Gildan Activewear Inc.

Ladies and gentlemen, thank you for standing by and welcome to the third quarter 2021 Gildan ActiveWare 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. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Sophie Argeru, VP, Investor Communication. Thank you. Please go ahead.

Thank you, Gail. Good morning, everyone, and thank you for joining us. Earlier this morning, we issued a press release announcing our earnings results for the third quarter of 2021. We also issued our interim shareholder report containing management's discussion and analysis of consolidated financial statements, which 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. Joining me on the call this morning are Glenn Schimandy, President and Chief Executive Officer of Gildan, 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 a Q&A session will follow afterwards. I would 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 Canadian securities regulatory authorities that may affect the company's future results. And now, I will turn it over to Rod. Rod, go ahead.

Thank you, Sophie. Good morning to all, and thank you for joining us on the call today. We are pleased with the record results we delivered in the third quarter, building on the strong performance we achieved in the first half of the year. Our back-to-basics strategy and our focus on operational execution is delivering a sustainable improvement in the economics of our business. And this, combined with the continued improvement in the demand environment, allowed us to generate record sales of $802 million in the quarter, which were above pre-pandemic levels, record adjusted EPS of $0.80, up 51% over 2019, and free cash flow of $232 million, a record for a third quarter. On our capital allocation priorities, we were active with our share repurchase program, which we reinstated in August. buying back more than 3.3 million shares in the quarter, and another 1.3 million in the month of October, bringing our total share reverses to date to more than 4.6 million shares at a total cost of approximately $175 million. Our net debt position further declined to $287 million by the end of the third quarter, reducing our net debt leverage ratio to 0.4 times and leaving us with strong ongoing return of capital capability. Turning to the details of our results for the quarter, total net sales of 802 million were up 33% over last year, driven by sales volume increases in activewear and underwear, favorable product mix, and lower promotional spending and accruals. In the activewear category, where we generated 656 million in sales, 44% higher than last year, volume growth was primarily driven by the strong Euro-VU recovery in imprintables POS. Consequently, activewear shipments were up in imprintable channels, both in North America and internationally, as well as in North American retail channels compared to last year. Sales in the hosiery and underwear category of $146 million were flat versus the prior year, as lower stock sales, which were affected by supply constraints of sourced stock products, offset continued sales volume growth of underwear products. When compared to pre-pandemic levels, Sales in the third quarter reflected strong growth, increasing 8% from a base of $740 million in the third quarter of 2019, with higher activewear and underwear sales volumes and saveable products mix as the main drivers for the growth. Our activewear sales volumes reflected the significant recovery in demand in our imprintables channels and higher year-over-year sell-through of our products in retail. We were pleased with the continued recovery we saw in our total imprintables POS, which turned positive in the quarter, driven by positive sell-through versus 2019 in North America, despite international POS still lagging 2019 levels. In the hosiery and underwear category, sales were 21% above 2019, driven by strong underwear volumes, which more than doubled, offset in part by lower stock sales. So overall, a strong top-line performance, despite a tight supply chain environment, particularly on the arms side, which has been limiting our ability to build inventory as a secondary priority to our current primary focus of servicing our customers' POS needs. Moving on to margin performance, a key call-out for the quarter, with adjusted gross margin coming in at 31.4%. This translated into an 890 basis point margin increase compared to 22.5% in the third quarter of 2020. Margin performance was driven primarily by favorable product mix, a reduction in promotional spending and accruals, the impact of non-recurring COVID-related costs incurred last year, and cost benefits from our back-to-basics initiatives, which are continuing to favorably impact our gross margin. When compared to the third quarter of 2019, adjusted gross margins of 31.4% in the quarter brought 400 basis points, due mainly to our back-to-basics cost efficiencies and lower raw material costs, while net selling prices remained essentially flat to 2019. Turning to S&A, expenses of $81 million in the quarter, or 10.1% of sales, were relatively flat versus the second quarter this year, enough approximately $20 million compared to $61 million, or 10.2% of sales in the third quarter of 2020. The year-over-year increase was mainly due to higher variable compensation expenses, offset in part by back-to-basics cost savings. Relative to 2019 levels, STNA expenses were up slightly, and as a percentage of sales total 10.1%, improving 60 basis points compared to 10.7% in the third quarter of 2019, as volume leverage and cost savings more than offset higher variable compensation. Summing this all up, as a result of our growth in sales, our strong gross margin performance and STNA leverage, we generated adjusted operating income of 172 million in the third quarter, translating to an adjusted operating margin of 21.5% compared to 12.2% last year. Net financial expenses were down $6 million over the prior year, offsetting higher income taxes. Consequently, we reported net earnings of $188 million and adjusted net earnings of $159 million, up from $56 million and $59 million respectively in 2020. Adjusted diluted EPS for the quarter was $0.80, up 167% from $0.30 last year. Compared to 2019, stronger adjusted gross margin and SG&A performance drove a 500 basis point adjusted operating margin improvement in the quarter, compared to 16.5% in 2019, which led to a 51% increase in adjusted EPS versus the third quarter of 2019. Finally, from a free cash flow perspective, we generated $232 million in the quarter, bringing our total on a year-to-date basis to $478 million and leaving us well-positioned to deliver over $500 million of free cash flow for the full year. As I mentioned earlier on the call, we ended the quarter with a net debt position of $287 million, down approximately $75 million from the end of the second quarter. Our debt leverage ratio declined sequentially to 0.4 times net debt to trailing 12 months adjusted EBITDA from 0.6 times at the end of the second quarter, well below our target leverage range of one to two times, and positioning us with strong ongoing return of capital capability. This sums up the key highlights of our results for the third quarter, and before opening up the call to questions, I want to touch on two more areas, ESG and the current market environment. On the ESG side, we were pleased this past week to rank eighth overall in the Investors Business Daily Top 100 Best ESG Companies list, which was published on October 25th. Further to our top ten ranking, Gildan placed first in the consumer goods sector. Strong recognition of our focus on ESG, which is a fundamental part of our overall business strategy. On the current environment, although there are various dynamics in the marketplace today, including supply chain disruptions and inflationary pressures, which are creating headwinds for many companies, we believe we are well positioned to manage through these factors and continue to deliver on our financial objectives. Our relative positioning is strong given our vertically integrated model and the geographical locations of our manufacturing supply chain. The vast majority of our sales are internally manufactured, predominantly in our facilities in Central America and the Caribbean. Consequently, our exposure to manufacturing delays for source products from the Eastern Hemisphere, specifically countries like Vietnam and other regions in Asia that have been experiencing pandemic-related shutdowns, is low. Similarly, our dependence on West Coast ports, where we are seeing heavy backlogs, is also limited, as the largest proportion of our ocean shipments come through ports in the East Coast. And Although we are seeing some inflationary pressure on transportation costs, our exposure to the level of freight inflation for goods coming in from Asia is limited in the context of our overall supply chain. On the other side of the ledger, our yarn supply has remained constrained due to U.S. labor market tightness, although we are seeing improvement. Overall, we have done an exceptional job managing through these constraints and we are confident that our team will continue to navigate through this environment. Finally, on raw material costs, obviously many of you have been following the recent rise in cotton prices, which is a meaningful input for many apparel companies. Typically, we like to maintain a certain level of visibility over our future raw material costs, and we try to mitigate or offset rising raw material costs through a combination of hedging, cost reductions driven by our scale and vertical integration, and through pricing. In this regard, we believe we are well positioned to manage through current inflationary pressures, primarily due to back-to-basis cost efficiencies, combined with recent pricing actions we started to implement in the fourth quarter of this year. In particular, having lowered pricing last year in order to drive market share, even with the recent price increases we have announced, our current pricing levels remain only modestly above 2019 pre-pandemic levels. providing us with strong flexibility to manage inflationary pressure as we go forward. So, in closing, our continued focus on execution and our strong performance to date in the context of the current environment, together with the positive progression in demand, which is now driving POS trends in North America above pre-COVID levels, leaves us feeling good about the momentum we're seeing in our business. In spite of supply chain tightness in certain areas and rising inflationary pressure, Our positioning gives us confidence that we can manage through these near-term factors, and as we continue to shift our focus to a capacity, innovation, and ESG-driven sustainable growth strategy, we believe we are well-placed to capitalize on market share opportunities and create long-term value for our shareholders. This concludes my formal remarks, and with that, I will turn it back over to Sophie.

Thank you, Rod. Before moving to the Q&A session, I would ask that you limit the number of questions and we will circle back for a second round of questions if time permits. I will now turn the call over back to the operator to start off this question and answer session. Gail?

Thank you. As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Your first question comes from the line of Paul from CP Group. Your line is open.

Thanks, guys. I'm curious if you can give us an update on the additional manufacturing capacity you expect to come online for 22 when you might be able to start taking orders under the assumption that that additional capacity can fulfill orders in 22 or maybe you have already. And then second, just on the price increases, just curious, you know, what have we seen so far? Did any of your price increases impact the third quarter? And what sort of increases are we talking about that will impact the future quarters? Thanks.

Okay. Well, I'll take the capacity question, Ms. Glenn. Well, what we said in previous calls is that we were repurposing all of our equipment from Mexico into Central America. And we were going to expand our capacity in the neighborhood of about $500 million in potential revenue. And that equipment was going to be installed towards the end of this year, which was what we are on track for. The bulk of this equipment will be installed by the end of fiscal 21. We have already started to wrap up the capacity. I mean, as you can see, we're already producing past 2019 levels as we support sales as we move forward. And that's being balanced out by our ability to bring on our yarn to support the capacity increase. So that's what we're really managing through right now, which is improving every day as we get more folks back to work and our capacity and training and everything else in our yarn facilities, as well as our yarn partners, which experience really the same type of shortfall in their yarn. So we're moving forward. and the capacity we ramped up during 22, and it'll be a function of really the availability of our yard, which we're working and focusing on. So we only have really one major focus right now is just making sure we secure our yard requirements to support this capacity buildup because everything else is in place.

Do you want to answer, Chris? On the price increases, Paul, I mean, if you look at our pricing in the third quarter, and if you want to compare it versus pre-COVID levels, Really, we didn't have any net price increase in the third quarter. We're basically flat to 2019. As you move into the fourth quarter, we did take some price increases. They will start to kick in at the beginning of the quarter, but it's pretty modest, as I called out in my comments. So, overall, we're effectively looking at net price in the fourth quarter of between 2% and 3% versus 2019. And then if you move to next year, we'll see where we are. I mean, obviously, as we think about our whole system, our vertically integrated manufacturing system and our back-to-basics, that's the first place we look to offset cost pressure and increases. And so we'll look at that and we'll use that scale and back-to-basic efficiencies to offset as much cost as possible. But we will take whatever price we need as we move into 2022 in order to manage our margin profile. And we've talked about this many times before that we are really driving this operating margin target of 18%. We believe that's the optimal place for us to be as we run the business, as we drive to use our capacity. And so we will effectively manage as we move into 2022 to focus on that and take what price we need in order to manage that. But again, that'll be after we use all of our efficiencies. And I think given our overall price setup, we're very well positioned to manage that as we move forward.

Rod, just as a follow-up, what do your price gaps look like versus the competition right now? And how do you see that changing over time as you make your price adjustments? And how do you think your price adjustments might match up to the competition?

Well, look, we think that the price gap is widening. That's why we feel very comfortable. There's lots of room if we choose to raise prices. But keeping in mind that we have a lot of capacity coming on, and our focus is to be a capacity-driven company and drive our top-line sales. So where we are right now, I think we've got all the flexibility in the world. The gap in terms of pricing in the market, our products versus our competitors, is a is increasing. And, you know, our big focus right now is gearing up and delivering and build up our manufacturing capacity, the 500 million we have available. But don't forget, we have Bangladesh, which is going to be coming on at the end of Q4 22, which is also a big incremental 500 million of capacity. So we have a lot of capacity available to us. And this is a chance for us to, we believe, to take market share. So we want to balance all these pieces together, and as long as we can deliver top line growth with 18% operating margins, and take significant market share over the next couple of years, we think we will be very comfortable with that positioning. Got it. Thank you, guys. Good luck. Thanks, Paul.

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

Hi, thanks for taking my questions and congrats on the quarter. In terms of the outlook, management has performed very well on back to basics, probably better than would have anticipated at the outset. Can you give us some comments on where you are back to basics, what remains to be done, and that 18% margin, is management going to manage to that using inflationary pressure and drive towards that 18% or Are there other leaders that you may pull as it goes forward?

Well, the 18% is our focus, and, you know, we're going to continue to manage against the 18%. I think that's a given. And that's a long term. You know, it might go up a little bit like it did this year, but, I mean, you know, our focus is the 18%. And look, I mean, back to basics is it's a culture. It's not a strategy, really. So, you know, what we've done is we've instilled in our organization the a discipline to continue to drive. And that's what made our company successful. That's why we were able to capture a large portion of the market share, you know, even from the beginning stages is that Gildan developed a strategy of being a low-cost manufacturer, passing those cost savings into better quality products, innovation, and better pricing. You know, our back-to-basis strategy is just taking us back to what is the core competency of the company, and that's what we're continuing to do. So we think that there's still, you know, opportunities within our system. You can never stop. I mean, you have to challenge yourself. We're looking at ways to continue reducing costs and increasing capacity and efficiency. So, that's part of our DNA. So, that, I think, is going to continue to evolve as we go forward. And, you know, we're very excited about, you know, all this capacity that's coming on, this 500 million, we're big in Central America. I mean, it's all going to, you know, in our operating plants, we have deflation. I mean, most people are seeing inflation, but, I mean, our cost per operating and converting fabrics is coming down as a percentage, it's not going up. So that's one of the great things about how we leverage our system and we'll continue to do so as we go forward.

Okay, thank you for that, Colin. And I was hoping you could provide us any perspectives that you have on global minimum tax and how we should think about it as it applies to Kilgour.

Well, we're tracking what's going on with the global minimum tax to effectively reduce understand how it will evolve as we go forward. I think everybody's looking at it, and I think it's still probably a little bit early, I would say, to really get a good read on it. Obviously, we know what has been agreed and put forward, and now, obviously, it has to go to Congress. It has to go through the EU. I think what's really important as we think about our structure, we do have a low effective tax rate, but that's driven by our overall business structure. And it's driven by our vertical integration. It's driven by our setup in Central America. It's driven by a number of factors. And none of that will change. We're going to drive that whole vertically integrated system very hard as we go forward. It's all about back to basic. It's all about our pivot now to our growth strategy as we go forward. And as a result of that, that provides the competitive advantage, the strong competitive advantage we have versus the people that we compete against. So from a tax perspective, we'll see how that unfolds. Again, still early days. I think we are obviously focused on 18% operating margin. I think ultimately if our tax rates do increase, we'll probably reassess that. And if you look at the 18%, effectively, if our effective tax rate, which is around 5%, went up to 15%, that's a 10% increase. A 10% increase on our 18% operating margin would push our targets up really to about a 20% operating margin, and we did a 20% operating margin the last quarter. So ultimately, you know, we have to focus on running the business, driving that free cash flow ultimately, but it's not going to change the way we're set up, the way we think, the way we compete, what our DNA is, and we think that's very strong and that's going to deliver really strong values to shareholders long term. Thank you.

Next question comes from the line of Stephen McLeod from BMO Capital Markets. Your line is open.

Thank you. Good morning, and congrats on a great quarter. I just had two questions for you. One, I was hoping you could just give a little bit more color around your yarn supply situation. You mentioned it as sort of a near-term situation. sort of a near-term potential constraint as well as longer-term, you know, your managing capacity towards yarn. And then secondly, with respect to the inflationary pressures you're seeing and the pricing you've put through, I just more near-term was wondering if you could give a little bit of color around how you see Q4 gross margin evolving and potentially into Q1 as well.

Okay, I'll take the yarn. So, look, I mean, we've, made huge improvements. I mean, this, you know, yarn has been a little bit of an issue and related to mainly because of our U.S. labor pool and, you know, COVID-related absenteeism and et cetera. So, I mean, we've turned a corner. We've, you know, it's been something that's been affecting us all year long. We started the year, I think, you know, struggling would say is maybe a good word. But now we've, you know, we're improving every day and not just us. I mean, that's a broader sentiment amongst even the partners that supply us the yarn as well. And we've also increased, you know, our sourcing and internal volumes through equipment and other avenues. So, you know, we're basically, we feel that we're, you know, moving forward and we're actually producing more today than we did in 2019 as we're consuming some of this capacity. Obviously, we're not fully utilizing the potential of our $500 million, but over the course of this year, we see a plan to get us there, and that's what we're driving for. So, you know, we feel that we should be in a position to, you know, have a significant portion of that $500 million yarn available for us as we move through 2022. Dr.

So if you think about gross margin and how that's going to evolve as we go forward, if we look at the third quarter, our gross margin was 31.4%, very, very strong. The one thing I would call out is in that gross margin, there was about 140 basis points of margin that was related to the reversal of a reserve for promotions. So we did get a little bit of uplift in our margin associated from that, which we won't see in the fourth quarter. In the fourth quarter, we will see – now headwinds from raw materials coming through and inflationary pressures. We've called that out all year long that we expected that to hit us in the fourth quarter, and that will come through. And then that, to a certain extent, will be offset by the price increases that we talked about in prior questions. So, overall, you will see a decline in our gross margin in the fourth quarter. But I think, again, we keep going back to this, the fact that we are running the business to achieve that target operating margin of 18%. And I think as we move into the fourth quarter, you'll see us be able to deliver on that. And then as we move into 2022, on a broader level, effectively, we will be managing growth margin, SG&A, everything, the whole focus together with, obviously, our sales, our capacity-driven growth to hit that target. And that will effectively – we'll see how it goes quarter to quarter as we move into the new year. But, again, we're focused effectively on delivering that number full year. And this fourth quarter, I think, will be a good quarter, down from where we currently are. But I think you'll see, again, numbers pretty well in line with that as we finish up the year and move into 2022.

Okay, that's great. Thanks. Thanks, Rob. Thanks, Mark.

Your next question comes from the line of Chris Lee from Bajority. Your line is open.

Thank you, and good morning. Glenn, to the extent that you can share, can you tell us how much of the conning requirement for next year has been locked in, you know, prior to the recent surge in con prices? I'm just trying to get a sense of, you know, when Gildan would start consuming con that's been above the $1 level. Thank you.

Well, Chris, we really don't provide that information, but I think that maybe one other way of looking at it is that cotton's been trading quite significantly higher on a year-over-year basis for some time now. So, I mean, the higher cost of yarn or cotton, let's say, for example, is probably already impacting our cost of goods sold as we go forward. But I don't really... I wouldn't want to say exactly, you know, our position in terms of cotton, but I would just say that cotton is definitely moving up. You know, we don't know where it's going to land, obviously, because it's still volatile. I mean, but, you know, we have a position that, you know, we feel comfortable where we are today. We have good visibility. We have our pricing strategy, which is in line and I think is not – we have lots of room on pricing if we need big. And, you know, we're going to deliver 18% operating margin regardless of the price of cotton at this point in time. So we really are pretty comfortable where we are, I think, as we move forward into 2022.

Okay, that's very helpful. And then my other question is, you know, historically where there would be some margin volatility is when, you know, there's a big jump in comp prices, but followed by quite a rapid decline in a short period of time. Do you see that as a risk? to margin, or do you think that in the current environment where there's low inventory, tight supply, and recovering demand, that if complex were to come down rapidly for whatever reason, that the type of margin volatility that you have experienced in the past will not materialize as much?

Yeah, right. I mean, look, the big volatility was in 2011, right, when it went to $2 because clocking in the world, ending inventories were 46 million bales. Today they're 80. So, I mean, we're not going to, you know, there's still ample cotton in the world. I mean, part of the, you know, the big spike in cotton is also a function of, you know, supply chain disruption. I mean, getting cotton to ports and things like that. So, people are panicking and trying to get their cotton. So, you know, I don't think that we're going to be in a position where we were in 2011. But, I mean, I would say that, look, we're not aggressively raising prices. I mean, we've got our price, I think, if you look at what Rod said, I mean, our price is going to be slightly 19. I mean, Q3, we're at the same level as 19. Q4 will be slightly higher than 19. So, you know, we're being careful on raising price and using what our strength is, our low-cost manufacturing, our cost initiatives, our back-to-basics to drive volume in this market because we think our competitors are under pressure. I think that they're Cost structures are broken, and this is a big advantage for us to take share and ramp up to our $500 million and then follow that up with Bangladesh. So, you know, we're not going to go crazy on price, I can tell you. We're going to manage that 18% operating margin, and we'll take what price we need, and I don't think that we'll be in a position to have to worry about the receipts of cotton coming back down to lower levels.

Great. Thanks, Helfer, and all the best. Thank you.

Next question comes from the line of Luke Hannan from Kanakor, Jindalwiti. Your line is open.

Thanks. Good morning. I just wanted to follow up on the, I guess, the demand part of the equation of what you would have seen in Q3. Was there any, on your end, did you notice any, I guess, pull forward of demand from your distributor customers as a result of these cotton prices going higher? So, I guess, you know, a chance for them to be opportunistic and get some lower cost inventory on their books?

No, look, I mean, we saw actually destocking in the channel in Q3. I mean, our distributor, our customers' inventories have actually you know, decreased slightly from Q2 to Q3 because demand is so strong. So, you know, this is all being pulled through by end-use demand. The market is very strong. You know, a lot of this is also a function of what's happening from onshoring, people needing product. I mean, the supply chain is basically, you know, we think our overall market has grown through COVID, obviously, through the onset of online selling, etc. So, You know, business is actually very strong. In fact, if anything, we left sales on the table.

Okay. And then just as a follow-up to that, Glenn, I know we've talked about in past calls just the delta, the amount of restocking potential, I guess, there is in the channel relative to 2019. But is there anything that's come out of your conversations with distributors that would indicate that they're maybe more comfortable with having lower inventory on their books sort of going forward post-COVID than they would prior to the onset of the pandemic?

No, I think that they need more product. I think they're – efficiencies are, I mean, the lack of product, I think, in the channel. I mean, their inventories are probably half of what they were in 19 today, so just to give you an idea of where they stand. You know, and it's not healthy. We need more inventory in the channel. That's what we're working to get to, you know, increase, obviously, our capacity to ultimately support better inventories in the channel because, you know, when they buy a product, if they have to ship, you know, a consumer or one of their end users, you know, one one size from the East Coast and one size from the West Coast and you wait to receive all those in your print shop, that's just not good business. That's not something that they want to do, right? So, you know, there has to be an optimal amount of inventory in the channel. It's below optimal levels today. The thing is that business is so strong that, you know, it's going to take some time before that restock eventually happens if it maintains at these types of levels. And I think that's where eventually it will happen and they need to have more inventory for sure.

Okay. Thank you very much.

Next question comes from the line of Brian Morrison from BB Securities. Your line is open.

Yeah, thanks very much. Good morning. Just want to follow up on that question, Glenn, because your inventory is down 23%. Maybe just update us on what you see as replenishment needs in the distributor channel now. And then in terms of the demand environment, when do you think you're going to be in a position to commence replenishment within the channel?

Well, we don't know that, obviously, because we don't know how strong POS will be as we move forward, right? So, I mean, you know, just turn positive. I think there's a lot more. I think we're leaving orders on the table today. We know it for a fact. I mean, there's a lot of business that we had. And, you know, so a lot of the capacity that we're building and increasing as we go forward, I think will go right into POS. So the question is, is that, you know, when, at what point in time will You know, we outstrip the demand of the POS, basically, and how high could the POS go? That's the part that we don't know. But that's a good problem to have. So, you know, we'll see what happens. I mean, we're in a relatively good, I think, position today. We'd like to have a little bit more volume as we speak, but it's coming along. And our inventories are in line. I mean, you know, one of our strategies in terms of back to basics is obviously, you know, continue to manage our working capital. and are few. So I don't think that it's our inventories that are too low in aggregate dollars, maybe a little bit low, but nothing significantly. It's just the fact that our capacity needs to be a little bit higher to be able to support the demand in the market today.

Just following up on that, where is your current state? What is the current state of your transfer of assets into your Central American facilities from Mexico?

It's pretty much complete. I mean, we have by the end of this quarter, you know, beginning of Q1, everything will be installed. You know, we've already started to utilize those assets because we are producing over 2019 levels as we speak today. And we'll continue to ramp up as we move forward and, you know, and build on our yarn availability, basically, which we have a plan to, you know, plan to ramp up. So I think we're moving forward. We will have more capacity as we move into 22. And our objective would be is to try and have as much as that 500 million available for sale in 23.

Okay. And last question, just in the context of supply chain headwinds, you know, is vertical integration, has that been a notable benefit in gaining market share or is it more still the pricing gap relative to the competition?

Well, I think that, look, we don't have a significant amount of inflation, so the pricing gap is obviously going to pay big dividends as we move forward. I mean, that's a given, right? But, look, we're in a position to, I think, continue driving success in our hemisphere. You know, it's paid off. We've got a very good, effective supply chain being vertically integrated and managing all aspects of our business. I mean, there's very few people in the world that do it, right? So, You know, it's proven that when you manage your own supply chain, you become more effective, you're in control of your destiny. So, you know, we're going to continue to benefit from our vertical integration. And I think that as the world changes, and, you know, this is something that's a wake-up call for everybody. I mean, you know, people are scrambling for product. They need to understand who their reliable partners are. I mean, I think that we also are going to be in a good position to continue having steady growth with all of our partners as we continue to move forward.

Thanks very much, Glenn.

Your next question comes from the line of Jay Sol from UBS. Your line is open.

Great. Thank you so much. Glenn, I'm wondering if you can elaborate a little bit on some of the demand sources in the quarter. You know, specifically, have you seen some of your orders coming in, you know, as a result of those big group events to the extent you kind of know that? I mean, do you think, like, the world is completely reopened, or are we still kind of in the middle stages of things getting back to normal and all the different sources of where your demand comes from really coming back, you know, as they were pre-pandemic?

I think that the market has grown. I mean, I said that all along, is that pre-pandemic, I think we think the market has grown significantly through the for people that have brands that are able to sell online. I mean, if you look at our products, I mean, they're the canvas for somebody to create a brand, right? I mean, they can buy our shirt, put their label in the shirt, put a screen print on the product and create a brand. So, a lot of that is, I think, has happened during the pandemic and there's a lot more brand driven opportunities. Online selling has become a big opportunity, I mean, which is relative to the brand as well, but you know, prodigating to consumers, which never were able to before. And that's a function of having digital printing, which has been a big impact in our industry where, you know, before you need to run a screen printing operation where, you know, you basically have to set up and make 200 units at a time. With digital printing, you can make onesies and twosies. So, you know, people are going online, you take a picture, you send it to your online provider, and 10 days later, or not even 10 days later, three days later, you get a shirt with your print on it. Near-shoring is becoming a bigger, bigger factor. And that's not just with, I think, global brands that we do business with, but I just think in general people are reacting quicker to the market. Retailers are buying T-shirts. They're asking their providers to, you know, source those products quicker and more domestic, which is somewhere which is driving our volume. So we just think casualization has been a big factor. Our police business is, you know, on fire, really. I mean, it's up significantly. on a year-over-year basis and up significantly over 2019 and continuing to grow. I mean, we can't make enough of it. So those are all things that are driving our business. So we think we're relatively in a good position to continue our growth. I mean, the only area that we have which I think is a little bit, you know, lagging is our international business, which really hasn't come back from POS, but that's improved over the last year.

Got it. Okay. Thank you so much.

Again, to ask a question, you will need to press star 1 on your telephone. Your next question comes from the line of Mark Petri from CIBC. Your line is open.

Yeah, good morning. I just wanted to follow up on a couple things you've touched on. I guess specifically just with regards to working capital, Are you comfortable with sort of the levels that you're at today, or do you think there's opportunity for that to move one way or the other? And then related to that, obviously the free cash flow generation is extraordinarily strong. When you think about opportunities to invest in your business, are there additional opportunities for either vertical integration or potentially expanding capacity through acquisition? Thanks.

Rob, you want to answer that?

Yeah, on the working capital, Mark, you know, our working capital, if you look in the quarter, was around 25%, 26%, right? It's a little low. I mean, back to basics has been about optimizing, you know, our whole setup, and through the optimization, we should be able to run with lower working capital. And we have been able to, actually. It's been a big benefit, I would say, from the whole strategy. But we are tight, and we are a little bit low. So if you think about 26, I would say that, you know, we used to talk about running with our working capital in the low 30s, 30 to 35, and I think probably now we could probably run with around 30, something like that. So effectively it's a little bit low, a little bit below where we want it to be, but it is a big part of our overall strategy, and we should be able to keep it reasonably low and turn it fast as we go forward.

What was the second part of the question you asked, Roy?

I was just asking about, you know, sort of opportunities to deploy capital aside from returning cash to shareholders, either other opportunities for vertical integration or potentially acquisition, you know, presumably to add capacity, but, you know, other possibilities too.

Okay, well, I think, look, we're always looking for, you know, ways to grow our business in terms of capacities. But I think that if there is some type of acquisition for us, you know, it would probably be more capacity, you know, more textiles or something that's going to drive our top-line growth, really. You know what I mean? So that's probably the type of acquisition that we would look at today. But, you know, we have a lot of capacity coming on, too, to be honest with you. I mean, you know, we have... a significant amount of capacity today in our Central America textiles, and we have Bangladesh 1, you know, coming online, and we have Bangladesh 2. So we're in a relatively good spot. So we'll continue to, you know, look at deploying our cash to shareholders. I mean, in the near term, for sure. Obviously, we will continue to buy back shares and look at returning capital through dividends. I think that's really the, in the shorter term, that's probably where I think where we will be in terms of cash flow. Return cash.

Thank you.

Okay.

Next question comes from the line of Jim Duffy from Stifel. Your line is open.

Jim, go ahead. I think you may have.

Sorry. I'm with you. Sorry for that. Congratulations on your ESG recognition to start. Can you guys speak to what you're seeing in your global lifestyle brands engagement, given your ESG standing in Western hemisphere manufacturing? I would expect that to be a very constructive foundation for discussions. Any new business opportunities to point to?

Well, look, part of our growth strategy is to continue developing our relationship with these customers. There's definitely, I think, been a big focus on nearshoring, and we're in talks with most of our global lifestyle brands to continue to grow their business, and I think combining that with our ESG strategy, even looking at providing products in other geographical markets, believe it or not, because we're positioning ourselves as a as a tier one supplier of product. And, you know, ESG for us, we think is going to be, you know, a game changer as we move into the future, because people are going to need to rely on their supply chain partners. And we believe that we're well positioned to continue capitalizing on our position.

Great. And Glenn, can I ask the state of distributor inventories relative to POS? And are you seeing any pull forward of demand from distributors in an attempt to build stock ahead of anticipated price increases?

No, no. What I said just a couple of questions ago was that the inventory in the channel really is roughly about half of what it was in 19. I mean, just put things in perspective. And POS is turning positive relative to 19. So, you know, inventories are tight in the channel.

Thanks.

Thank you.

There are no further questions at this time. Ms. Sophie, please continue.

Great. Thank you, Gail. And with that, once again, I would like to thank everyone for their participation today, and we look forward to speaking to you soon. Have a wonderful day to everyone. Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect.