Gildan Activewear Inc.

Ladies and gentlemen, thank you for standing by and welcome to the Q4 2022 Gildan ActiveWare earnings conference call. All participants are in a listen only mode. After the speaker's presentation, we will conduct a question and answer session. To ask a question, you'll need to press star followed by the number one on your telephone keypad. Please be advised that today's conference is being recorded. If you require operator assistance at any time, please press star zero. I would now like to hand the conference over to Elizabeth Hamoui. Please go ahead.

Good morning, everyone. This morning, we issued a press release announcing our fourth quarter and full year 22 results. Please take note, the company's MD&A and financial statements will be filed tomorrow and made available on our website. Joining me on the call this morning are Blanche Amandi, President and CEO of Gildan, Rod Harries, our Executive Vice President and Chief Financial and Administrative Officer, and Chuck Ward, President, Sales, Marketing, and Distribution. In a moment, Rod will take you through our results and a Q&A session will follow. Please note that certain statements included in this conference call may constitute forward-looking statements which 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. During this call, we will also discuss certain non-GAAP financial measures. Reconciliations to the most directly comparable IFRS measures are provided in today's earnings release, as well as our MD&A. And now, I'll turn it over to Rod.

Thank you, Elizabeth, and good morning, everyone. I'd like to start the call by thanking the entire Gildan team for everyone's excellent work and dedication during 2022. This put us in a position to be able to deliver record full-year results with sales up 11% and adjusted EPS up 14% and $573 million of capital returned to our shareholders during the year through a combination of share repurchases and dividends. We are now one year into the Gildan Sustainable Growth Strategy, or GSG strategy, and we are extremely pleased with our progress executing on all three of the key strategic pillars we laid out early last year, focused on manufacturing capacity, innovation, and ESG. And even though the environment has been challenging, with fourth quarter net sales coming in softer than we originally expected, we believe our strong fundamentals and competitive advantages are positioning us to be able to navigate through near-term macro headwinds and capitalize on future growth. I'll provide a detailed update on our GSG strategy and our financial outlook later in my remarks. But first, let me take you through our fourth quarter results. We reported total revenue of $720 million, down 8% versus the prior year quarter, due to a 5% decrease in activewear, where we generated $595 million of sales, while sales in the hoser and underwear category of $125 million were down 21% in the quarter. More specifically, the decrease in activewear sales during the quarter reflected continued POS softness in retail and markets, as well as some slowing in in printables combined with the impact of the non-recurrence of post-pandemic restocking, which occurred in the same quarter last year. Highlighting a few bright spots, the quarter included strong sell-through of ring, spun, and fleece products, where we believe our market share continues to grow. And we saw higher year-over-year shipments in international markets, as distributors in Europe replenished inventory levels, showing some confidence in the outlook ahead. And, as in previous quarters during 2022, higher net selling prices were also a favorable factor for activewear during the fourth quarter. In hosiery and underwear, we generated sales of $125 million in the quarter, reflecting weak category-level demand for these products and the ongoing impact of tight inventory management by retailers. We also saw this reflected in the numbers reported by MPD, with demand for men's underwear and hosiery in the total measured market down again for the quarter, without any sequential improvement from Q3. Moving on to margins, excluding accrued insurance recoveries of 26 million recognized in the fourth quarter, adjusted gross margin came in at 29.1%, down 150 basis points compared to 30.6% last year. The decline was primarily due to higher raw material and manufacturing costs, which more than offset higher net selling prices and favorable product mix. Our SG&A expenses for the fourth quarter were $76 million, down 6% from last year, reflecting lower compensation expenses as well as ongoing cost containment efforts. As a percentage of sales, SG&A expenses were 10.5%, 20 basis points above the prior year, reflecting the impact of lower sales in the quarter. As part of our annual impairment testing requirements, we recorded a non-cash impairment charge in the fourth quarter of $62 million, with the charge tied to current market conditions and related to intangible assets acquired in previous SOC and HOSRI business acquisitions. You should note this charge follows a net reversal of impairment for these assets recorded in the same quarter last year in the amount of $32 million. Excluding this charge, and given our combined growth margin and SG&A performance, adjusted operating margin in the fourth quarter came in at 18.8%, down 160 basis points from 20.4% last year, but in line with our expectations for the quarter, despite lower than expected sales. Overall, adjusted net earnings for the December quarter totaled $117 million, or $0.65 per share, down 14% from adjusted net earnings of $149 million, or $0.76 per share last year. This brought adjusted net earnings per share for the full year to $3.11, a record for Gildan, and we think a testament to the strength of our overall business model. Turning to free cash flow, for the quarter we generated $131 million, up from $116 million in the prior year quarter, mainly driven by focused working capital management efforts, which combined with insurance recoveries more than offset the impact from inventory build in the quarter and higher capital investments during 2022. Full year cash flow totaled $198 million, down from 594 million in 2021, mainly due to significant investments in inventories and the impact of higher capital investments. On inventories, you may recall we were running below optimal levels last year due to the impact of the hurricanes in Honduras in 2020 and a tight yarn supply environment in 2021. Our inventory levels now put us in a strong position to service our customers as we move through 2023. On capital spending, we spent approximately $80 million on capex in the quarter, bringing total capital investments for the year to approximately $245 million, with most of the spending related to optimization and expansion projects. Further, we repurchased approximately 1.2 million common shares in the fourth quarter for approximately $37 million, bringing our share repurchases for the full year under two buyback programs to 13.1 million shares, or 7% of our float, at an overall cost of $444 million. We did this while maintaining a strong balance sheet with our net debt on January 1st totaling $874 million and our net debt to adjusted EBITDA leverage ratio at 1.1 times at the lower end of our target range of 1 to 2 times. This brings me to our update on our GST strategy and our outlook for the year ahead. A year ago, we provided an overview of Gildan's sustainable growth strategy focused on capacity-driven growth innovation, and ESG. We are pleased with the progress we have made with our strategy, which is reflected in our strong 22 results. With our 2022 revenue base of over $3.2 billion and our full-year adjusted operating margin of 19.7%, coming in at the higher end of our target range of 18% to 20%, we believe our business model is positioning as well to deliver on our long-term profitability and return targets. Specifically, by executing on our strategy, We have shifted gears from a year ago when we were capacity constrained. Today, our capital investments have translated into increased manufacturing capacity and flexibility throughout our supply chain. This has allowed us to invest in inventory and improve product availability, which together with leadership in pricing and ESG is enabling us to adapt to the current environment and take market share in key product categories. Turning to 2023. We feel cautiously optimistic despite ongoing uncertainty. In the first part of 2023, we expect continued headwinds tied to the demand environment and to strong comparative periods, particularly as we cycle post-pandemic inventory replenishment in the first quarter. In this regard, while we continue to see momentum in the imprintables market driven by the return of large gatherings and the shift of consumer spending to experiences, including travel, We're also seeing macro uncertainty weighing on buying patterns as some of our customers are placing orders closer to their needs and managing their inventory levels more tightly. Nonetheless, we believe we are well positioned to gain share even in a softer demand environment. And we have recently seen this in the strength of our distributor POS, which is now running better than the fourth quarter. With regard to our national accounts business, where we serve as retailers, Our business continues to be impacted by soft demand in retail and markets and ongoing tight inventory managed by retailers. However, despite this current tightness, we expect demand for replenishment-type products to start to normalize as we move through the year, given the nature of the products we sell. Finally, in international markets, we started to see improvement in Q4 with positive sell-through trends in certain regions, together with healthy demand for inventory to support a stronger outlook for Q23. Moving to the margin front, in the first part of the year, we're expecting increased margin pressure due to higher raw material and input costs, which are currently in our inventories. As we move past the first quarter, we expect these headwinds to start to abate and to deliver strong margin performance during the remainder of the year. So summing it all up and looking at our 2023 financial performance and providing additional color given the current circumstances, We expect revenue growth for the full year to be in the low single-digit range, following what will be a slow start to the year in the first quarter, given the demand environment and tough comps. On margins, we expect our full-year adjusted operating margin to fall within our 18 to 20 percent target range, despite expected margin pressure in the first quarter driving us 200 to 300 basis points below the low end of our target range. As we translate this into earnings, we expect to achieve adjusted diluted EPS in 2023 in line with 2022, assuming the continuation of share repurchases aligned with our capital allocation targets of purchasing approximately 5% of our public float annually. Finally, we plan to stay the course on our new capital projects while managing our existing capacity carefully, demonstrating our confidence in the long-term outlook for our business. Capital expenditures are expected to come in at the lower end of our previously stated 6% to 8% range. And with significant working capital investments behind us, we expect to drive strong operating and free cash flow generation for the year. So overall, you can see we enter the second year of our GSG strategy excited. And as we prepare to launch production at our new manufacturing facility in Bangladesh in late March, which will ramp up through the year, providing us with new capabilities and opportunities ahead. Our in-stock levels are in great shape. We have significant flexibility in our manufacturing system and a healthy balance sheet. In closing, although the current environment presents its challenges, we remain excited and focused on our long-term strategy. Favorable industry trends remain intact, including the casualization of apparel, the interest in private label, the growing creator economy, and ongoing developments in digital printing, as well as the appeal of nearshoring and sustainable practices. all of which are creating long-term growth opportunities for Gildan, given our strong competitive advantages. With that, I will now turn the call back over to Elizabeth.