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.