Gildan Activewear Inc.

Thank you for standing by and welcome to the Q1 2023 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 1 on your telephone keypad. If you would like to withdraw your question, again, press the star 1. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Elizabeth Hamoui, Please go ahead.

Good afternoon, everyone. Earlier, we issued a press release announcing our results for the first quarter of 2023. We also issued our interim shareholder report with the Canadian Securities and Regulatory Authorities and the U.S. Securities Commission, which are available on the company's corporate website. As a reminder, please note that we will be holding our virtual AGM tomorrow morning at 10 Eastern Time. More information can be found on our events page. Joining me on the call are Glenn Chamandi, President and CEO of Gildan, Rod Harries, our Executive Vice President and Chief Financial and Administrative Officer, Chuck Ward, President Sales, Marketing and Distribution, and Jesse Haim, Vice President, Head of Investor Relations, which Rod will introduce in a moment. Before I begin, please take 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 thank you all for joining us today to discuss our first quarter results. Before I start, I'd like to welcome Jessie Hayham, our new Vice President, Head of Investor Relations at Gildan, who, as Elizabeth called out, is joining us on the call today. Many of you may know Jessie, as prior to her last role, she spent much of her career as a sell-side analyst, including 10 years covering Gildan. We are extremely pleased to have Jessie joining the team, and I know she is looking forward to meeting with all of you. Now, moving to the results. The quarter unfolded largely as we anticipated, with sales in line with our expectations and year-over-year demand trends showing meaningful improvements sequentially across all categories and channels. We did experience some margin pressure during the quarter, which came in slightly higher than we had anticipated due to the timing of fleece shipments, which I'll address a little later. But all in all, we were pleased with our quarterly performance. And even though the economic environment remains uncertain, we remain comfortable reconfirming our outlook today. Further, and more importantly, I'd like to highlight that we are continuing to make progress with our GSG strategy. And after one year of execution, we are pleased with the initiatives we are driving under each of our strategic pillars related to capacity, innovation, and ESG, which all are reinforcing our strong competitive position. We also remain committed to our capital allocation priorities, including return of capital to shareholders, supported by our healthy balance sheet and strong annual free cash flow generation. With that, let's now turn to the details of our Q1 results. Net sales for the first quarter came in at $703 million, reflecting a decline in activewear sales of 12%, partly offset by 7% growth in the hosiery and underwear category. In activewear, as previously communicated, we faced a strong comparative period as we cycled post-pandemic inventory replenishment at U.S. distributors. Overall, although year-over-year POS trends at North American distributors remained down, they showed notable sequential quarterly improvement. Further, while international sales in the quarter were down 17%, continuing to maintain a positive outlook regarding recovery in international markets for the full year, encouraged by positive POS in the first quarter. Growth in the hosiery and underwear category for the quarter was mainly driven by socks, both in the mass channel and with global lifestyle brand customers. While industry demand for men's underwear remained down year over year, year over year POS trends improved sequentially, and we are pleased with how our private label underwear programs are unfolding. Additionally, while our retail customers remain cautious on replenishment across all product categories, we were encouraged by improving inventory levels in the first quarter, reflecting what we believe is an improving demand environment for our products. Turning to margins, gross and adjusted gross margin came in at 26.7% and 26.2%, down year-over-year by 430 and 470 basis points, respectively. This is mainly a result of the anticipated flow-through impact on our cost of sales of peak fiber costs, and higher manufacturing input costs. Margins were also impacted by unfavorable mix related to fleece sales. Specifically, despite strong fleece POS in the quarter, we saw lower fleece shipments than expected as distributors are being careful in this environment to buy as close as possible to their needs, which for this category tends to be more towards the back half of the year. Accordingly, while this impacted our margins for the quarter, the mix impact is expected to reverse throughout the remainder of the year. These factors were partly offset by the favorable impact of higher net selling prices in the quarter, which we implemented and called out last year. SG&A expenses for the first quarter of $82 million were largely in line with prior year levels, and as a percentage of net sales were 11.6%, which was up from the prior year due to sales deleverage. We generated operating income of 18.2% of sales, which included the benefit of a $25 million gain from the sale and leaseback of one of our U.S. distribution facilities. Excluding this gain, adjusted operating income was 14.6% of sales, slightly below our expectations, largely due to the unfavorable mixed impact of the lower flea sales during the quarter. After reflecting increased net financial expenses of $17 million and higher GAAP income taxes tied to the sale and leaseback gain, and factoring in continued share repurchases, we reported gap and adjusted diluted EPS for the quarter of 54 cents and 45 cents, respectively. Moving on to cash flow, higher working capital investments and lower net earnings led to 179 million of cash flows used in operating activities in the first quarter. After capital expenditures of 74 million and net proceeds of 51 million from the sale and leaseback transaction, we consumed approximately $202 million of free cash flow in the first quarter. Higher capital expenditures during the quarter mostly reflected investments in our new manufacturing complex in Bangladesh. In fact, construction of the first facility is in its final stages, and progressive ramp-up of operations is now underway, which will continue through 2023 into 2024. We also bought back $1 million of shares in the quarter, reflecting our strong commitment to return capital to shareholders under our capital allocation priorities. The company ended the first quarter of 2023 with net debt of $1.15 billion and a net debt to EBITDA leverage ratio of 1.6 times in line with our one to two times leverage framework. Moving on to the outlook. Today, we reconfirmed our full year outlook, which we provided on February 23rd. as we continue to believe we have the ability to drive top-line growth in 2023. Specifically, while the economic environment remains uncertain and we are dealing with cautiousness on inventory levels with our customers, our pre-OS trends were in line with our expectations for the first quarter. Further, we continue to expect incremental sales from the rollout of new programs servicing retail and markets to provide growth. We also expect continuing recovery in international markets driven by increased availability and depth of product at distributors. So even though the first half of the year will be challenging due to difficult comparative periods related to post-pandemic inventory replenishment in 2022 and the impact of peak raw material and higher input costs in our inventories flowing through our cost of sales in the first half of 2023, we see growth and margin improvement once these headwinds abate. Summing this all up, We continue to expect sales for the full year to be up low single digits compared to 2022. Further, with margin pressures from raw materials easing in the second half, we continue to expect our adjusted operating margin to fall within our 18% to 20% annual target range for the full year. We expect CapEx to come in at the lower end of our previously stated 6% to 8% range, and we expect strong free cash flow generation for the full year. And on the bottom line, we expect adjusted diluted EPS in line with 2022, which assumes the continuation of share repurchases aligned with our capital allocation targets of purchasing approximately 5% of our outstanding public float in 2023. So in conclusion, while we are mindful of the economic uncertainty and we are seeing cautiousness and a mixed consumer environment, we continue to be cautiously optimistic on 2023, and continue to work hard towards delivering on our goals and creating shareholder value. Thank you, and I will now turn the call back to Elizabeth.