Gildan Activewear Inc.

Ladies and gentlemen, thank you for standing by and welcome to the Q2 2022 Guilden ActiveWare Earnings Conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, please press star one again. For operator assistance throughout the call, please press star zero. And finally, please be advised that today's conference is being recorded. I would now like to hand the conference over to Sophie Argyrio, Vice President of Investor Communications. Please go ahead.

Thank you, Gavin. Good morning and thank you for joining us. Earlier this morning, we issued our press release announcing our earnings results for the second 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 US Securities Commission and will be available on the company's corporate website. With me today, is Glenn Shamandi, Gildan's President and Chief Executive Officer, and Rod Harries, our Executive Vice President and Chief Financial and Administrative Officer. Shortly, Rod will take you through the results, after which 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 risk, 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 it over to Rob.

Thank you, Sophie. Good morning to all, and thank you for joining us on the call today. We were pleased to announce this morning that we delivered another strong quarter, with record sales up 20%, and EPS and adjusted EPS up 15% and 27% respectively. We generated strong free cash flow of $159 million in the quarter and continue to execute on our capital allocation priorities of reinvesting in our business and returning capital to our shareholders. Simply put, we believe our top and bottom line performance is a reflection of the control we currently have over our supply chain and our cost structure. And as we realize the ongoing benefits from back to basics and execute on the Gildan Sustainable Growth Strategy, And given macroeconomic uncertainty, we believe we are as well positioned as possible to navigate through any near-term challenges as we continue to position the business for longer-term growth. Now, turning to the specifics of our results for the second quarter, we generated sales of $896 million, up 20% over the prior year quarter, driven by higher sales in activewear, partly offset by lower sales in the hosiery and underwear category. Sales of activewear totaled $758 million, 27% versus last year due to higher base selling prices and lower year-over-year promotional discounting, as well as favorable product mix and higher unit sales volumes in North America. We were particularly pleased to see continued strong performance in ring fund and fleece products, key drivers of active wear growth in the quarter. Active wear volume growth in North America was offset in part by lower international shipments compared to last year, largely driven by weaker demand in Asia, where surges in COVID cases have prompted ongoing shutdowns. And finally, in the hosiery and underwear category, where we generated sales of $138 million, the 8% decline in the quarter was due to having to lap demand driven by last year's stimulus payments, as well as the impact of a softening retail environment unfolding this year. So on the whole, given all these considerations, we're very pleased with how our overall sales performance with our overall sales performance for the quarter. Moving on to our margin performance. Despite the headwinds of rising levels of inflation across our supply chain, our margins for the quarter remain strong. We generated growth and adjusted gross margin of 29.6% in the quarter versus growth margin of 32.2% and adjusted gross margin of 30.5% last year. On a GAAP basis, the growth margin decline of 260 basis points included the impact of the non-recurrence of a 175 basis point net insurance gain, which benefited gross margins last year. The balance of the gross margin decrease, which impacted both our GAAP and adjusted margin of 90 basis points, was due to higher manufacturing costs, partly offset by higher net selling prices and favorable product mix. Turning to S&A. expenses for the second quarter totaled $88 million, up approximately $8 million over the prior year. The increase was primarily due to the impact of inflation on overall costs and higher volume-driven distribution expenses. However, as a percentage of net sales, SG&A expenses fell to just below 10%, improving by 80 basis points compared to 10.7% last year, reflecting the benefit of sales leverage and continued strong overall cost management which more than offset the impact of inflationary cost pressures. Adding up these elements, we generated operating margin of 19.4% for the quarter and 19.6% on an adjusted basis, close to the high end of our 18 to 20% target range and only down slightly by 30 basis points over last year. After reflecting financial expenses and income taxes, which in aggregate were up $3 million over the prior year, We reported record net earnings of $158 million and $160 million on an adjusted basis, up 8% and 18% respectively compared to last year. Diluted EPS for the quarter totaled $0.85, and adjusted diluted EPS was $0.86, up 15% and 27% respectively over the second quarter in 2021. with the increases reflecting the benefit of a lower share count from our 2021 buyback program, which we just renewed with a new 5% NCIP program announced this morning. Moving on to cash flow and balance sheet items, we generated operating cash flow from operating activities of $210 million, and after capex of approximately $50 million, we delivered free cash flow of $159 million in the quarter compared to $208 million last year. After adjusting for a net cash benefit of $18 million related to insurance proceeds, which we received last year in the quarter, the balance of the decline reflected higher year-over-year capital expenditures tied to our projects in Central America, the Caribbean, and Bangladesh, and higher working capital requirements driven by the impact of the frontier acquisition, higher raw material and work and process inventories, and the impact of inflation on unit costs. Finally, we ended the quarter with a net debt position of $848 million and a leverage ratio of 1.1 times at the low end of our target range. This sums up our results for the second quarter, which combined with our first quarter has translated into strong overall performance in the first half of the year. Now as we move into the second half of the year, while we have seen some slowing, we believe the recovery of large events and travel and tourism remains a tailwind to demand, which is supported by the feedback we are getting from our major imprintables distributors. Also, while we are seeing a softening retail environment, for Gildan this is primarily impacting national account customer sales of activewear, rosary, and underwear products, which represents a smaller part of our overall business. So putting this all together, given our record first half performance, and the ongoing benefits of our back-to-basics strategy combined with our shift to the GSG strategy, we remain positive as we move forward and confident about our ability to deliver on our three-year objectives announced earlier this year. This concludes my formal remarks, and with that, I'll turn it back over to Sophie.