Q4 2019 Earnings Call

February 7, 2020

[music].

Ladies and gentlemen, thank you for standing by and welcome to the Haynes Man's fourth quarter 2019 earnings Conference call.

At this time, all participants I not listen only mode.

After the speaker presentation, there will be a question and answer session.

Ask a question during the session you'll need to press star one on your tell.

Phone.

Please be advised that todays conference is being recorded if you acquire any further assistance. Please press star zero I.

I'd now like to hand, the confidence there speaker today Tc local our Chief Investor Relations Officer. Please go ahead Sir.

Good day, everyone and welcome to the Hanesbrands quarterly.

The conference call webcast.

We're pleased to be here today to provide an update on our progress after our fourth quarter of 2019.

Hopefully everyone has had a chance to review the news release, we issued earlier today.

The news release updated that they Q document and the replay of this call can be found in the investor section of our Haynes Dot Com website.

On the call today, we may make forward looking statements either in our prepared remarks on the associated question and answer session.

These statements are based on current expectations or beliefs and are subject to certain risks and uncertainties that may cause actual results to differ materially.

These risks are detailed in our virus filings with the FCC and may be found.

And on our website as well as in our news releases the company does not undertake to update or revise any forward looking statements, which speak only for the time at which they are made.

Unless otherwise noted today's references to our consolidated financial results as well as our 2020 guidance exclude all restructuring and other action related charges and expenses.

Additional information, including a reconciliation of these and other non-GAAP performance measures to GAAP can be found in today's press release.

With me on the call today are Gerald Evans, our Chief Executive Officer, and Scott Lewis, Our Chief Accounting Officer interim Chief Financial Officer.

For today's call Gerald and.

I will provide some brief remarks and then we'll open it up to your questions I'll now turn the call over to Gerald.

Thank you Tc Hanesbrands delivered a solid fourth quarter with record cash flow overall results were once again right in line with our guidance and demonstrate that our multiyear strategy to improve our business is working.

He highlights in the quarter include operating cash flow that exceeded the high end of our guidance for both the quarter and the full year.

We delivered on our commitment to bring our leverage back within our target range. We saw continued strong performance isn't international consumer direct and champion.

And adjusted gross margin improved 130 basis points.

Over prior year, driven by increases in both our us innerwear and us actually were segments.

And us anywhere is operating profit and operating margin increased over prior year with both metrics exceeding our guidance in the quarter, despite lower than expected revenue.

We believe this is an indication that us indoors profit has begun to.

Yes.

In addition to use innerwear as fourth quarter profit performance, we saw two additional developments that point to improving revenue and profit trends in 2020.

First our intimates business improved sequentially and was inline with our expectation for the quarter.

The strong performance was driven by our broad business, which increased.

Over prior year, as our revitalization efforts and product innovations such as easy light and Dreamliner continued to gain traction.

And second while early store resets by a major retailer had a short term impact on basic sales in the quarter. We're pleased with the longer term potential. This reset holds for our business.

Within the stores that have been.

We are gaining shelf space and we're gaining market share. Once completed we believe this reset should have a positive impact on our basics business beginning in the second half of this year.

Over the past several years, we have executed a strategy to diversify our business and position the company for increased earnings growth and shareholder returns.

To accomplish this we said five specific goals and we've delivered on each as highlighted by our fourth quarter and full year results.

First we've diversified our revenue.

International revenue now accounts for 36% of sales up from 11% in 2013.

Consumer direct revenue, which represented 30.

Percent of fourth quarter sales in 25% of full year sales is up from 9% in 2013.

And on a constant currency basis global champion, excluding cnine generated more than $1.9 billion of revenue in 2019, an increase of more than $1.1 billion in just three years.

Second we have consistently delivered organic revenue growth the fourth quarter marked our 10th consecutive quarter of constant currency growth.

And we accomplished this despite challenges in our US business that include a muted holiday and a $46 million headwind from exited programs.

Third we positioned the business for higher levels of.

Stability over the next several years by exiting unprofitable businesses and restructuring our supply chain to lower cost. We believe our supply chain restructuring initiatives have positioned us innerwear and the company for improving margins over the next two years.

We also believe this represents an important milestone for us innerwear as it remains a critical.

Driver of our strong cash flow.

Fourth we are generating higher levels of operating cash flow.

In 2019 operating cash flow increased 25% over prior year to more than $800 million. This is approximately $200 million higher than our cash flow from just three years ago.

And fifth.

We have reduced our net debt by more than $1.1 billion in less than two years. We ended the year at 2.9 times Levered on a net debt to adjusted EBITDA basis, which is a full turn lower than our peak.

Now that we're back within our long term range of two to three times our priority for 20.

20 is to use our excess free cash to buy back stock.

The focus of our entire organization for the past several years has been on strengthening our business to return to a model that is able to magnify sales growth into faster operating profit growth and ultimately even faster EPS growth.

With a lot of heavy lifting.

And our program exits behind US we believe 2020 represents an inflection point for our company one that reveals the underlying strength of our ongoing business and unleashes the full potential of our capital allocation model to drive accelerated shareholder returns.

Turning to our 2020 guidance through the remainder of my remarks.

For comparison purposes, I'll be referencing our Rebased 2019 results, which adjusts for the exits of Cnine at target and our Dk and why intimates license. This will provide a clear view of the underlying trends within our business.

Using the midpoint, our 2020 guidance implies approximately 3%.

New growth.

This is driven by strong performances in international consumer direct and champion.

And while we continue to plan conservatively with respect to our U.S Innerwear business, we expect improved revenue trends in 2020 in both basics and intimates our guidance for US Innerwear assumes revenue growth ranging from down 1% to up 1%.

For the full year.

And for the total company, we expect adjusted operating profit growth of 7% as our investment spending normalizes and cost savings from our supply chain restructuring flow through particularly within our US Innerwear segment, where we expect operating profit to be up over prior year.

With lower interest expense and.

A lower share count, we expect adjusted earnings per share growth to accelerate to 15%.

Embedded in our guidance is $200 million of share repurchases.

And we expect to generate between seven and $800 million of operating cash flow.

So in closing we delivered solid performances for the quarter end the.

Our year.

And as our 2020 outlook suggest we believe Weve reached an inflection point in our business model with our exited programs behind us and all of our capital allocation tools at our disposal. We believe we are well positioned for accelerating earnings growth and shareholder returns over the next several years.

And with that.

I'll turn the call over to Scott Lewis, our Chief Accounting Officer, who is serving as interim Chief Financial Officer, Scott has held leading roles in our strong global Finance organization. Since the company went public and is providing us with a seamless leadership transition to support our goals and strategies Scott.

Thanks, Joel before I discuss our fourth.

Quarter results I want to highlight a supplemental document on our website reflects revisions to our prior period results. These revisions primarily relate to adjustments to our income tax balances.

Revisions had a minor accumulated earnings per share impact of one cents over the three year period from 2017 between 19.

Additionally.

Nation can be found in our FHLB document as well as in our 10-K.

Now, let me discuss the quarter overall reported solid fourth quarter results revenue adjusted operating profit and earnings per share were in line with our guidance a cash flow from operations exceeded the high end of our range.

For the.

Quarter sales were $1.75 billion on constant currency basis sales increased slightly over prior year I'll note that our results reflect $46 million expected headwinds in our activewear segment from the extra commodity programs in the mass channel as well as the plan wind down of fee not at target.

Adjusted gross margin increased 140 basis points over last year to 41.4% driven by higher margins in both our innerwear and activewear segments.

Adjusted operating profit in the quarter was $263 million and included $3 million of currency headwinds as compared to last year.

Our adjusted operating margin of.

15% increase approximately 40 basis points over prior year as our strong gross margin performance more than enough.

Our distribution costs and unexpected bad debt charge of $3 million related to a retailer bankruptcy in Australia, but.

With adjusted and GAAP earnings per share were 51 cents, an increase of over prior year.

So, 10% and 24% respectively.

And the quarter, we generated $559 million and cash flow from operations, an increase of $57 million compared to prior year.

For the full year, we generated a record $803 million and cash flow from operations.

With respect to the.

<unk> balance sheet as compared to last year, we reduced our inventory balanced by more than $150 million and we pay down over $600 million a bit.

Our leverage at the end of the quarter was 2.9 times on a net debt to adjusted EBITDA basis. This is down one full turn from our peak in the first quarter.

2018.

And brings us back within our target range of two to three times.

With that summary, let me take you through our fourth quarter segment performance.

As compared to last year us innerwear sales declined 4%.

However, operating profit increased 5% as our operating margin expanded 210 basis points to.

24.6%.

With operating profit and margin exceeded our forecast in the quarter as a benefits from oil price increases and lower distribution expenses more than offset higher commodity costs and lower unit volume.

For the quarter basics revenue declined 5% due to the impact from door closings.

And an earlier than planned disruption from store resets at a large mass retailer.

These reset circled in short term fluctuations we believe once completed the showed a positive impact on our basics business beginning in the second half of this year.

And with respect to our intimates business as expected our trends improved sequentially driven by.

Our business.

For the quarter brought revenue increased slightly and operating margins improved nearly 300 basis points over last year as our revitalization efforts and new product innovations gain traction.

Turning to our US Activewear segment sales declined nearly 7% over last year and were slightly better.

Our forecast.

Payments result reflect the $46 million of expected year over year headwinds I referenced earlier.

As compared to prior year champion activewear sales, excluding seeing on increased 14%.

As seen on revenue declined, 26% or $26 million and filled in the remainder of our activewear segment.

And approximately $30 million, which was better than our forecast.

As a result operating margin of 15.8% declined 30 basis points over prior year.

Diverse gross margin increase in the quarter driven by the benefits of our remixing activity, including a higher mix of champion sales. This was more than offset by higher stx.

Expense, including higher distribution costs.

In our international segment revenue increased nearly 7% and was above our forecast driven by stronger than expected results and with our activewear and innerwear businesses.

On a constant currency basis international sales increased 10% or $60 million.

Over prior year.

With mid single digit growth in innerwear, and 22% growth and champion.

International's operating margin of 14.9% declined 140 basis points over last year as the benefits from higher sales were more than offset a short term FX transaction cost pressures as well as the $3 million Australia.

Bad debt expense I referenced earlier.

Touching briefly on a global champion business, excluding cnine constant currency sales increased 22% over last year, and we're aligned with our expectation.

This consists of 22% growth in both our domestic and international champion businesses.

And now turning to guidance.

To present, a more representative comparison of our ongoing business between 2020 and 29 team we've provided a supplemental table on our website.

This table provides rebased financial information between 19 adjust for the exits have seen on at target and the Dk Anwar intimates license.

My guidance discussion all year over year comparisons will reference.

Our Rebased 2019 results also point you to our press release and ethic Q document for additional guidance details.

However, I will like to share a few thoughts to frame our 2020 outlook.

We expect solid growth with enhanced profitability, even though the first quarter.

As expected to see difficult comparisons with a strong balance sheet, our capital allocation strategy is expected to drive accelerating earnings per share growth.

And we've identified additional cost reduction actions to those we began last year that should generate further profit improvement in 2021 and beyond.

Our 2020 guidance.

Demonstrates accelerating growth rates as you move down the piano.

At the midpoint, our full year guidance implies revenue growth as approaching 3% and adjusted operating profit growth approximately 7%.

With expected benefits from lower interest expense and $200 million of share repurchases plan early in the year, we expect adjusted earnings per share.

With approximately 15%.

We expect to generate 700 to 800 million in cash flow from operations. After any additional capital allocation initiatives. This year, we expect our leverage to decline of 2.7 times by year end.

With respect to our restructuring and other actions, we expect approximately $50 million of.

Surges in 2020.

Approximately $10 million are these charges are costs related to the excess of xenon and the Dk Anwar license.

Approximately $10 million relate to our 2019 supply chain restructuring, which were previously plan.

The remainder of the charges are focused on additional actions to further reduce costs primarily with our.

Launching an isolation, we expect these additional restructuring actions to deliver approximately $40 million of incremental profit, but $30 million coming in 2021, and remaining $10 million coming in 2022.

Touching on the first quarter, we expect needed revenue and operating profit growth due to transitory.

And timing issues in the international and Us Innerwear segments.

Within us innerwear, we're facing headwinds from a large soc shipment and last year's first quarter as we displaced a competitor a large value retailer.

We also expect continued short term disruption in our basics business from the previously discussed store resets.

At a large mass retailer.

International constant currency revenue growth is expected to slow to 2% and the quarter before returning to mid single digit growth in the second quarter due to the timing of Asia expansion this year compared to last year.

And International's first quarter operating profit is expected to decline due to the increase.

Estimates to support our Asia expansion as well as short term FX transactional cost pressures.

For the rest of the year, we expect revenue and operating profit growth as we benefit from the continued momentum in our intimates business. The completion of store resets in the mass channel.

Expanded distribution in Asia cost savings from our supply chain.

Next spring and price increases in certain international markets to offset the cost pressures from foreign exchange rates.

So in closing we delivered solid results for both the quarter and full year, we delivered on a number of initiatives to improve our business model and as our outlook suggests we believe weve reached an inflection point now at our program exits are behind us.

And Weve brought back our leverage within our targeted range. We believe the combination of our strength and business model, our strong balance sheet and all of our capital allocation tools position us for accelerating earnings growth and total shareholder returns in 2020 and beyond.

With that I'll turn the call back over the Tc.

Thanks, Scott that.

Foods, our prepared remarks, we'll now begin taking your questions. It will continue as time allows I'll turn the call back over to the operator to begin the question and answer session operator.

Thank you.

No to ask a question you wanted tapas style line on your telephone.

Tele CCI question pest upon key.

And the interest of time, we ask that your limit yourself to one question.

Any additional questions you make you back up.

Our first question comes from Omar Saad with Evercore ISI. Your line is now open.

Thanks for taking my question.

I wanted to ask nice nice quarter, guys I wanted to ask.

A little bit more color around the basics reset what's happening in that kind of core basics business I think there's that sounds like something is going on at a mass retailer sounds like an opportunity for shelf space, but maybe you can give us a little bit more color, what's happening there how to expected to kind of flow through the PNM Allen and timing of when that part of the business might reaccelerate again. Thanks.

Hi, Omars.

Oh, thanks for the thanks for the question and we are pleased with the fourth quarter, our record cash flow and double digit EPS growth and are in line guidance really speak to what we've been doing to improve our business model and we really do look to 2020 as an inflection point for this business and an important part of that is the underlying strength of our ongoing businesses and in part of that is.

Dinnerware, and and yet and we did see improvement from a profitability standpoint, certainly at the end of of 2019 as we look to 2020, we do expect the the revenue to improve as we work through the store research sets in the large retailer the large retailers started the reset time at the end of last year.

In 2019, a little earlier than we had expected in and as you see with resets or sell off of have exited SK use in businesses and so forth that can create some short term interruption, but what we do see in what we like is our space is expanding and with that space expansion, we're seeing our share expand so the balance of the chain.

Through the first part of 2020, but we expect as we get passed that that is we get to the second half will pick up the tailwind of that on our innerwear business and the benefit we saw from share expansion in the initial reset along with the improving trends, we're seeing out of our intimates business on the revenue side. We expect to also then pick of the.

Additional restructuring cost restructure benefits that we implemented in 2019 flow through the second half. So we really do expect to stabilization of of our revenue line as we work through the balance of 2020, and we expect operating profit to be up and so we're very encouraged by that and that's an important punctuation on our.

On cash flow as well when we see our profit growing within innerwear.

Thank you. Our next question comes from Jason Yes. Your line is open.

Great. Thank you so much so I have a two part question number one is stacie, maybe give us a little bit of.

Direction on how you expect gross margins by after this year.

And then secondly, the press release mentioned something about.

Identify control deficiencies.

Can you know the consumer material weakness in internal control can you give us idea of of what that means and what some of the action you have already taken in say, we'll continue to take over.

Over the year to you know to address that situation. Thank.

Okay.

Yes, Hi, let me this is Joe let me take the gross margin part and I'll turn it over to Scott to talk about the revision part of the question from a gross margin standpoint, we would expect our growth our gross margins to strengthen as we work through the year. We've got a number of restructure our initiatives that we undertook in 2019 that will flow through in 2020 as.

Works its way off the balance sheet.

Into the second half the year. So you would expect that to ramp along with our revenue is is ramping in the first as we get overlap some of the headwinds in the first quarter 2020. So Scott would you want to ensure thanks drilled and good morning, and thanks for your question.

For the revision just to put some context around this.

Adam the impact of the revision adjustments.

To monitor cumulative earnings per share impact to us of one sent over the three year period of 2017 to 29 team.

And I think it's important to understand as we look forward. This this tax issue with will not impact our tax rate as we move forward we.

Turning to expected tax rate in the mid teens.

We discovered the issue as we were preparing our year end financial statements. This year.

The issue revolves around relates to the tax treatment of intercompany.

Inventory transactions.

And ultimately impacted our our prior period.

Tax balances now when we did we identified this week.

We had them we quantified it and we've revised prior period financial statements to correct for these errors. We also addressed it for other immaterial out of period items at the same Tom and he mentioned the controls and from a controls perspective.

We already license from process improvements in this area, we actually one of the process improvements that we were working through at helped identify this issue.

We ultimately to conclude as this was a material weakness we have and will continue to refine enhance controls in this area I was hoping that's very seriously and we intend to enter implement these enhancements to the.

Of course over the course of 2020.

Thank you. Our next question comes from Susan Anderson with B. Riley FBR. Your line is now okay.

Hi, good morning, Thank for taking my question.

Just wondering if you could maybe quantify it there and how much the innerwear business is impacted next year by.

Cninety CMI and then the door closures and then also how you're thinking about that with a champion sales in 2020 as we go throughout the year, both domestically and internationally in the impacts of the Asia distribution expansion. Thanks.

Sure. Let me look at that let me start with the C. Non portion of your.

Question, it's in the Rebase numbers that we looked at on the basics are the innerwear side of things that was approximately $42 million of sales. It was in innerwear basics. We have recovered the vast majority of them, but it's a bit masked in the the rebase numbers because as we plan for 2020, we also assumed.

There would be the impact of door closures of.

About $35 million to $40 million. So the they offset in the numbers, but I think you should should take solace in knowing that we have plan conservatively on the innerwear side and as we began to hear about door closures and other places we have those covered in our our guidance as we look toward 2020, so we feel weve appropriately planned.

The.

Aware business from the standpoint of being conservative yet.

And no the the phasing of that business as we also see to the revenue and and.

Profitability ramp throughout the year. So we feel good about that business, where its position in appropriately planned from a conservative standpoint.

From the and then the Asia.

And just kind of how the year, maybe unfolds full for growth, yes from a champion business first of all let me just save last year champion had another we finished really well in fourth quarter champion was up.

22% to in the fourth quarter again, and it was 22% domestically in 22% internationally and just to give you a sense of how big that business has become it's about 400.

Third $60 million globally in the quarter and it finished up 40% for the years. So as we look at 2020, we expect to two surpassed the 2 billion dollar Mark we expected Doe another year of double digit growth for champion. We are overlapping some very large comps in the first part of the years. So we we plan to a.

Hi to mid to high single digit growth rate for champion in the first half of the year in.

A double digit growth in the second half of the year low double digit growth in the second half of the year.

So we're continue to be very bullish on champion and its its ability to continue to grow we've seen strong Pos we saw strong Pos through the holiday periods around the world.

As well and we're well on our way as obviously to reach our 2 billion dollar goal in 2022 years early and we believe we can add the next billion in the next four to five years.

Thank you. Our next question comes from Ike Boruchow loss aka your line is now open.

Hey, good morning, everyone Gerald two questions.

And Thats a Q there is some commentary about finding a new cnine partner and something new revenue stream in the second half, but it sounds like it should be minimal I'll just any more color on that would be would be really helpful. It's interestingly you guys are able to to get a partner for the brand.

And then secondarily there was a big department store that talked about.

You know a three year store store closing program. Just curious if you could let us know how that impacts your multiyear view of of innerwear, how tied to those.

The 125 doors you are just us anything there over the next three years would be helpful as well.

Sure, let me start with as seen on part of the.

And as Cnine has continued to perform well right through the balance of 2019, a really exceeded our expectations through the balance of 2019, and it's clear to us that there's a strong consumer.

Base out there that's very loyal to that brand. We are in the final stages of discussions with a new partner and we expect to launch that.

Program initial program in the second half of this year relatively small to start with and as you noted it is in our guidance at this point in time, but it has the potential to to ramp nicely over time as as as we get the program going So we will provide some more specifics on that in the coming months, but we're very pleased to have the the opportunity to.

To keep that is that brand in the market and satisfy those consumers from the standpoint of the department store information. The vast majority of the business. We do in Macy's is it on is it on Macy's dot com and in their largest stores.

And Thats, where the where all of our really growth comes from an account as.

Good any announcement the stores targeted for closures or a small part of their total business and while the closure list is not yet been fully communicated we believe the doors targeted for closure to not do not represent a material part of our business in regards to 2020 as I noted in my earlier comments, we had planned possibility as of two additional door.

Others in the market and we feel that we have the initial 30 covered in our guidance and as the list develops we'll continue to assess that but we feel we've got in covered in our guidance for 2020, I think once again it reinforces what we've been focused on for a while as is the consumers' choice of where they shop and the shopping habits continues to evolve.

We've been focusing over the last few years on diversifying our revenue base and where we sell in particularly developing our our consumer direct piece of the business, which is in as we noted in our comments was 25% of our business.

In the last year, and so Macy's dot com as part of that as well as pure plays and as well as our own side. So we'll continue to diversify.

Where we sell to meet the shifting needs of the consumer so we feel good about where we have innerwear going in that will continue to end innerwear is one of our fastest growing consumer direct businesses.

Thank you. Our next question comes from Jim Duffy with Stifel. Your line is now open.

Thanks, Good morning, guys nice job.

The cash flows in the balance sheet.

So this gives you some new found balance sheet flexibility in the 2020 looking at the implied cash flow outlook for 20, well in excess of the dividend obligation in the 200 million and plan repurchases because the balance go to debt reduction or could you see repurchases beyond that 200 million.

Hi, Jim as Gerald and thanks for that we have definitely focused on Delevering as you now and where we're very proud to have achieved that goal. It gives us a lot of flexibility in them.

We're very disciplined around capital allocation approach. We have noted that our intent is to use the 200 million of excess cash to to repurchase shares that will.

Allow us to continue to de lever on we'll assess as we work through the year, but certainly getting solidly back in our range gives us significant amount of flexibility and exercising our FFO capital allocation. So we'll work through the year, but we're very pleased to be back within our range.

Thank you. Our next question comes from Heather Balsky.

With Bank of America. Your line is open.

Hi, Thank you for taking my question first with regards shared champion guidance for next year can you just talk about.

On the different components in terms of active wear and international and how you're thinking about the growth. There and then also in terms of your cash flow guidance.

If you could just help us a little more color how do we think about some moving pieces, especially working at all thanks.

Sure let me take the first half of that now let.

Scott take the second half of that from the standpoint of.

Champion, we expect does continue to see the balance growth really between international and the and the domestic pace it.

Is growing nicely actually the.

The.

The innerwear piece of our champion is growing at a very rapid rate as well as helping drive that total total strong growth that we're seeing around the world. So we expect both the activewear and innerwear elements of our champion business to grow we as we've said before we've been very successful in the men's business, we still have room to grow.

So as we develop.

A greater share in the women's business as well as the kids business and and outerwear represents a new category for us as well. So we see multiple areas that we can continue to expand the business as well as continue to grow of course, where we have distribution today.

Yep.

Excellent.

So your question and good morning.

We are we're very proud of the record level of cash flow that we had in 2019. The the team did a fantastic job. This year, we and a good improvement in our cash cycle days and we feel this takes us to a new level.

From nine reef and reinforces our ability to generate cash flows are operating cash.

As a my team we accomplish that through strong GAAP net income and working capital management.

As you think about 2020 Cashel levels in our guidance is the 700 $800 million you can you can arrive at that and a couple of ways.

In one way of looking at our 2020 GAAP net income.

At the midpoint is around $585 million.

Add back our non cash items, like depreciation and amortization and stock compensation, which is typically around $180 million to $190 million inland Rotten the midpoint within that guidance range.

Other way of thinking about it is if you look at our 2019 cash flow level of 803.

$3 million, our 2020 GAAP net income is at the midpoint is around $20 million lower.

The 19 as we've talked about program exits and just using the same working capital assumption that we had a 19 was actually flat.

For that year, we regret within that guidance range again, so we'd like this was a prudent way of looking.

Net cash flows in 2020, and we'd like again, we're in a really good position to drive.

Strong cash flows side in 2020 and beyond and this is helping with with strong returns and again, Joe mentioned earlier. This gives us opportunities to continue to lever for share repurchases and really drive shareholder return.

Thank you. Our next question comes from Tiffany, Canada with Deutsche Bank. Your line is now open.

Hi, Thanks for taking your questions would you. Please help us understand better what Charles Deborah revenue increase in the fourth quarter and if you anticipate that carrying forward as part of the flattish rebase full year guidance for innerwear.

Despite retailer door closures or put another way would you quantify what level of broad growth is baked into your 2020 brands.

Sure it from the standpoint of what drove that growth. It was we certainly have been on working on a revitalization.

Program for for sometime now within the intimates business in one of our key elements of our Brock.

Expansion was innovation and we've seen both our dream wine or easy light innovations performed very well and as you may recall, we pair that with.

Both them online our digital support as well as TV support in the case in the valley easy lights. So we so nice traction from the standpoint of those launches and we've seen at ramp and we.

Spect It will continue to ramp, particularly as we get through the into the later quarters of the year. So we are expecting actually growth out of our intimates business.

Last year and in the guidance that we gave.

Thank you. Our next question comes from Paul The choice of Citi. Your line is now open.

Hello, Thanks, guys.

Cuba, you took some price on the innerwear side that helped margins in that segment can you just maybe talk about how your retail partners have adjusted their pricing what sort of sell throughs. Yes. They are seeing just basically what's the consumer reception to the price increases and also just wanted to make sure on the.

International side, you mentioned some bad debt.

But negatively hurt your profits this past quarter was that a onetime thing or do you expect any more of that to continue and as clay. Thanks.

Sure that from the pricing question, we've implemented our pricing in Innerwear really last February.

February of 2019, you may recall at the time, we were pricing because commodity is it peaked ahead of that pricing and we put that pricing in place. So it's been in place a long time, we generally seeing that pricing in the market is settled out around it and so forth. What we're seeing now though is the pricing continues to lap itself that the peak of the.

Oddities is passed and we're actually seeing margin improvement as the commodity cost begin to ramp down in the pricing overlaps that so we're seeing that and as we look to innerwear in the second half of 2020, we get the added benefited the supply chain restructurings that we executed in 2019 will work their way off the balance sheet and give us added.

Movement in our operating margins in profit within Innerwear in particular.

From the standpoint of the international Bad debt that was a bankruptcy in Australia, and we would expect that to be an individual event not something is ongoing.

Thank you next question comes from David Watson.

Sorry. Your line is now open.

Yes. Thanks for taking my question can you give us an update on the new distribution agreements for champion in South Korea, and China and also do you think that the health crisis in China will affect store openings. This year. Thanks.

Sure from his standpoint in the distribution agreements, we have two new partners one.

In Korea, and one in China as you noted from the standpoint to have their own how they will flow. They are planned for later in the year. So at this point in time, we do not see the current issue having an impact on on that business you may recall that our Chinese commercial businesses as fairly small today less than 1% from the standpoint.

One of that overall issue, we're taking it very seriously isn't it's an evolving.

Issue, we have stopped our own travel of of our our employees as well as weve watching very carefully from the standpoint of our vendors and we will keep that travel stopped until.

We see that the illnesses is is.

They are seized from the standpoint of our business, we don't see it have any of.

Meaningful impact on our business at this time and we certainly are working on contingency plans either from a sourcing standpoint, or a business standpoint, but.

Back to your original question, we feel good about those distributors and they'll have more of a.

Second half impact.

Thank you.

Next question comes from John Kernan Cowen Your line is now open.

Hey, good morning, guys. Thanks for taking my question.

Until you mentioned in called out champion hitting your target.

Earlier than you anticipated and you mentioned $1 billion, an incremental top line that you thought you.

The brand could generate can you walk us through how you're getting there and just the bridge between distribution growth in North America International kind of how we should think about that billion dollars.

In revenue opportunity you're talking to you.

Sure as we began to look at it from the standpoint of the next billion. We see it is continued to be a.

We'll expansion and in many ways that some of the categories I touched on earlier important element to that to drive from years from simply being predominantly a.

A men's brand to one that becomes a across genders and includes.

The kids business as well it would obviously include an important ramping in markets like Asia, where we think there's tremendous.

Andy further expansion in our Europe markets and within the U.S. market. For example, we have pretty solid distribution, that's where you would you would expect certainly to us to build a bigger business across womens and kids as well and then there are categories out there that we really don't play in such as outerwear and we also are in the midst of partnering with a company on on.

Initial shoe offerings as well so we we see lots of avenues to growing we would see its or sort of being consistent growth over time.

Thank you. Our next question comes from Carla Casella with Jpmorgan. Your line is now open.

Hi, you talked about most of the.

Shelf space gains and losses, and I think you gave us some nice clarity on the Internet and Koreans have and China, but can you say the timing of what was that was that the only major change in shelf space. This year was there something else that was committed in one of the other categories that I'm asked.

Now I'd like to this demos shelf space were fairly stable from a shelf space and when I speak to you about that and shelf space I'm speaking more on the innerwear side of things shelf spaces as fairly stable, we do see the solidification of the the basic space within that the mass channels, we referred to earlier, but we feel good about our our shaves shelf space in our our innovations behind it.

Of course on the active wear aside and champion in particular, we're continuing to drive distribution expansion in the U.S. as well as globally. So we have a nice nice trend there as well.

Thank you that concludes our question and answer session I would now like to turn the call back over to TCV of a lot for any closing remarks.

We'd like to thank everyone for attending our call today, and we look forward to speaking with you soon.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.

[music].

Ladies and gentlemen, thank you for standing by and welcome to the Hanesbrands fourth quarter 2000, <unk> earnings Conference call.

All participants are not listen only mode.

After the speaker presentation, there will be a question and answer session.

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I would now the kind the confidence desperate good today do you see local our Chief Investor Relations Officer. Please go ahead Sir.

Good day, everyone and welcome to the Hanesbrands quarterly.

The conference call webcast, we're pleased to be here today to provide an update on our progress after our fourth quarter of 2019.

Hi, everyone has had a chance to review the news release, we issued earlier today.

The news release updated I think you document and the replay of this call can be found any investor section of our hands Dot com website.

On the call today, we may make forward looking statements either in our prepared remarks on the associated question answer session.

These statements are based on current expectations or beliefs and are subject to certain risks and uncertainties that may cause actual results to differ materially.

These risks are detailed in our virus filings with the FCC and may be found.

And on our website as well as in our news releases the company does not undertake to update or revise any forward looking statements, which speak only to the time at which they are made.

Unless otherwise noted today's references to our consolidated financial results as well as our 2020 guidance exclude all restructuring and other action related charges and expenses.

Additional information, including a reconciliation of these and other non-GAAP performance measures to GAAP can be found in today's press release.

With me on the call today are Gerald Evans, our Chief Executive Officer, and Scott Lewis, Our Chief Accounting Officer, and interim Chief Financial Officer.

For today's call Gerald and.

I will provide some brief remarks and then we'll open it up to your questions I'll now turn the call over to Gerald.

He highlights in the quarter include operating cash flow that exceeded the high end of our guidance for both the quarter and the full year.

We delivered on our commitment to bring our leverage back within our target range. We saw continued strong performance isn't international consumer direct and champion.

And adjusted gross margin improved 130 basis points.

Over prior year, driven by increases in both our U.S. innerwear and U.S. active wear segments.

And U.S. Anywheres operating profit operating margin increased over prior year with both metrics exceeding our guidance in the quarter, despite lower than expected revenue.

We believe this is an indication that U.S. in other words profit has begun to.

Yes.

In addition to you as you know, whereas fourth quarter profit performance. We saw two additional developments that point to improving revenue and profit trends in 2020.

First our intimates business improved sequentially and was inline with our expectation for the quarter.

The strong performance was driven by our broad business, which increased.

Over prior year as our revitalization efforts and product innovations such as easy light and dream, where continued to gain traction.

And second while early store resets by a major retailer had a short term impact on basic sales in the quarter. We're pleased with the longer term potential. This reset holds for our business.

Within the stores that have been.

We're gaining shelf space and we're gaining market share.

Once completed we believe this reset should have a positive impact on our basics business beginning in the second half of this year.

Over the past several years, we've executed strategy to diversify our business and position the company for increased earnings growth and shareholder returns.

To accomplish this we said five specific goals and we've delivered on each as highlighted by our fourth quarter and full year results.

First we have diversified our revenue.

International revenue now accounts for 36% of sales up from 11% in 2013.

Consumer direct revenue, which represented 30.

For Ciena fourth quarter sales and 25% of full year sales is up from 9% in 2013.

And on a constant currency basis global champion, excluding see nice generated more than $1.9 billion of revenue in 2019, an increase of more than $1.1 billion in just three years.

Second we have consistently delivered organic revenue growth the fourth quarter marked our 10th consecutive quarter of constant currency growth.

And we accomplished this despite challenges in our U.S. business that include a muted holiday and a 46 million dollar headwind from exited programs.

Third we positioned the business for higher levels of.

Stability over the next several years by exiting unprofitable businesses, a restructuring our supply chain to lower cost, we believe our supply chain restructuring initiatives have positioned U.S. innerwear and the company for improving margins over the next two years.

We also believe this represents an important milestone for U.S. innerwear as it remains a critical.

Driver of our strong cash flow.

Fourth we are generating higher levels of operating cash flow.

In 2019 operating cash flow increased 25% over prior year to more than $800 million. This is approximately $200 million higher than our cash flow from just three years ago.

And fifth.

We have reduced our net debt by more than $1.1 billion in less than two years. We ended the year at 2.9 times Levered on a net debt to adjusted EBITDA basis, which is a full turn lower than our peak.

Now that we're back within our long term range of two to three times our priority for 20.

20 is to use our excess free cash to buy back stock.

With a lot of heavy lifting.

Turning to our 2020 guidance through the remainder of my remarks.

For comparison purposes, I'll be referencing our Rebase 2019 results, which adjusts for the exits of Cnine at target and our Dk and why intimates license. This will provide a clearer view of the underlying trends within our business.

Using the midpoint, our 2020 guidance implies approximately 3%.

Your growth.

This is driven by strong performances in international consumer direct and champion.

And while we continue to plan conservatively with respect to argue as innerwear business, we expect improved revenue trends in 2020 in both basics and intimates.

Our guidance for U.S. Innerwear assumes revenue growth ranging from down 1% to up one.

For the full year.

And for the total company, we expect adjusted operating profit growth of 7% as our investment spending normalizes and cost savings from our supply chain restructuring flow through particularly within our U.S. Innerwear segment, where we expect operating profit to be up over prior year.

With lower interest expense and.

A lower share count, we expect adjusted earnings per share growth to accelerate to 15%.

Embedded in our guidance is $200 million of share repurchases.

And we expect to generate between seven and $800 million of operating cash flow.

So in closing we delivered solid performances for the quarter end the.

Our year.

And with that.

I'll turn the call over to Scott Lewis, our Chief Accounting Officer, who is serving as interim Chief Financial Officer, Scott, It's held leading roles in our strong global Finance organization. Since the company went public and is providing us with a seamless leadership transition to support our goals and strategies Scott.

Thanks, Gerald before I discuss our fourth.

Quarter results I want to highlight a supplemental document on our website reflects revisions to our prior period results.

These revisions primarily relate to adjustments to our income tax balances.

Isn't that a monarch cumulative earnings per share impact of one cents or with a three year period from 27 thing the 29 thing.

Just one for.

Amazing can be found in our FHLB document as well as in our 10-K.

Now, let me discuss the quarter overall reported solid fourth quarter results revenue adjusted operating profit and earnings per share, we're aligned with our guidance or cash flow from operations exceeded the high end of our range.

For the.

Quarter sales were $1.75 billion on a constant currency basis sales increased slightly over prior year.

Well that's in our results reflect $46 million expected headwinds at our activewear segment from the excess commodity programs in the last channel as well as the plan whine down of thinking on at target.

Adjusted gross margin increased 130 basis points over last year to 41.4% driven by higher margins in both our innerwear and activewear segment.

Adjusted operating profit in the quarter was $263 million and included $3 million of currency headwinds as compared to last year.

Adjusted operating margin.

15% increase approximately 40 basis points over prior year as our strong gross margin performance more than it was.

Recent caused an unexpected bad debt charge, a $3 million related to a retailer bankruptcies in Australia.

But the adjusted and GAAP earnings per share were 51 cents an increase of over prior year.

13% and 24% respectively.

And the quarter, we generated $559 million in cash flow from operations, an increase of $57 million compared to prior here.

For the full year, we generated a record $803 million and cash flow from operations.

With respect to the.

Balance sheet as compared to last year, we reduced our inventory balance by more than $150 million and we pay down over $600 million a bit.

Our leverage at the end of the quarter was 2.9 times on a net debt to adjusted EBITDA basis. This is down one full turn from our peak in the first quarter of.

2018.

Brings us back within our target range of two to three times.

With that summary, let me take you through our fourth quarter segment performance.

As compared to last year, U.S. Innerwear sales declined 4%.

However, operating profit increased 5% as our operating margin expanded 210 basis points to.

24.6%.

Operating profit and margin exceeded our forecast in the quarter as a benefit from oil price increases at lower distribution expenses more than offset higher commodity costs and lower unit volume.

For the quarter basics revenue declined 5% due to the impact of door closings.

At an earlier than planned disruption from store resets a large mass retailer.

These resets are called in short term fluctuations. We believe once completed the showed a positive impact on our basics business beginning in the second half of this year.

And with respect to our intimates business as expected our trends improve sequentially driven.

Rob business.

For the quarter brought revenue increased slightly operating margins improved nearly 300 basis points over last year as our revitalization efforts and new product innovations gain traction.

Turning to our U.S. Activewear segment sales declined nearly 7% over last year and were slightly better there.

Our forecast.

What's result reflect the $46 million of expected year over year headwinds I referenced earlier.

As compared to prior year champion Activewear sales excluding thing on increased 14%.

Seen on revenue declined, 26% or $26 million and filled in the remainder of our activewear segment.

And approximately $30 million, which was better than our forecast.

Outdoors operating margin of 15.8% declined 30 basis points over prior year.

Covers gross margin increase in the quarter driven by the benefits of our remixing activity, including a higher mix of champion sales. This was more than offset by higher stx.

Staff, including higher distribution costs.

And our international segment revenue increased nearly 7% and was above our forecast driven by stronger than expected results, but theyre activewear and innerwear businesses.

On a constant currency basis international sales increased 10% or $60 million.

Over prior year.

Single digit growth in innerwear, and 22% growth and champion.

International's operating margin of 14.9% declined 140 basis points.

Over the last year as the benefits from higher sales were more than offset a short term FX transaction cost pressures as well as the $3 million Australia.

Bad debt expense I referenced earlier.

Touching briefly on a global champion business, excluding seeing on constant currency sales increased 22% over last year, and we're aligned with our expectation.

This consists of 22% growth in both our domestic and international champion businesses.

And now turning to guidance.

To present and more representative comparison of our ongoing business between 2020 and 29 team we provided supplemental table on our website.

This table provides a rebased financial information between 19, just for the Axis Athena target and the Dk Anwar intimates license.

Hi, guys discussion all year over year comparisons will reference.

Our Rebase 2019 result, also point you to our press release and ethic Q document for additional guidance details.

However, I would like to share a few falls to frame our 2020 outlook.

We expect solid growth with enhanced profitability, even though the first quarter.

As expected to see difficult comparisons with a strong balance sheet, our capital allocation strategy is expected to drive accelerating earnings per share growth.

And we've identified additional cost reduction actions to those we began last year that should generate further profit improvement in 2021 and beyond.

Our 2020 got it's.

Demonstrates accelerating growth rates as you move now the piano.

At the midpoint, our full year guidance implies revenue growth, that's approaching 3% and adjusted operating profit growth approximately 7%.

With expected benefits from lower interest expense at $200 million of share repurchases plan early in the year, we expect adjusted earnings per share.

Approximately 15%.

We expect to generate Pfseven hundred 800 million in cash flow from operations.

For any additional capital allocation initiatives. This year, we expect our leverage the decline of 2.7 times by year end.

Respect to our restructuring and other actions, we expect approximately $50 million a.

Surges in 2020.

Approximately $10 million are these charges are costs related to the excess as seen on and the dk and why license.

Approximately $10 million relate to our 2019 supply chain restructuring, which were previously planned.

The remainder of the charges are focused on additional actions to further reduce cost primarily with our.

Gotcha.

And isolation, we expect these additional restructuring actions to deliver approximately $40 million of incremental profit, but $30 million coming in 2021, and remaining $10 million coming in 2022.

Touching on the first quarter, we expect muted revenue and operating profit growth due to transitory.

Okay, and timing issues and the international and Us Innerwear segments.

Within the U.S. innerwear are facing headwinds from a large soc shipment at last year's first quarter as we displaced a competitor a large value retailer.

We expect continued short term disruption in our basics business for the previously discussed store resets.

At a large mass retailer.

And International's first quarter operating profit is expected to decline due to the increase.

Estimates to support our Asia expansion as well as short term FX transactional cost pressures.

For the rest of the year, we expect revenue and operating profit growth as we benefit from the continue momentum and our intimates business. The completion of store resets in the mass channel.

Expanded distribution in Asia cost savings from our supply chain.

Next rate and price increases in certain international markets to offset the cost pressures from foreign exchange rates.

In closing, we delivered solid results for both the quarter and full year, we delivered on a number of initiatives to improve our business model and as our outlook suggests we believe weve reached an inflection point now a program exits are behind us.

And we brought back our leverage within our targeted range. We believe the combination of our strength and business model, our strong balance sheet and all of our capital allocation tools position us for accelerating earnings growth and total shareholder returns in 2020 and beyond.

With that I'll turn the call back over the Casey.

Thanks, Scott that.

Lose our prepared remarks, we'll now begin taking your questions. It will continue as time allows I'll turn the call back over to the operator to begin the question and answer session operator.

Thank you.

And then ask the question Jani Tapas style one on your telephone.

<unk> question has to punky.

And the interest does time, we asked whats your limit yourself to one question.

I have any additional questions you make you back up.

Our first question comes from Omar Saad with Evercore ISI. Your line is open.

Thanks for taking my question I wanted to ask a nice nice quarter guys I wanted to ask.

A little bit more color around the basics reset what's happening in that kind of core basics business I think there's that sounds like something is going on at a mass retailer sounds like an opportunity for shelf space, but maybe you can give us a little bit more color, what's happening there how to expected to kind of flow through BNL and timing of when that part of the business might reaccelerate again. Thanks.

Oh Mars.

Oh. Thanks, Thanks for the question and we are pleased with the fourth quarter, our record cash flow and double digit EPS growth and are in line guidance really speak to what we've been doing to improve our business model and we really do look to 2020 as a an inflection point for this business an important part of that is the underlying strength of our ongoing businesses and in part of that isn't.

Dinnerware, and and yet and we did see improvement from a profitability standpoint, certainly at the end of of 2019 as we look to 2020, we do expect the the revenue to improve as we work through the store research sets in the large retailer that large retailers started the reset at the end of last year.

In 2019, a little earlier than we had expected and as you see with resets or sell off of exited a SK use and businesses and so forth that can create some short term interruption, but what we do see and what we like is our space is expanding and with that space expansion, we're seeing our share expand so the balance of the chain.

On cash flow as well and we see our profit growing within innerwear.

Thank you. Our next question comes from Jason Yes. Your line is open.

Great. Thank you so much so I have a two part question number one is Scott can you maybe give us a little bit of.

Direction on how you expect gross margins by after this year.

And then secondly, the press release mentioned something about.

Identify control deficiencies.

Nick.

On student material weakness in internal control your best idea of what that means and what some of the actions you've already taken they will continue to take.

Over the year too.

Address that situation. Thank.

Yes, Hi, let me this is Joe let me take the gross margin part and I'll turn it over to Scott to talk about the revision part of the question from a gross margin standpoint, we would expect our growth our gross margins to strengthen as we work through the year. We've got a number of 'em restructure initiatives that we undertook in 2019 that will flow through in 2020 as.

Works its way off balance sheet.

Into the second half the year. So you would expect that to ramp along with our revenue is is ramping in the first as we get overlap some of the headwinds in the first quarter of 2020. So Scott would you wont take this year, thanks drilled and good morning, and thanks for your question.

For the revision just to put some context around this.

Adam the impact of the revision adjustments had a minor cumulative earnings per share impact to us of one sent over the three year period of 2017 to 29 chain.

It's important to understand as we look forward. This this tax issue with will not impact our tax rate as we move forward we.

Turning to expect the tax rate in the mid teens.

We discovered the issue as we were preparing our year end financial statements. This year.

The issue revolves around relates to the tax treatment of intercompany.

Inventory transactions.

And ultimately impacted our our prior period.

Tax balances now when we just we identified this week.

We had though we quantified it and we've revised prior period financial statements to correct for these errors. We also addressed it for other immaterial out of period items at the same time and he mentioned the controls and from a controls perspective.

We already made some process improvements in this area, we actually one of the process improvements that we were working through it helped identify this issue.

We ultimately to conclude as this was a material weakness I. We haven't will continue to refine enhance controls in this area I was thinking that's very seriously and we intend to implement these enhancements to the.

Of course over the course of 2020.

Thank you. Our next question comes from this and Anderson with B. Riley FBR. Your line is now okay.

Hi, good morning, Thanks for taking my question.

Wondering if you could maybe quantify a bit and how much that innerwear business impacted.

Share.

Cninety CMI and then they door closures and then also how you're thinking about pick with a champion sales in 2020 as we go throughout the year, both domestically and internationally and.

Having said that each at distribution expansion. Thanks.

Sure. Let me look it let me start with the C. Non portion of your.

Question, it's in the Rebase numbers that we looked at on a the basics are the innerwear side of things there was approximately $42 million of sales. It was in innerwear basics. We have recovered the vast majority of that but it's a bit masked in the rebase numbers because as we plan for 2020, we also assumed.

There would be the impact of door closures of.

About $35 million to $40 million so they they offset in the numbers, but I think you should should take 'em solace in knowing that we have plan conservatively on the innerwear side and as we began to hear about door closures and other places we have those covered in our our guidance as we look toward 2020, so we feel weve appropriately planned.

The.

Aware business from the standpoint of being conservative yet.

And no the the phasing of that business as we also see to the revenue and.

Profitability ramp throughout the year. So we feel good about that business, whereas position and appropriately plan from a conservative standpoint.

From the than the Asia.

And just kind of how the year, maybe unfolds full for growth yeah from a champion business first of all let me just save last year you haven't had another we finished really well in fourth quarter champion was up.

22% in the fourth quarter again, and it was 22% domestically and 22% internationally and just to give you a sense of how big that businesses the comments about 400.

Hundred $60 million globally in the quarter and it finished up 40% for the years. So as we look at 2020, we expect to two surpassed the 2 billion dollar Mark we expect the Doe another year of double digit growth for champion. We are overlapping some very large comps in the first part of the year. So we we plan to a.

Hi to mid to high single digit growth rate for champion in the first half of the year in.

A double digit growth in the second half of the year low double digit growth in second half of the year.

So were continued to be very bullish on champion and its its ability to continue to grow we're seeing strong Pos we saw strong Pos through the holiday periods around the world.

And as well and we're well on our way as obviously to reach our 2 billion dollar go in 2022 years early and we believe we can add the next billion in the next four to five years.

Thank you Sir our next question comes from.

With Wells Fargo. Your line is now open.

Hey, good morning, everyone Gerald two questions.

And that's the Q, there's some commentary about finding a new cnine partner and something new revenue stream in the second half, but it sounds like it should be minimal I just any more color on that would be would be really helpful. It's interesting that you guys are able to to get a partner for the brand.

And then secondarily.

There was a big department store the talked about.

You know a three year store store closing program. Just curious if you could let us know how that impacts your multiyear view of of Innerwear, how tied to those 125 doors. You are just just anything there over the next three years would be helpful as well.

Sure, let me start with as seen on part of the question Cnine has continued to perform well right.

Through the balance of 2019, a really exceeded our expectations through the balance of.

2019, and it's clear to us that Theres a strong consumer.

Base out there that's very loyal to that brand. We are in the final stages of discussions with a new partner and we expected launch that program initial program in the second half of.

This year relatively small to start with and as you noted it isn't our guidance at this point in time, but it has the potential to ramp nicely over time as as as we get the program going So we'll provide some more specifics on that in the coming months, but we're very pleased to have the the opportunity to keep that that brand in the market.

Satisfy those consumers from the standpoint of the Department store information.

The vast majority of the business we do in Macy's is it on is it on Macy's dot com and in their largest stores.

And Thats, where the where all of our really growth comes from an account as noted in the announcement the stores targeted for closures.

Or a small part of their total business and while the closure list is not yet been fully communicated we believe the doors targeted for closure not do not represent a material part of our business in regards to 2020 as I noted in my earlier comments, we had planned possibility of additional door closures in the market and we feel that we have.

The initial 30 covered in our guidance and as the list develops we'll continue to assess that but we feel we've got it covered in our guidance for 2020 I think once again it reinforces what we've been focused on for a while is is that consumers choice of where they shop in their shopping habits continues to evolve and we've been focusing over the last few years on.

Diversifying our revenue base, and where we sell in particularly developing our our consumer direct piece of the business, which is in as we noted in our comments was 25% of our business.

In the last year, and so Macy's dot com as part of that as well as pure plays in as well as our own side. So we'll continue to diversify where we sell to meet the shifting.

Needs in the consumer so we feel good about where we have innerwear going in that will continue to end innerwear is one of our fastest growing consumer direct business.

Thank you. Our next question comes from Jim Duffy with Stifel. Your line is open.

Thanks, Good morning, guys nice job with the cash flows in the balance sheet.

So this gives you some new found balance sheet flexibility in the 2020 looking at to implied cash flow outlook for 20, well in excess of the dividend obligation in the 200 million in plan repurchases because the balance go to debt reduction or could you see repurchases beyond that 200 million.

Hi, Jim as Gerald.

And thanks for that we have definitely focused on Delevering as you now and where we're very proud to have achieved that goal. It gives us a lot of flexibility and.

We're very disciplined on capital allocation approach. We have noted that our intent is to use the 200 million of excess cash to to repurchase shares that will allow us to continue to de lever.

We'll assess as we work through the year, but certainly getting solidly back in our range gives us significant amount of flexibility and exercise Apo capital allocation. So we'll work through the year, but we're very pleased to be back within our range.

Thank you. Our next question comes from Heather Balsky with Bank of America. Your line is open.

Hi, Thank you for taking my question first with regards to your champion guidance for next year can you just talk about.

The different components in terms of active wear and international and how you're thinking about the growth. There and then also in terms of your cash flow guidance. If you could just help us a little more color.

How do we think about some moving pieces, especially working cap at all thanks.

Sure, let me take the first half of that and outlet.

Scott take the second half of that from the standpoint of.

Champion, we expect does continue to see the balance growth really between international and the and the domestic pace. It is growing nicely actually the.

The.

The innerwear piece of our champion is growing at a very rapid rate as well as helping drive that total total strong growth that we're seeing around the world. So we expect both the active wear and innerwear elements of our champion business to grow we as we've said before we've been very successful in the men's business, we still have room to grow as we develop.

Great.

It or share in the women's business as well as the kids business and and outerwear represents a new category for us as well. So we see multiple areas that we can continue to expand the business as well as continue to grow course, where we have distribution today.

Excellent I appreciate your question and good morning, we're we're very proud.

The record level of cash flow that we had in 2019, the the team did a fantastic job this year we.

Good improvement our cash cycle days, and we felt this takes us to a new level.

From a brief and reinforces our ability to generate cash flows are operating cash flows in my team we accomplish that.

Through strong GAAP net income and working capital management.

As you think about 2020 cash flow levels in our guidance is the 700 $800 million. You can you can arrive at that and a couple of ways.

And one way of looking at our 2020 GAAP net income the midpoint is around 580.

$5 million, if you add back our non cash items like depreciation and amortization and stock compensation, which is typically around $180 million to $190 million a human Rotten a midpoint within that guidance range.

Another way of thinking about it is if you look at our 20 910 cash level of $803 million our 2020.

GAAP net income is at the midpoint is around $20 million lower.

Then my team as we talked about program exits and just using the same working capital assumption that we had a 19 was actually flat.

For that here, we you Rob right within that guidance range again, so we'd like to to the prudent way of looking at cash flows and 2020.

And we'd like again, we're in a really good position to drive.

Thank you.

Next question comes.

Tiffany Kanaga with Deutsche Bank. Your line is open.

Or put another way would you quantify what level of broad growth is baked into your 2020, France.

Sure it from the standpoint of what drove that growth. It was we certainly have been on working on a revitalization.

Program for for sometime now within the intimates business and one of our key elements of our bra expansion was innovation and we've seen.

Their dream why on our easy light innovations performed very well and as you may recall, we pair that with.

Both online or digital support as well as TV support in the case in the valley easy light. So we so nice traction from the standpoint of those launches and we've seen at ramp and we expect it will continue to ramp, particularly as we.

Get through the into the later quarters of the year. So we are expecting actually growth out of our intimates business next year in the guidance that we gave.

Thank you Sir our next question comes from Paul The choice of Citi. Your line is now open.

Hello, Thanks, guys.

Some price on the in our.

Aware side that help margins in that segment can you just maybe talk about how your retail partners have adjusted their pricing what sort of sell throughs you had that they're seeing just basically what's the consumer reception to the price increases and also just wanted to make sure on the international side you mentioned.

Bad debt.

Negatively hurt your profits this past quarter was that a onetime thing or do you expect any more of that to continue and clay. Thanks.

Sure that from the pricing question, we've implemented our pricing and Innerwear really last February so February of 2019.

You may recall at the time, we were pricing because commodity is it peaked ahead of that pricing, we put that pricing in place. So it's been in place a long time, we've generally seen that pricing in the market is settled out around it and so forth. What we're seeing now though is the pricing continues to lap itself that the peak of the commodities is passed and we're actually seeing.

Margin improvement as the commodity cost begin to ramp down and the pricing overlaps that so we're seeing that as we look to anywhere in the second half of 2020, we get the added benefited the supply chain restructurings that we executed in 2019 will work their way off the balance sheet and give us added improvement in our operating margins in profit.

Within innerwear in particular.

From the standpoint, the international bad debt that was a bankruptcy in Australia, and we would expect that to be an.

Individual event not something is ongoing there.

Thank you next question comes from David Swatch Morningstar. Your line is now open.

Sure from his standpoint in the distribution agreements, we have two new partners, one inquiry and one in China as you noted.

From the standpoint of the of their around how they will flow. They are planned for later in the year. So at this point in time, we do not see the current issue having an impact on on that business you may recall that our Chinese commercial businesses as fairly small today less than 1% from the standpoint of that overall issue we're taking it.

Very seriously isn't it's an evolving.

We have stopped our own travel of of our our employees as well as we watch very carefully from the standpoint of our vendors and we will keep that travel stopped until.

We see that the illnesses is is stopped rcs from the standpoint of our business we.

Let's see it having any I mean.

Meaningful impact on our business at this time and we certainly are working on contingency plans either from a sourcing standpoint, or a business standpoint, but back to your original question. We feel good about those distributors and they'll have more of a second half impact.

Thank you.

Next question comes from.

John Kernan Cowen Your line is open.

Hey, good morning, guys. Thanks for taking my question.

Karen you mentioned in called out champion hitting your target.

Earlier than you anticipated and you mentioned a $1 billion an incremental top line that you thought.

You did brand can generate can you walk us through how.

We're getting there and just the bridge between distribution growth in North America irrational kind of how we should think about that billion dollars.

In revenue opportunity you're talking to you.

Here as we began to look at it from the standpoint of the next billion. We see it is continued to be a global expansion and in many ways that some of the.

I agree that I touched on earlier important elements that drive from just from simply being predominantly a.

A men's brand to one that becomes a across genders and includes.

The kids business as well it would obviously include an important ramping in markets like Asia, where we think there's tremendous opportunity further expansion in our Europe.

Markets and within the U.S. market. For example, we have pretty solid distribution, that's where you would you would expect certainly to us to build a bigger business across womens and kids as well and then there are categories out there that we really don't play in such as outerwear and we also are in the midst of partnering with a company on on some initial shoe offerings as well so we we.

See lots of avenues to grow and we would see its or sort of being consistent growth over time.

Thank you.

Next question comes from Carla Casella with Jpmorgan. Your line is now open.

Hi, you talked about both the shelf space gains and losses and I think.

You gave us some nice clarity on the Internet.

Kranz hats, and China, but can you say the timing of what that was that the only major change in shelf space. This year was there something else that was and then in one of the other categories and then asked.

Now I'd like to this demos shelf space were fairly.

From a shelf space and when I speak to you about that michelle's basins big more on the innerwear side of things shelf space is as fairly stable, we do see the solidification of the the basic space within the mass channels, we referred to earlier, but we feel good about our our shaves shelf space in our our innovations behind it of course on the active wear aside and champion in.

Secular we're continuing to drive distribution expansion in the U.S. as well as globally. So we have a nice nice trend there as well.

Thank you that concludes our question and answer session I would now like to turn the call back over to Steve of a lot for any closing remarks.

We'd like to thank everyone for attending our call today.

And we look forward to speaking with you soon.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.

Q4 2019 Earnings Call

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