Gildan Activewear Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the Q2 2023 Field and ActiveWare Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Jessie Hayem. Please go ahead.

Good morning, everyone. Earlier, we issued a press release announcing our results for the second 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 our corporate website. Joining me on the call today are Glenn Stimandi, 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. This morning, Rod will take you through the results for the quarter, and a question and answer session will follow. Before we 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, Jessie. Good morning to all, and thank you for joining us on the call today. This morning, we reported our second quarter results, which came in slightly ahead of our expectations, upline and operating margin. We ended the quarter with $840 million in net sales, with better-than-expected sales volumes in activewear. which offset weaker-than-expected product mix tied to current market conditions, which I'll speak about a little later. During the quarter, we believe we outperformed the industry in a challenging environment supported by positive activewear POS trends and the breadth of our product offering, which provided flexibility in what appears to be an increasingly more price-conscious environment. This speaks to our strong competitive position and our ability to continue to drive market share gains. This said, While we continue to expect our revenues to grow year over year in the second half, we believe it is prudent to lower our outlook for the full year to reflect the impact of current market conditions on active ore mix, as well as near-term uncertainty related to the broader macro environment. I will take you through the details of our revised 2023 outlook a little later, but first I'd like to highlight that we remain fully committed to our capital allocation priorities, having returned $175 million to shareholders year-to-date supported by strong free cash flow, which we continue to expect will exceed $425 million for the full year. As such, with our existing NCIB program expiring, we announced this morning the renewal of our NCIB program to repurchase up to 5% of the company's issued and outstanding common shares over the next 12 months. Now let me turn to the specifics of our second quarter results. Net sales for the second quarter came in at $840 million, down 6 percent year-over-year, reflecting a decline in activewear sales of 9 percent, partly offset by 8 percent 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. Overall, the year-over-year POS trend for the activewear category was positive during the quarter, driven by performance in North America, which improved sequentially, largely as anticipated. On the other hand, international markets remain challenged, with sales in the quarter down 2% versus the prior year, with POS trends softening sequentially, which fell below our expectations. Finally, good growth in the hosiery and underwear category for the quarter was mainly driven by underwear sales volume growth, reflecting the expansion of our private label offering and the rollout of new programs in the mass retail channel. Further, while industry demand for men's underwear remained down year over year, It continues to improve sequentially, and we remain encouraged by the improving momentum for this product. Turning to margins, adjusted gross margin came in at 25.8%, down 380 basis points year over year. This is largely a result of the anticipated flow-through impact on our cost of sales of peak fiber, as well as unfavorable product mix in activewear related to shifting product preferences in this environment. SG&A expenses for the second quarter were $78 million, down $11 million versus last year, mainly due to lower variable compensation expenses and our continued cost containment efforts, which more than offset the impact of cost inflation. As a percentage of sales, SG&A of 9.3 percent improved 70 basis points despite the impact of sales deleverage. Consequently, we generated operating income of 21.7 percent of sales during the quarter, which included a net insurance gain of $74 million related to the two hurricanes that impacted the company's operations in Central America back in 2020, partly offset by restructuring charges of $30 million, which include the closure of a sewing facility in Honduras. On an adjusted basis, operating margin of 16.5% was up 190 basis points sequentially, slightly better than expected, but down 310 points compared to the prior year. After reflecting net financial expenses of 21 million and factoring in continued share purchases, we reported gap and adjusted diluted EPS for the quarter of 87 cents and 63 cents, respectively. Moving on to cash flow and balance sheet items. Cash flow from operating activities was 182 million in the second quarter, which includes the net positive effect from the insurance gain mentioned earlier. This compares to 210 million in the prior year and the drop is primarily due to higher working capital and lower net earnings. We continue to maintain healthy inventory levels, ensuring product availability and depth. Furthermore, we expect our inventory levels to decrease sequentially, as was the case in Q2, and end the year below 2022 levels. After capital expenditures of $56 million, we generated approximately $126 million of free cash flow in the second quarter. On the CapEx front, The progressive ramp-up of our new Bangladesh facilities is underway, which will continue through 2023 into 2024. We also bought back 2.6 million shares in the quarter, reflecting our strong commitment to return capital to shareholders. The company ended the second quarter of 2023 with net debt of $1.17 billion and a net debt to EBITDA leverage ratio of 1.8 times, in line with our one to two times targeted debt levels. Moving on to the outlook for the full year. With strong comparative periods now behind us, we continue to expect our revenues to grow in the second half of the year, supported by the planned rollout of incremental retail programs. However, despite continued market share gains, we are seeing current market conditions negatively impact active wear product mix in both North American and international markets, as customers focus on lower-priced products. Combined with the near-term uncertainty related to the macro environment, We believe it is prudent to temper our previous full year 2023 expectations for revenue growth and operating margins, which now reflect the trade down occurring within our activewear product category. Finally, our full year 2023 outlook is also factoring in the impact of higher than previously expected financial charges for the second half. Accordingly, for 2023, we now expect revenue for the full year to be flat to down low single digits versus the prior year. We also expect full-year adjusted operating margin to be slightly below the low end of our 18 to 20 percent annual target range. Although this said, we continue to expect sequential quarterly improvement in operating margins through the second half of 2023. We expect adjusted diluted EPS in the range of $2.55 to $2.65, including the impact of assumed share repurchases of 5 percent of our outstanding public float in 2023. And finally, we expect strong full-year free cash flow generation above $425 million after capital expenditures, which we continue to expect to be at the lower end of our 6% to 8% target range. So in conclusion, while we face some near-term headwinds driven by the macro environment, which we can see is driving customers to focus on lower-priced products and which has largely driven the change in our 2023 outlook, we are encouraged by our performance relative to our peers. as we continue to gain market share in a difficult environment. Accordingly, we remain confident that as macro pressures subside, we will be positioned to fully capitalize on our market share gains and resume our growth trajectory. This combined with our cost structure that we believe is well under control in which we continue to improve positions us well as we work towards delivering on our financial targets and creating long-term shareholder value under the Gildan Sustainable Growth Strategy focused on three key pillars of capacity-driven growth, innovation, and ESG. Thank you, and I will now turn the call back to Jessie.