Gildan Activewear Inc.

Ladies and gentlemen, thank you for standing by and welcome to the third quarter 2022 Gildan ActiveWare earnings conference call. All lines have been placed on mute to prevent any background noise. Please be advised that today's conference is being recorded today, Thursday, November 3rd, 2022. 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, then the number one on your telephone keypad. If at any point you would like to remove yourself from the queue, just press star one again. I would now like to hand the conference over to Sophie Argyrio, Vice President of Investor Communications. Please go ahead.

Good morning and thank you all for joining us. Earlier this morning, we issued a press release announcing our earnings results for the third quarter of 2022. along with 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. With me today is Glen Shimandi, Gildan's President and Chief Executive Officer, and Rod Harries, Executive Vice President and Chief Financial and Administrative Officer. This morning, 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 of the U.S. Securities and Exchange Commission and the Canadian Securities Regulatory Authority. 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 relief and in our MD&A. And with that, I'll turn it over to Rod.

Thank you, Sophie. Good morning, all, and thank you for joining us on the call today. This morning, we were pleased to report another strong quarter, particularly in the current macroeconomic environment. Specifically, Despite tough retail in international markets, the strength of our vertically integrated manufacturing model and the resiliency of our large core imprintables activeware business is clearly differentiating us and driving our ability to deliver. So, during the third quarter, we generated sales growth of 6% over record sales last year. We delivered another quarter of operating margin at the top end of our target range, and we grew adjusted EPS by 5%. while returning $125 million of capital to shareholders through dividends and share buybacks. At the end of the quarter, our balance sheet remained in great shape, with net debt to EBITDA at 1.2 times, as we continued to run at the low end of our target leverage framework. Moving on to the details of our results. Our sales for the quarter totaled $850 million, with activewear sales up 13%, while hosiery and underwear sales were down 26%. Total active wear sales were $742 million in the quarter compared to $656 million last year, driven by higher net selling prices. Sales volumes to U.S. and Canadian distributors grew over last year and included strong sell-through of ring-spun products, where we believe our market share continues to grow. The area where we saw weaker volumes was with national accounts or retail-related customers due to the broader industry decline in demand across retail. International shipments were also down due to ongoing demand weakness across these markets. In hosiery and underwear, where we generated sales of 108 million in the quarter, the decline in sales compared to last year reflected both weaker sell-through and the impact of tight inventory management by retailers. So, on the whole, and despite the challenging environment, we are pleased with the sales performance we were able to deliver in the quarter as travel, tourism, large events, and the everyday use and replenishment nature of our products continue to drive underlying demand and offset softer retail market conditions. Moving on to our margin performance. Despite the headwinds of inflation across our supply chain, our margins for the quarter remain strong. We generated gross and adjusted gross margin of 29.7 percent in the quarter, essentially maintaining levels versus the second quarter of this year. Compared to last year, gross and adjusted gross margins declined as we expected, reflecting declines of 540 and 170 basis points, respectively, compared to gross margin of 35.1% and adjusted gross margin of 31.4% in the third quarter last year. Keep in mind, last year's margin on a GAAP basis included a 30 million or 370 basis point impact related to net insurance gains tied to the 2020 hurricanes in Central America, which were not in our numbers this year. Excluding this item, the growths and adjusted growth margin decline on a year-over-year basis was due to higher raw material and other manufacturing costs, which more than offset higher net selling prices and favorable mixed impacts. Turning to SG&A, expenses for the third quarter came in at $79 million, down slightly versus the prior year. And as a percentage of sales, SG&A came in at 9.3% compared to 10.1% last year. The decrease in SG&A expenses was due to lower variable compensation expenses and our continued focus on containing costs, which more than offset the impact of cost inflation and higher selling expenses. The improvement in SG&A as a percentage of sales reflected primarily the benefit of sales leverage. Overall, looking at our SG&A performance so far this year, we continue to be pleased with how the team is managing around the 10 percent of sales level in this difficult inflationary environment. Summing up these elements, the sales increase combined with our growth margin and SG&A performance in the quarter translated to operating margin levels of 20.5% on a GAAP basis and 20% on an adjusted basis coming in at the high end of our target range. And after reflecting higher net financial expenses due to increases in interest rates and average borrowing levels, higher GAAP income taxes, as well as the benefit of a lower outstanding share base driven by our share buybacks, we reported GAAP and adjusted diluted EPS for the quarter of $0.84. This compared to GAAP diluted EPS of $0.95 and adjusted EPS of $0.80 in the third quarter of 2021, reflecting a 5% year-over-year increase in EPS on an adjusted basis. Now, before concluding on our results, let me provide some commentary on our cash flow and balance sheet. During the third quarter, we generated 66 million of cash flows from operating activities, down in comparison to 243 million generated last year, mainly due to higher working capital requirements that were largely inventory related. And after funding capital expenditures of 74 million, we ended up consuming 70 million of free cash flow. We ended up consuming 7 million of free cash flow in the quarter. On inventory levels, At quarter end, our inventories totaled just over $1.1 billion, up from $725 million last year. As a reminder, last year's inventories were at suboptimal levels due to production constraints from yarn labor shortages and the impact of the hurricanes in Central America from late in 2020. Higher inventories this quarter were also due to the impact of inflation on unit costs, as well as higher raw material and work and process levels, given broader supply chain constraints. Finally, we finished the quarter with a net debt position of $944 million and maintained our leverage ratio at 1.2 times at the low end of our target range, as mentioned previously. This sums up our results for the third quarter, which combined with our record results in the first half of the year, leaves us in a position of strength as we navigate through near-term challenges related to the current environment. In this regard, and importantly, our large North American business geared toward imprintable channels continues to benefit from demand driven by travel, tourism, and large events, and is expected to remain relatively stable. On the other hand, where we are seeing continued weakness is with our national account or retail-related customers, which represents a smaller part of our business. Further, in international markets, we are also continuing to see ongoing softness in demand. From a profitability standpoint, we feel good about the actions we have taken to strengthen the economics of our business. And while the impact of higher costs will impact the fourth quarter, we remain committed to delivering on our operating margin targets. So in closing, we have a strong team, and we believe a proven track record of operating excellence in both good and tough environments. This, combined with the progress we are making in executing on the key pillars of Gildan's sustainable growth strategy, driven by capacity, innovation, and ESG, gives us confidence in our ability to deliver on our three-year growth objectives, which we shared with you earlier in the year. This concludes my formal remarks, and with that, I will turn it back over to Sophie.