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.