Gildan Activewear Inc.

Thank you, Tay, and thank you for standing by. Welcome to Q1 2022 Gilda and 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. To ask a question during the session, you will need to press star 1 on your telephone. 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 first speaker today, Ms. Sophie Archirio, Vice President, Investor Relations. Please go ahead.

Thank you, Christine. Good afternoon, everyone, and thank you for joining us. Earlier, we issued our press release announcing our earnings results for the first quarter of 2022. 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 Glensham Andy, our President and Chief Executive Officer, 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. Before we begin, please take note that certain statements included in this conference call may constitute forward-looking statements. 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. During this call, we will also discuss certain non-GAAP financial measures. Reconciliations to the most directly comparable IFRS financial measures are provided in today's earnings release and in our MD&A. And with that, I'll turn the call over to Rod.

Thank you, Sophie. Good afternoon, all, and thank you for joining us today. Let me begin by saying we're off to a strong start to 2022 as we delivered record net sales up 31% and record adjusted EPS up 58% over last year for the first quarter. Great results as we shift to our Gildan Sustainable Growth Strategy, which is focused on driving growth and margin performance as we invest in and fully leverage our world-class large-scale vertically integrated manufacturing platform. This platform, together with an efficient product portfolio and go-to-market approach, is providing us with strong capability to service our customers in an environment where many apparel companies are facing supply challenges. Further, because of our industry-leading ability to produce at low cost, we have been in a strong position to be able to price to offset inflationary pressures and to deliver margin performance. Beyond our strong operating results, we were also pleased about our ability to execute on our capital allocation priorities during the quarter, including repurchasing 5.1 million shares, or 3% of our float, and returning more than $200 million of capital to shareholders while maintaining a strong balance sheet. Turning to the details of our results for the quarter, total net sales of $775 million reflected an increase of $185 million, or 31%, over the first quarter last year, largely driven by volume growth and net selling price increases with some favorable impact from product mix. Activeware sales of $667 million were up 38%, and hosiery and underwear sales of 108 million were up 3%. Volume growth in activewear was driven by strong demand in North America, particularly in the distributor channel, with strong sell-through driven by the continued recovery of large events, travel, and other end-youth markets. Volume growth with distributors was also driven by our ability to better service seasonal inventory requirements and to support growth given our improved production levels this year versus last year. Also contributing to the activewear sales growth was higher net selling prices, which reflected the impact of base price increases that were implemented starting in the fourth quarter last year, as well as the impact of lower year-over-year promotional discounting. We were also pleased to see that ring-spun and fleece products were key contributors to our strong sales performance in the quarter, driving favorable product mix. Finally, the 3% increase in the hosiery and underwear category was primarily driven by higher selling prices, which drove strong results when compared to industry sales for these categories, according to MVD data. So overall, strong top line delivery for the quarter. Moving on to our strong margin performance, adjusted gross margin of 30.9% was down slightly year over year by 20 basis points. You may recall last year we received a one-time cotton subsidy, which benefited gross margins in the quarter by 300 basis points. Excluding this benefit, adjusted gross margin expanded by 280 basis points in the quarter. The improvement was largely due to higher net selling prices and favorable product mix, which more than offset the impact of higher cotton costs and inflation across our manufacturing expenses. Turning to SG&A. expenses for the first quarter of $81 million were up approximately $8 million compared to last year. The year-over-year increase was primarily due to higher volume-driven distribution expenses and the impact of inflation on overall costs. SG&A expenses as a percentage of net sales improved two percentage points to 10.4% compared to 12.4% last year as the benefit of volume leverage and our continued focus on cost management more than offset inflationary cost pressures. Bringing it all together, our strong sales and gross margin performance combined with SG&A leverage translated to adjusted operating margin of 20.4% for the quarter, which compared to 18.7% last year was up 170 basis points, and which led to record adjusted EPS for the quarter of 76 cents, 58% above the prior year quarter. Moving on to cash flow and balance sheet items, we consumed 86 million of free cash flow during the first quarter, which included working capital investments to support growth and seasonal requirements, as well as 34 million of capital expenditures related to capacity expansion. As mentioned earlier, from a capital allocation perspective, we were also active on our share repurchase program during the quarter, and combined with the share repurchases we have done in April, we have now completed more than 60% of our current NCIB program. Our net debt position at the end of the quarter increased to $829 million and our net debt leverage ratio of one times was at the low end of our one to two times target range. On the debt side, I would also highlight that as we focus on ESG as a key pillar of our strategy and reinforcing our commitment towards our ESG targets, During the first quarter, we amended the terms of our existing $1 billion revolving credit facility to incorporate sustainability-linked terms. In this regard, we are proud that Gildan is the first Canadian apparel manufacturing company to tie financing costs to the achievement of important ESG targets. Let me now give you a quick update on our Gildan Sustainable Growth, or GSG, strategy. As part of our capacity-driven growth initiatives, We are pleased with the progress we are making on our overall expansion plans in Central America and Bangladesh, which all remain on track. Further, as part of our efforts to strengthen our vertical model, we are also making good progress with the integration of frontier yarns as we increasingly internalize and optimize production. Finally, on the ESG side, beyond the sustainability-linked loan, which I mentioned, We were also pleased to launch the Gildan Respects marketing campaign during the quarter. Now, before concluding with my remarks, let me share some commentary on what we are seeing in the current environment. As I mentioned earlier, throughout the first quarter, we saw strong demand for our activewear products in North America. More recently, while we have seen some deceleration in POS over the last few weeks, overall demand for activewear remains healthy. Similarly, We have also started to see some slowing in sell-through for certain hosiery and underwear category products that could be related to broader economic factors, including the impact of the non-recurrence of stimulus and other support payments which consumers received last year. However, although it's difficult to predict how macro concerns will play out, we believe the favorable industry dynamics which we discussed at our investor day will remain a tailwind to demand. This, combined with the continued recovery in areas impacted by the pandemic, including tourism, travel, and the progressive comeback of large events, together with inventory levels in the distributor channel, which remain below pre-pandemic levels, is expected to provide support for demand going forward. Further, on the cost side, our vertically integrated model and the disciplined pricing strategy we have followed so far puts us in a strong competitive position. and provides us with good flexibility to navigate inflationary headwinds and deliver against our profitability goals. Consequently, we are pleased with the start to the year and the progress that can be made in 2022 towards our three-year objectives as we execute on our GSG strategy, driving strong organic growth and margin performance by focusing on capacity expansion, innovation, and ESG to create long-term value for our shareholders. This concludes my formal remarks, and with that, I will turn it back over to Sophie.