, on the margin performance. We're pleased to see a strong recovery in gross margin compared to the third quarter this year, and more importantly, improvement compared to last year. Before reflecting charges related to our retail skew rationalization initiative and the small PPE write-down, which I addressed earlier, together with the reversal of a net insurance gain related to the hurricanes of $9.6 million in the quarter, our adjusted gross margin totaled 25.8%, 330 basis points better than the previous quarter, and 20 basis points above our gross margin of 25.6% last year. On a sequential basis, the gross margin improvement was largely a reflection of the strong mix we had in the quarter as we had anticipated. Stronger mix also drove year-over-year margin improvement, together with the impact of lower raw material costs and the flow-through of manufacturing efficiencies from our back-to-basics strategy. These positive factors more than offset the impact of lower average net selling prices, as we continue to push forward with our imprintables pricing strategy, as well as COVID-related and other period costs in the quarter. Benefits from our back-to-basics strategy also help drive down SG&A costs in the quarter. SG&A expenses totaled 71.9 million, or 10.4% of sales, and we're down 6% compared to 76.5 million, or 11.6% of sales in the prior year quarter. Adding up all these elements, we generated operating income of 78.8 million in the quarter, up from 24.3 million last year. On an adjusted basis, operating income came in at 105.7 million, reflecting an operating margin of 15.3%, up from 14.1% in the fourth quarter of 2019. Financial expenses of 13.1 million in the fourth quarter were slightly higher than last year, due primarily to fees associated with amendments to our debt facilities made earlier in the year and the impact of foreign exchange. After deducting financial expenses, we reported net earnings of $67.4 million, or $0.34 per diluted share. On an adjusted basis, net earnings totaled $90 million, or $0.45 per diluted share, up 9.8% over last year, as a result of the higher sales and stronger operating margin performance. Turning the free cash flow in the balance sheet. As I mentioned earlier in my remarks, free cash flow of $278 million in the quarter reflected record performance, bringing cumulative free cash flow for the year to $358 million. While we did reduce capital expenditures this year, the free cash flow generation has largely been driven by reductions in working capital, as we adjusted inventory levels through the pandemic and in response to our Back to Basics initiatives. During the fourth quarter, we also saw inventory levels reflect reduced production related to the hurricanes. On inventories overall, We ended 2020 with inventory levels of $728 million, down 23% from the third quarter, and down 31% from approximately $1.1 billion at the end of 2019. While we will build some of this inventory back in the first quarter, we do expect to run at lower overall average inventory levels going forward than we have historically run with, given the benefits from our back-to-basics strategy. Given our free cash flow, we reduced our net debt position during the quarter to $577 million, down from $862 million a year ago. Consequently, we ended the year with available liquidity close to $1.6 billion, providing us with strong flexibility as we start 2021. Our debt leverage ratio was 3.5 times adjusted EBITDA. However, for debt covenant purposes, our leverage ratio was 1.3 times. Given this positioning, let me take a moment to address our capital return programs. We remain committed to returning capital to shareholders through our dividend and share repurchase programs over the long term. And while we are currently well positioned from a liquidity perspective, before resuming capital return to shareholders, the company's priority remains to position its external net debt leverage ratio within its historical target range of one to two times. Once we achieve this level and also have good visibility on how the pandemic is evolving, we expect our board will review capital return policy. Looking forward, while we're encouraged by the recovery we've seen in our business and pleased with our competitive positioning in light of the progress we've made with our back-to-basics strategy, we remain cautious with our expectations for 2021, given the ongoing impact of COVID-19 and continuing restrictions on social gatherings. Further, while our supply chain is stable and ramping back from the fourth quarter hurricane impacts, the risk of COVID-19 disruption remains for all companies. All these factors contribute to an uncertain outlook, and consequently, we are not providing detailed guidance for 2021. However, we can provide some commentary on our expectations based on what we are seeing so far in the market. Imprintable's POS in the U.S. and internationally is currently running slightly weaker during the first quarter compared to what we saw in the fourth quarter. and it's overall down about 10% to 15% compared to 2019 levels. We believe this deterioration from the fourth quarter run rate is the result of second wave lockdowns in various geographies, as well as weather-related impacts in the U.S. over the last couple of weeks, and we would hope to see improvement as we move forward. In retail, we continue to see higher active wear and underwear sales compared to 2020. However, sales in the sock category continue to be down year over year. Accordingly, while overall we expect to see sales improve from 2020 levels, as I said earlier, we remain cautious with our outlook. On a stronger note, we do believe the progress we have made driving our back-to-basics strategy will continue to strengthen our financial and operating flexibility and support our margins as we continue to drive towards our long-term targets. Now, before I comment on cash flow, a small point on our adjusted measures. I just want to remind you that as we continue to assess the full impact of the hurricanes on our business and operations, we do expect to recognize additional recoveries in 2021. Consistent with the treatment of the net insurance gain in the fourth quarter, these future insurance recoveries, net of related costs and charges, will be excluded from our adjusted financial measures. Finally, on cash flow, we are planning on resuming growth capital expenditures in 2021 for our major capacity expansion project in Bangladesh. we continue to remain excited about the benefits this next phase of expansion will bring for our business. Overall, we are projecting total capital expenditures for 2021 to run in the range of 4% of sales, and after reflecting this level of capital expenditures, our goal is to generate positive free cash flow for the year. So in closing, we do expect a better environment with the ongoing rollout of the vaccines in 2021 than we saw last year, and are hopeful that we will start to see a more normalized environment emerging as we move through the year into 2022. However, regardless of how this plays out, we do believe the actions that we have taken in 2020 with respect to our back-to-basics strategy are strengthening and reinforcing our competitive position. Fundamentally, we believe this will ultimately allow us to take advantage of growth opportunities in the principles, retail, and international markets, while at the same time driving profitability as we deliver long-term value for our shareholders. Thank you, and with that, I will turn it back over to Sophie.

Thank you, Ron. That concludes our formal remarks, and we'll be starting the Q&A session. I would ask that you limit the number of questions to two so we can address as many callers as possible, and we'll circle back for a second round of questions if time permits. I'll now turn the call over to the operator for the question and answer session. Thank you.

And as a reminder, to ask a question, simply press star, then the number one on your telephone cue pad. Your first question comes from the line of Brian Morrison with TD Securities.

Oh, good morning. Rod or Glenn, can you just talk about where your manufacturing facilities stand right now with respect to the impact from the hurricanes? Is everything back online? Or then what capacity utilization rate do you plan on running maybe through Q1 or Q2? and how should we think about period costs as a result going forward?

Well, to answer the capacity side of the question, while we're continuing to ramp up, we're at a point where our current capacity right now is exceeding our POS requirements. We've got to the point where we've built the production up to surpass the ongoing current POS trend in the market. And we're going to continue to produce at a higher rate than our POS through this quarter, and by Q2 we think we'll be fully caught up. And that will allow us also at the same time as once we get our production up to these levels to take advantage of any upside as we go into recovery into the market in the back half if there is recovery from the pandemic back to normalization. So I think we're in relatively good shape. We're sort of, you know, We'll be in a better position as we enter Q2, and I think we'll have enough capacity as we look forward into the remainder of the year to capitalize on any material left side to, you know, improvements of the pandemic and social gatherings.

And I just add on with respect to period costs, Brian, if you look at the capacity levels that we're currently running at, as Glenn said, we're running ahead of POS, and now we're running basically at levels where we don't expect to see any real significant period costs. out of, let's say, period absorption that we normally have seen as we've moved through the 2020 period. So period costs are pretty well behind us. All of our period costs, for the most part, now are rolling into our inventory, and we don't expect to see any significant changes.

Okay, thank you for that. And then just a second question, if I can. With respect to the big run in commodity prices here, if we can just go back to sort of cotton 101. I know you're hedged out six to nine months, but are you able to put price increases or cost mitigation to offset this? Maybe just remind us the percentage of COGS that cotton or conversion costs make and the recent increases as baked into your 18% long-term margin target guidance.

Well, I would say that, you know, for fiscal 2021, we're very comfortable with our cotton position. Historically, as cotton has gone up, we're able to pass that cotton increases to our customers. So if cotton remains at these types of levels, you know, we'll see pricing go up as we move into 2022. I think that's the way you should look at it. So we're diagnostic, I believe, of the price of cotton.

Thank you very much, Mike.

Our next question comes from the line of Paul Liguez with Citigroup.

Thank you. It's Tracy filling in for Paul. You guys mentioned the POS trends were trending somewhat below 4Q, and I'm wondering if you could parse that out between the current period and fourth quarter by region. So what does that look like in the U.S. versus fourth quarter in Canada and in your other international markets?

Thanks. Quarter to date, Rod had mentioned in his commentary, we were down around 10% to 15%. That's pretty much across the board. The only thing I would add to that is that in the U.S., I think early in the quarter, we were running more similar to Q4, but, you know, the weather has been dramatically bad across the United States, which I think has put an impact on the POS. So I think in our U.S. market, I think it's more – like Q4, but having weather impact in the rest of our markets are around that 10% to 15% range.

Got it. Thanks. And then just a follow-up. What's your view of, cotton aside, the current pricing environment in your key categories, and what are you expecting in terms of pricing and promotions for this year?

Well, look, we're going to continue to leverage our back-to-basics strategy. We're going to continue to, you know, leverage our manufacturing cost savings. I mean, if you look at our whole back-to-basics strategy, it's focused on growth, you know, improving underperforming areas of our operations, leverage our costs, drive market share, increase margins, increase returns, and increase our return capital to shareholders. That's what a back-to-basics strategy is. So, you know, we have the luxury to continue being priced aggressively which we will continue to do this year as we move through this year. Our pricing has been pretty stable, I would say, once we launched our back-to-basic pricing strategy. Probably we came back early in July. We've been continually pricing aggressively. And that price is winning for us. We think we're getting share. Our business is performing very well. And I think one thing that we have to also – look at is that, you know, with the market even being down, you know, 10% to 15%, 70% of our total market in the United States or the principal market is related around social gathering. So, you know, our market has evolved through e-commerce, and we think that as we see this recovery with our continued back-to-basics strategy, we are very optimistic as we move into either the 21 and into 22. Got it.

Thanks very much.

Your next question comes from the line of Vishal Sridhar with National Bank.

Hi. Thanks for taking my questions. I was wondering, in the quarters, if you could help us understand the impact on sales and even on gross margin rate of the next shift.

If you look at the mix in the quarter, the mix was strong in Q4. So effectively, we're up 20 basis points year on year, but the mixed impact was 190 basis points. So it was strong. And as I said in my remarks, it was in line with what we expected. So if we look at where we were in the second quarter, mixed was a negative impact on margins of 600 basis points. If you look at where we were in the third quarter, it was a negative impact of 280 basis points. And as the sales came back, as we expected, effectively we get the mix impact along with that. And so mix turned positive force in the third quarter. And it was a big driver of our margin improvement. Back to basics also was a big driver. So if you look really at what's going on, the mix is coming back, and then the back to basics is really driving margin improvement as well overall. And very pleased with what we saw in the fourth quarter. And, again, expect that to continue as we move into 2021.

Okay, that's helpful. And into Q4, how much does it factor on next was fleece, and should we expect the fleece seasonality to return back to normal in 2021?

If you look at Q4, we did have good fleece sales. Fleece has been a good category, a good category through the pandemic, and it continues to be a good category. But overall, we did effectively see I would say, broader mix that we were expecting, right? And we've talked about this in the past. As the sales come back, we do see what we call fringe products effectively coming into the mix and driving margins. So, fleece was good. Strong category. Very good. Continues to be very good. But also with other areas of our business as well, it was driving that mixed impact.

Also, the fashion basic side of our business is also growing at a much faster clip today, which is also providing a mix improvement

Okay, and just a last one here. With respect to back to basics, obviously the company is making good traction on that and continues to. How much of that strategy are we starting to see the benefits of now flowing through the P&L? Is there big benefits yet to come, or are we kind of early days still?

Well, if you look at the strategy overall, again, I think we're particularly pleased if you look at Q4. and you look at the margin levels that we've been running at, both from a gross margin perspective and an SG&A perspective, effectively we're back to operating margin levels above where we were actually in 2019 in that range, let's say on lower sales. So effectively, you know, the benefits of back-to-basics are really coming through, but they will continue to come through as we go forward, right, as effectively as sales continue to increase, all of the benefit from the reduction of the product portfolio, the skew rationalization, the impact that has on manufacturing, on distribution, all of that will play through. So this is a strategy that, as we've said many times, really takes the business back to effectively a business model that we know can generate strong sales, very good margin performance, and very good and I would say capital utilization as well as we drive the business forward.

Okay, thank you. Congrats on the quarter.

And your next question comes from the line of Stephen McLeod with BMO Capitals.

Thank you. Good morning, guys. I just wanted to circle around on a couple things here. You know, you talked about the key one Q1 sort of being a little bit weaker. I know you sort of addressed this a little bit in a previous question, but are there any specific areas where you're seeing incremental weakness, or is it fairly broad across the board as it compares to Q4?

Well, no, it's across the board compared to Q4, but I mean, honestly, I think it's somewhat weather-related. I mean, you know, see what's happening in Texas, and the Northeast got hammered with, you know, back-to-back snowstorms, so You know, when people stop buying, they stop buying altogether. So I would say it's across the board. But I would say, like I said earlier, I think that the market is more like a negative 10 in the U.S. and 10 to 15 every ounce. And weather has drove down. February has driven down the U.S. market to the minus 10 to 15 range that we said before. So we're still in Persia. It's improving.

Okay. Okay. That's great. And then I just wanted to follow up on the cotton price inflation, which has been quite dramatic. And I understand that you sort of had the ability to pass that through. But are you seeing any pricing movements on behalf of your competitors or any demand disruptions or order disruptions from some of your imprintables customers related to this price inflation that we've seen on the cotton?

Well, we're the price leader in industry, right? So, you know, we're going to continue to price aggressively. So, you know, people either match or give up market share. And we're going to continue to do that through the course of this year. We feel very comfortable with our cotton position. And as we move into next year, cotton remains at these types of levels. We'll see inflation and pricing going up. I think that's how we're going to play the year. We're well positioned and we're building up our capacity. And really what we're looking forward to is the recovery in the back half of the year because we should have capacity to support additional growth as the recovery happens.

Okay, great. And then maybe just one more if I could. On the last call, you made some interesting comments about the addressable market exiting the pandemic being even bigger than it was when you're coming into the pandemic. Have you seen any data points that would change that view at all or anything that would give you more confidence that that, in fact, will be the case?

Well, look, it's got to be at the end of the day because, you know, the market is pretty robust right now, and social gatherings have not really occurred. I mean, they're starting to slowly come back. But, you know, the corporate promotional area, I mean, people are still working at home, so that whole market's dried up completely. You know, travel and tourism, you know, it's not really robust, I can tell you that. So all the, you know, Little League baseball schools and everywhere where there are rock concerts, I mean, All these events have been the driver of our, you know, market historically. So the fact that the market is even minus 10 to 15 is phenomenal. So our view is that, you know, if you look back in our investor presentations 10 years ago, we said the size of the market was $4 billion. You know, the market has evolved and grown. And the last, you know, four years of investor presentations, we estimated the market would be $6.5 billion. I would say that, you know, this market post-pandemic is going to be moving up from that level. And we're also getting the effect of onshoring as well. I mean, we're in a business where you can buy product at once, you know, buy our shirts if need be, change the labels if you have to. So the fact is that I think that that's also going to help drive demand with the product offering that we have today and the capabilities we have in the market. So, All these things really, I think, are a place to, you know, to access recovery. I think it's a very good decision.

Okay, that's great. Thank you very much.

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

Great. Thank you so much. You know, Glenn, could you talk a little bit about, you know, how the back-to-basics strategy is – impacting what you're doing with American Apparel and also sort of relate that to your comment about pushing forward with your imprintables pricing strategy. Like, what do you see in that brand, and what's the outlook for specifically in, like, the ring-spawn kind of fashion T-shirt market?

Well, the brand is going to be focused on really more our wholesale B2B-type business. I think that's where we're taking the brand. You know, it's going to be the fashion segment of our printable markets. We will have some of the products being sold online, like you can see on some of the big online retailers. But it's going to have a niche. It's going to be a little bit higher priced. It's going to be a little bit different. So we have a two-brand strategy. We have Gildan, which is really the core brand, and American Pearl, which is, you know, a step up with a little bit of differentiation in product and fabrication and assembly of the garment. So it's got a home within Gildan. It's doing good. obviously it's not the size of where Gilman is because we've got a huge history of market share and we also have Comfort Colors which is another brand which is basically again a little bit more unique because it's garment guide so we have a good brand portfolio we've narrowed down the SKU base of all of our brands so that we're really focused on what's going to sell and we're comfortable that our portfolio is what we need today to continue driving our back-to-basics strategy. And the back-to-basics strategy is really making sure that we grow is the pillar of our strategy, is growth. The second pillar of our strategy is making sure that we peel out any underperforming parts of our business. Because how do you get margin expansion? It's not necessarily by having to raise prices or be more effective. It's also by taking the margins, the lower profitability products you have in your line, or complexity out, that all ultimately, you know, increases your overall mix of your margin without doing anything. A couple of that, we're driving and leveraging a better cost position because you have less complexity. That all drives share. And that's what we feel is very comfortable as we move forward. You know, margins will continue to move up. Returns will improve. Our return on net assets will improve as we perform in terms of using less working capital. And ultimately, that will allow us to return more capital to our shareholders. So, We've got a good plan. We've got the right products, and I think we're positioned well in the market.

Got it. Thank you for that. Maybe, Ron, if I could ask one more question. Just on SG&A dollars, like, how are you thinking about budgeting, you know, the first quarter and for the rest of the year, just to help us with our models a little bit? I mean, should we continue to expect the same kind of run rate of SG&A dollars that we saw in 4Q versus 2019 as we go in here into 2021? Yeah.

Yeah, I mean, look, if you look at the first quarter of every year, right, generally it's a little bit lower sales quarter. So our percent of sales generally goes up, right, as far from an SG&A perspective. But if you look at the dollar amount effectively on a quarter-over-quarter basis, I mean, we've done a great job on our SG&A, and we're going to stay focused on that as we go forward. We're working towards that 12% target overall. And so... That really is where we're trying to get to when we look at it on a four-year basis. So if you look at our SG&A, I mean, as the environment normalizes, some cost is coming back into the system. And I think you'll see that effectively for all companies. If you look, there's cost, oil-related costs, you've got travel. Things are coming back in. But we've done a very good job, I would say, Jay, on our SG&A, and we're going to keep it at those levels as we move forward. as we drop towards that 12% target overall.

Got it. Okay, great. Thank you so much.

And your next question comes from the line of Chris Lee with Des Jardins.

Good morning. Glenn, just based on your comments about an expanded addressable imprintables market, is it fair to assume that we do not necessarily need to see the traditional social gathering or corporate promotional end-user segments to fully recover in order for your sales to be back at the prequel level?

Well, look, we're down to 10% to 15%. So, you know, the answer is we definitely need some type of recovery of social gathering, really, to take our sales back up to the normalized level. Otherwise, we'd probably be there today. So I would say, no, we need to have that recovery happen. But if you take the percentage of sales of the, you know, social gathering type products in our universe, you know, it used to be 70% of our market, right? So, you know, people are buying products in different places. They're buying them online. So, you know, there's been a little bit of, I didn't go to the local fair to buy my T-shirt. I'm going to go buy it online. But they bought their shirt, right? So it's not going to be a duplicate, you know, increase because social gatherings, you know, start to occur. So, I would say net-net, you know, the market will expand. You know, I think we've got an efficient distribution system in general in the overall market. And, you know, time will tell to see what happens once the recovery takes place.

Okay, that's helpful. And your last investor day, I seem to remember, and I could be wrong, but you mentioned that you had about 20 to 25% market share in the fashion basic segment, and there's a lot more room to grow. Do you have that number updated given everything that's happened?

Well, it's growing. I mean, I think we've definitely grown it significantly this year. I mean, I haven't got the exact number to give you today, but I would say that we definitely have significant growth. I mean, the two big areas of growth in our POS are fleece and fashion basics. I mean, that's what's really driving our unit volume growth. So we definitely are, for sure, driving growth.

Okay. Thanks for the comment.

And your next question comes from the line of Luke Hannon with Canaccord Genuity.

Thanks. Good morning. Rod, I think you touched on in your prepared remarks that you guys are going to be free cash flow positive. You expect to be free cash flow positive for the year. And I know part of that is going to be running at sort of lower inventory levels just as a result of the back-to-basics strategy. But How should we be thinking about, I guess, your production schedule and how that's going to affect your inventory balance throughout the course of the year? Is it going to be more normalized as in historical years where you're sort of building up that inventory balance in the first half of the year and sort of drawing it down in the back half? How should we be thinking about that?

I think that the inventory, look, we're tight on inventory now as we're catching up during the hurricane. So until we get to, you know, Q2, on our business. And as we get into the back half, you know, like I said earlier, our manufacturing capacity is running at a rate which is outstripping the, you know, the POS at the current level. So if that happens and we keep producing at these levels, we'll build a little bit of inventory at the end of the year. And if the market recoveries, then we'll probably have similar type inventories with higher sales. So one of the two will happen.

Got it. And then, Glenn, I know you touched on this earlier in the call, sort of how you're thinking about online and the rest of the addressable market throughout the course of the year. But has the pandemic sort of made you reconsider or view your channels a bit differently in trying to access that customer through online versus other channels? Have you guys given internally any thought about expanding those capabilities?

Well, the thing is that back in 2018 when we came to the market and we started our back-to-basics strategy, we looked at the market because we used to have a retail market and we had a printware market. We said, look, the world is emerging. It's all of a sudden our two markets were merging into one. That's what happened this year because the lion's share of all the sales that are being sold through our distributed network are heading on to online-type sellings. Either people buying online from our distribution network that they're servicing online sellers. You know, the local screen print fishing guy, let's say, for example, Myrtle Beach, you know, who never sold online was selling online today. I mean, so, you know, the whole world has gone online. And I think that, you know, we're still getting the benefit of that without having costs associated with servicing, shipping, picking. And that's the reason why we, you know, we got out of last year of the ship to the So it's definitely working. We're still, you know, being able to address those markets, but we don't have the costs associated with really, you know, the individual onesies and twosies. So I think that's sort of why we're so confident in our ability to grow sales and reduce costs.

Understood. Appreciate it, Kelly.

Your next question comes from the line of Patricia Baker with Scotiabank. Thank you for taking my question. Rod, I wonder if you could share with us your anticipated timeline with respect to getting your net debt within your targeted range of one to two times.

Well, I think if you look at our leverage ratio and you think about LTM, Q2 was a very tough quarter last year. So I think the first thing you have to look at that, Patricia, it'll drop away out of the calculation right as we move into Q2. So I think that will effectively have a big impact on bringing the ratio down. We're three and a half times on a reported basis at the end of Q4. And as we go forward, effectively, we'll see how things play out. Ultimately, we are, as we said, I think we're very pleased with the way Back to Basics is running, what we're doing with the business. We'll see how the first quarter plays out, see where we are in the second quarter. But I think that the the movement of that EBITDA out of our ratios will have a big impact as we get to the second quarter.

Okay, excellent. Thank you very much, Rob. And our next question comes from the line of Mr. Jim Duffy with Stifel.

Hi, this is Peter McGloswick for Jim. Good morning. As we think about the long-term 30% gross margin target, What factors are needed to bridge from run rate levels today? Is this a function of capacity utilization from existing manufacturing, or does it rely on the new capacity ramping or more pricing? Just what other drivers might be required to build for those targeted 30% levels?

It's just a function of us continuing to drive our back-to-basics strategy as all the components come together as we maximize our manufacturing capacity. you know, continue to improve our underperforming areas of our business, you know, grow to the top line, improve our mix. All those things combined will allow us to achieve our targeted 30% gross margin as we move into the future.

Thanks. Then near term, as we think about the 10% to 15% in printables point of sale versus 2019 levels, can you provide any insight into the view of distributor inventory alignment with these sell-through dynamics? Is there any contemplation in your term of restocking or destocking?

Well, I would say that the current inventory in the channel is normal low, but on a current POS basis. So in other words, with a negative POS basis. So that's really where we are in the channel today. So if the market... would materially come back, there would be a little bit more inventory required to support those sales in the channel at a normal low level. Okay, thank you. Okay, thank you.

And our final question comes from the line of Mark Petrie with CIBC.

Good morning. I just wanted to come back to the topic of the end markets and sort of the evolution of that you're seeing with the final customer. And I guess my question is, you know, does that shift have implications for the profitability of those products for you or your distributor, or does it have other implications with regards to sort of your manufacturing footprint and the efficiency there?

It doesn't change anything for us. or our customers, because, you know, we still ship full cases, full truckloads en masse to our customers through the distribution function, and that's what they do. So we're the, you know, we're the brand, we do the marketing, and the manufacturer of our products and our distributors do the distribution function. So, basically, for them, it's just going to a different outlet. Instead of going to necessarily a screen printer, it's going to an online screen printer or a screen printer that it could even be the same customer they're selling to, but he's now, instead of selling in his In his retail outlet, he's now selling online to consumers, right? So it's just a question of how the net consumer gets the product, but the channel and the functionality is still exactly the same. It's just a question of how it's getting to the end user, because even though we don't sell necessarily, you know, we're more of a B2B type business, the fact is everything ultimately ends up in the consumer's hands, and it's just a question of where do they pick them up. Does it lead to any shift in mix? Not really. I think, you know, the mix is pretty much consistent. You know, and I think mix is more driven by, you know, style changes or preferences. Like, you know, fleece has become a casual wear item. And that may be, again, back to people working at home, leisure wear. Leisure wear is a growing category. I mean, if you look at all the fashion brands today, I mean, they're getting out of suits and ties and going out to sweaters and other things because people are working at home and And I think that trend will not change. I think that could be also a big driver of our success because, you know, people are becoming more casual. This work-at-home thing basically has taken off the suit and tie for sure, right? So I think that's one area. So fleece has been a big driver. Fashion, you know, T-shirts basically is obviously a growing category. The area where, you know, the basic side of our business, I mean, that's where And if you go and look at the opening day of the baseball game, I mean, they're not giving away fashion T-shirts. They're giving away, you know, our basic byproducts. So that's where we'll really get the big push, I think, on the recovery is when the basic side comes back because of the big gatherings, rock concerts and NASCAR and et cetera, et cetera. So I think we're well-positioned. going to be the big evolution to the overall manufacturing of Gildan, which is going to support our international sales, as well as support continued fashion basic segment for us. So, you know, overall, I think we're well positioned, and we're looking forward to the recovery. You know, I think we prepared quite well this year, you know, relative to all things being equal. So, you know, as we get to this recovery, I think we're going to be rocking it.

And you guys just touched on it, but I just wanted to ask about Bangladesh. Could you just remind us in terms of the timing of that being a contributor to your business?

Yeah, well, that's going to support, you know, it's going to come on in 22, and it's going to support really 23 sales. I mean, by the time it comes on in 22. Okay, thanks a lot. Thank you.

And at this time, there are no further audio questions. And are there any closing remarks?

Thank you, Polly. Again, I thank everyone. We thank everyone for joining us this morning. And we look forward to speaking to you very soon. So have a great day. Thank you.

And thank you, ladies and gentlemen. This concludes today's conference call. Thank you for your participation. You may now disconnect.