Gildan Activewear Inc.

Ladies and gentlemen, thank you for standing by. And welcome to the Q2 2021 Gildan Active Wear Earrings Conference Call. At this time, all attendees are in a listen-only mode. Please be advised that today's conference is being recorded. After today's presentation, there will be a question-and-answer session. And 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. Thank you. Now, I would like to hand over the conference over to Sophie Argyri, VP, Investor Communications. Please go ahead.

Thank you, Ruel. Good morning, everyone, and thank you for joining us. Earlier this morning, we issued a press release announcing our results for the second quarter of 2021. We also issued our interim shareholder report containing management's 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. I'm joined here today by Glenn Chimamdi, President and Chief Executive Officer of Gildan, and Bob Harries, our Executive Vice President and Chief Financial and Administrative Officer. Momentarily, Rod will take you through the results for the quarter and a Q&A session will follow. Before we begin, I'd like to remind you 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 the Canadian Securities Regulatory Authorities that may affect the company's future results. And with that, I'll turn the call over to Rod.

Thank you, Sophie. Good morning to all, and thank you for joining us in the call today. This morning, we reported strong second quarter results, which, as anticipated, reflected a significant recovery from the height of the COVID shutdowns in the second quarter last year. We also delivered improved sequential performance, building from the solid start that we saw in the first quarter this year. Further, when compared to pre-pandemic levels in the second quarter of 2019, our results are showing that even though we have not seen a full top-line recovery, our back-to-basics strategy is unfolding better than planned. Benefits from eliminating redundancy and complexity in our business are driving solid sales performance, efficiencies in our operations, cost savings, and stronger profitability. Of course, this strong performance is supported by strong execution, and once again, our team demonstrated exceptional operating capability during the quarter by delivering on our targets while navigating through the challenges of a tight supply chain environment. In the end, we were able to deliver higher than anticipated sales of $747 million and adjusted operating margin of 19.9%, adjusted EPS of 68 cents, up 21% over the second quarter of 2019, and record second quarter free cash flow of $208 million. Given the strong recovery so far, the better-than-expected progress of our back-to-basics strategy, the company's prospects for continued free cash flow generation, and with our net debt leverage ratio now at 0.6, our board approved yesterday the reinstatement of our share repurchase program to buy back Over the next 12 months, up to 5% of the company's outstanding shares. So overall, another strong quarter. Now turning to more specific details on our results. As I just mentioned, for the second quarter, we generated sales of $747 million, up 225% over the prior year, driven by volume increases across all product categories and favorable product mix. Activeware sales came in at $597 million, up 354%, and sales in the hosiery and underwear category were $150 million, up 53% versus last year. Volumes were up in all markets and geographies, particularly in printables, driven by the strong recovery in POS and the impact of the non-recurrence of significant distributor inventory to stocking, which we saw last year, as distributors drew down their inventories during the COVID shutdown period. On the underwear and hosiery front, we saw double-digit POS growth, drive higher underwear unit sales during the quarter, as well as in hosiery products, which were particularly impacted by last year's store closures. Comparing the second quarter of 2019, which was a strong quarter, sales were down 7%, which we nonetheless think is encouraging when considering the impact of both lower imprintables net selling prices this year and product mix slightly unfavorable compared to 2019. Overall, imprintables POS was down approximately 8% compared to the same period in 2019, showing some further improvement from the 10% decline we saw going into the quarter, mainly due to improving trends in North America. Specifically, imprintables POS in North America was down in the single-digit range compared to the second quarter of 2019, while POS in international imprintables markets remained weak, down close to 30%. In retail channels, overall POS in the quarter was up compared to the same quarter in 2019. So overall, we were pleased with the top-line performance we delivered in this quarter, especially given the context of a tight supply chain environment where labor shortages in the U.S. are continuing to affect yarn supply and constraining our ability to completely rebuild inventory levels following the hurricane from last year. Moving to gross profit, we reported a strong recovery over last year generating adjusted gross margin of 30.5% in the quarter. While last year we had significant COVID-related costs and back-to-basics related charges in the second quarter of 2020 flowing through our numbers, we are now also seeing the favorable impact of product mix, lower raw material costs, and benefits stemming from our back-to-basics initiatives in our gross margin. This is evident on a sequential basis, with adjusted gross margin in the quarter up 240 basis points from 28.1%. after excluding the one-time USDA pandemic assistance benefit we received in the first quarter of this year, which impacted margins by 300 basis points. Likewise, our margin performance compared to 2019 pre-pandemic levels also improved meaningfully, even though sales have not yet fully returned to 2019 levels. Adjusted gross margin of 30.5% in the second quarter was up 270 basis points compared to 27.8% in the second quarter of 2019. The increase was driven primarily by lower raw material costs and back-to-basics cost savings, which more than offset lower imprintable net selling prices and slightly unfavorable product mix compared to 2019. Turning to SG&A, our SG&A expenses in the quarter were $80 million, up approximately $50 million over last year, driven primarily by increases in variable compensation expenses and volume-driven distribution costs, offset in part by back-to-basics cost savings. As a percentage of sales, SG&A expenses of 10.7% were down significantly from last year, as you would expect, and 80 basis points better than 11.5% in the second quarter of 2019. Adding up these elements, we generated adjusted operating income of $149 million, translating to an operating margin of 19.9% in the quarter. The significant recovery from the loss we posted last year was driven by the higher sales, strong gross margin performance, and SG&A leverage. Lower financial expenses driven by reduced average debt levels and the non-recurrence of fees related to debt facility amendments we made last year also offset the impact of higher income taxes. Consequently, we generated net earnings of $146 million or $0.74 per deleted share and adjusted net earnings just over $135 million or $0.68 per share compared to a net loss of $250 million or $1.26 per share and an adjusted net loss of $197 million or $0.99 per diluted share in the second quarter last year. Compared to 2019, stronger adjusted gross margin and SG&A performance drove a 360 basis point adjusted operating margin improvement in the quarter compared to 16.3% in 2019, which led to a 21% increase in adjusted EPS. Finally, from a cash flow perspective, we generated $208 million in the quarter, which was a record for a second quarter. up from $177 million last year and $26 million in 2019. The increase over last year was primarily due to higher operating earnings and included a net cash benefit of $18 million from insurance proceeds we received in connection to damages sustained from the hurricanes last year. These positive elements were partly offset by higher trade receivable balances driven by the sales increase, a lower drawdown in inventory compared to last year when our facilities were idled, and higher capital expenditures related to our manufacturing capacity. Our net debt position at the end of the second quarter was $363 million, down from $542 million at the end of March, and our debt leverage ratio fell to 0.6 times net debt the trailing 12 months adjusted EBITDA, which is now below our historical target leverage range and down from 2.1 at the end of the first quarter of 2021. Consequently, as highlighted at the beginning of the call, Given the strength of the results we are achieving and the free cash flow we are generating, we were pleased to announce this morning that in addition to the reinstatement of our dividend last quarter, we are now reinstating our share repurchase program, an important step given the emphasis we place on return of capital to shareholders under our overall capital allocation program. This sums up the key highlights of our results for the second quarter. In short, strong results driven by a number of considerations, which on balance give us reason to feel good about our outlook. On the positive side, we are encouraged by the recovery we have seen in North America so far, including the sell-through trends for our products, as well as the benefits we are seeing from our back-to-basics strategy. On the other side of the ledger, we remain cautious about certain factors, including the pace of recovery outside of North America, which currently is weak, Further, on the supply chain side, U.S. labor shortages continue to be a factor affecting yarn supply, although we have seen some improvement more recently. We're also seeing tightness in raw material inputs and broader transportation-related issues, which are creating inflationary pressure. Consequently, we can sum it up by saying we remain cautiously optimistic as the recovery progresses, confident that our people and our strategy are positioning us well to continue to move through this environment and capitalize on market share opportunities. as we fully utilize and grow our manufacturing capacity, deliver on our profitability targets, and create shareholder value for the long term. This concludes my formal remarks, and with that, I will turn it back to Sylvie.