Gildan Activewear Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the Q4 2021 Gildan ActiveWare Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's opening remarks, there will be a question-and-answer session. To ask a question during the session, you will need to press star then 1 on your touchstone telephone. If anyone should require assistance during the conference, please press star then 0 to reach an operator. Please be advised that today's conference is being recorded. I would like to hand the call over to Sophie Argyrio, Vice President, Investor Relations. Please go ahead.

Thank you, Michelle. Good morning, everyone, and thank you for joining us. Earlier this morning, we issued a press release announcing our earnings results for the fourth quarter and full year of 2021. 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, the 24th of February, and will be available on our 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 statement 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 Authority's that may affect the company's future results. And now I will turn it over to you, Rod.

Thank you, Sophie. Good morning and thanks for joining us today. This time last year when we reported our fourth quarter results, we expressed confidence that we were entering 2021 as a fundamentally stronger company. We now believe our results and accomplishments for this year are strong evidence of that. We finished the year with record top and bottom line performance in the fourth quarter, leading to record sales, earnings, and free cash flow for the full year. Simply put, thanks to the strong efforts, expertise, and focus of our whole team, we navigated through a still challenging environment in 2021 to deliver on the core objective of our back-to-basics strategy, which was to remove complexity from our business so we can better leverage our world-class vertically integrated manufacturing system to better support our customers. By delivering on this objective, we were able to capitalize on improving demand during 2021 at margin levels much stronger than pre-pandemic levels. We also delivered on our capital deployment priorities. And as you saw from today's earnings announcement, we are now moving forward with the Gildan Sustainable Growth Strategy with well-defined initiatives to enable us to deliver strong performance over the next three years, which I will cover after I take you through the details of the quarter. So let's get started. During the fourth quarter, we generated record net sales of $784 million, up 14% from last year, with activewear sales of $627 million, up 17%, and hosiery and underwear sales of $157 million, up 3%. The overall sales increase was primarily due to higher sales volumes and net selling prices in activewear, partly offset by product mix due to the timing of fleece sales compared to last year. Higher active wear sales volumes were driven primarily by higher year-over-year point of sales and, to a lesser extent, by the impact of some distributor restocking in the North American imprintables channel, although I would emphasize that inventory levels in the channel continue to remain well below 2019 pre-pandemic levels. If we look at sales relative to pre-pandemic levels, total net sales were up 19% above the fourth quarter in 2019. driven by higher unit sales volumes, net selling prices, and stronger mix in activewear, partly offset by lower stock sales. Volume growth in activewear reflected the continuing positive trend of higher POS in the North American imprintable channel, higher sales of activewear through retail channels, combined with the positive impact of the non-recurrence of distributor inventory destocking that occurred in the fourth quarter of 2019. Where we continue to see a lag in demand versus pre-pandemic levels, was in international sales, given the impact of the Omicron variant and lockdowns in various regions. Moving on to our gross margin, where performance remains strong. We generated gross margin of 29.2% in the quarter, up 670 basis points. On an adjusted basis, gross margin of 30.6% was up 480 basis points compared to last year. The strong improvement over 2020 was driven by higher net selling prices, and manufacturing efficiency stemming from our Back to Basics initiatives. The positive impact of these factors more than offset inflationary pressure on raw materials and other manufacturing costs, and the mixed impact from the timing of flea sales compared to the prior year. Relative to 2019, we saw a strong improvement in adjusted gross margin in the quarter, up 500 basis points. The increase was due to higher net selling prices, favorable product mix, and Back to Basics efficiencies, which more than offset higher raw material and manufacturing costs. Fourth quarter SG&A expenses came in at $80 million, $9 million above the fourth quarter last year, due mainly to higher volume-driven distribution expenses and higher variable compensation. As a percentage of sales, SG&A expenses were 10.3%, which was slightly better than last year. Compared to the fourth quarter of 2019, SG&A expenses as a percentage of sales improved by 130 basis points. Strong sales and gross margin performance, together with our continued focus on SG&A, translated into operating income in the quarter of $177 million, or 22.6% of sales, a significant increase from $79 million, or 11.4% of sales last year. The increase in operating margin included the net benefit of a $32 million impairment reversal related to our hosiery cash generating unit for which we had recorded an impairment charge last year and which now has been reversed to the full extent possible given the significantly improved economic environment and outlook for this category. On an adjusted basis, which excludes this benefit, operating income of $160 million was up $55 million over last year An adjusted operating margin of 20.4% in the quarter was up 510 basis points from 15.3% in 2020. Consequently, we generated record net earnings of 174 million and EPS of 89 cents per diluted share in the quarter, up from net earnings of 67 million and 34 cents in 2020. Adjusted net earnings and adjusted EPS in the quarter totaled 149 million and 76 cents up from 90 million and 45 cents last year. With another record quarter this year, we also set a new full year record with EPS of $3.07 per diluted share and adjusted EPS of $2.72 per share, up 64% over 2019. Moving on to free cash flow. The 116 million we generated in the fourth quarter brought our full year free cash flow to 594 million. also a record level and up from $358 million last year. The increase reflected strong earnings, improved working capital management, and the timing of insurance collections related to the 2020 hurricanes, partly offset by higher capital expenditures. At year-end, our net debt position stood at $530 million, down from $577 million at the end of 2020, and our leverage ratio was 0.7 times adjusted EBITDA, below our target range of one to two times. During 2021, we were pleased to be able to reinstate dividend payments and share repurchases. And in aggregate, we returned more than $335 million of capital to shareholders during the year. This morning, we were also pleased to announce a 10% increase in our quarterly dividend. And with our current share repurchase program now almost complete, our debt leveraged below our target range, and strong confidence in our ability to generate free cash flow, Today, we also announced that we are increasing our share repurchase plan from 5% to 10% of our float. So overall, we accomplished a great deal in 2021. But more importantly, as we look back to the launch of our back-to-basics strategy, we delivered what we envisioned from this plan. We simplified and focused our business, allowing us to deliver adjusted operating margin expansion of close to 500 basis points. And our RONA, which is return on net assets, improved by more than 800 basis points during the 2018 to 21 period. It also put us in a position to continue to expand our capacity in Central America and the Caribbean and resume our expansion plans in Bangladesh, where we are now rapidly moving forward with the construction of the first of two large-scale textile and sewing facilities. In addition, our clear focus allowed us to push forward with reinforcing our vertically integrated supply chain model through broadening our existing yarn capabilities with the acquisition of Frontier Yarns in December. We are very pleased with this acquisition, which is now allowing us to further internalize yarn production and support our textile expansion plans in Central America and the Caribbean. So today, thanks to Back to Basics, we stand as a less complex, more focused, and competitively advantaged organization, stronger than we have ever been, and well positioned for sustainable growth. This leads me to the last area I'd like to cover in our opening remarks. During the fourth quarter, we completed a comprehensive strategic planning process to define the underlying initiatives that will support our next phase of growth under what we call the Gildan Sustainable Growth Strategy. While back to basics will always remain at our core, under the Gildan Sustainable Growth Strategy, our efforts now turn to building on our strong foundation to drive organic top and bottom line growth. through three key pillars, capacity expansion, innovation, and ESG. Under this revised strategy, we believe that by leveraging our competitive advantage as a low-cost, vertically integrated manufacturer and executing on projected capacity expansion plans, delivering superior quality, value-driven, and innovative products to our customers, and through our leading ESG practices, we can drive strong organic revenue growth, profitability, and effective asset utilization to deliver compelling shareholder value creation. To this end, we announced in our press release today that under the Gildan Sustainable Growth Strategy, our outlook over the next three years, based on everything we are seeing today and assuming a continued global recovery, reflects net sales growth at a compound annual growth rate in the 7% to 10% range, while maintaining operating margins in the 18% to 20% range. Further, to support our long-term growth and vertical integration, we're expecting investments in capital expenditures as a percentage of sales to be in the range of 6% to 8% over this period. Finally, at the same time as we're investing in our business, we're also planning to continue to return capital to shareholders through dividend growth and through continued share repurchases in line with our one to two times leverage framework and valuation considerations. So overall, a complete plan to grow our business and to deliver strong shareholder value and ESG performance, which we plan to provide more detail on at our Virtual Investor Day, now scheduled for March 29th. So let me close here with how I started my remarks. Last year, when we reported our year-end results, we expressed our confidence that we were entering the new year as a fundamentally stronger company. Today, we reiterate that sentiment with even greater conviction. And with that, I will now turn it back over to you, Sophie.