Q4 2019 Earnings Call
Ladies and gentlemen, thank you for saying Goodbye and welcome to the Q4 2019, Gildan Activewear earnings Conference call.
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I would like to hand, the conference over to Sophie Argiriou. Please go ahead.
Okay.
Good morning, everyone and thank you for joining US earlier. This morning, we issued a press release announcing our results for the fourth quarter and a full year 2019 companies managements discussion and analysis and consolidated financial statements.
Expected to be files with the Canadian Securities and regulatory authority and the U.S. Securities Commission Tomorrow Friday, the 20% February and will be available on our website.
With me on the call today, we have lunch manzi, our president and Chief Executive Officer, and <unk>, Our executive Vice President and Chief financial and administrative officer, shortly but I'll be providing commentary on the results for the quarter and also for business outlook for 2020, as Sean mentioned afterwards well.
My next question.
Today Today's conference call include certain statements that may constitute forward looking statements within the meaning of the U.S. Private Securities Litigation Reform Act 1995, such forward looking statements involve unknown and known risks uncertainties and other factors, which could cause actual results to differ materially.
A future results expressed or implied by such forward looking statement, we refer you to the company's filings with the Securities and Exchange Commission.
Ladies Securities regulatory authority that May impact the company's future results and with that I'll turn the call over time.
Thank you Sophie good morning, everyone.
Fourth quarter net sales adjusted EPS older largely in line with Ya patients you said you end up over.
Full year results for 2019 lining up with the most recent guidance we provided.
As we finished the year, we were pleased with the overall progress we made on her back the basic strategy. During 2019 same focused on the execution of several optimization initiatives simplify our product portfolio and remove complexity in manufacturing and distribution operations.
These actions are strengthening our competitive position as we drive to deliver growth and our gross margin and yesterday towards.
If you recall two years ago, we embarked on our part back to basics plans to simplify our business and optimize operation by removing complexity that had built up in our business over the years from various acquisitions.
We started to execute on our plans early in 2018, when we realigned our organizational structure and consolidated our business segments into one front end sales and marketing organization streamlining administrative marketing and merchandising function and consolidating certain warehouse distribution activities.
During 2019, we made further progress moving on various optimization capacity expansion projects, including consolidating textile supposed to be in Soc operations. While at same time wrapping up our real Nancy six textile facility in Honduras.
Thinking longer term, we also acquired land in Bangladesh due in 2019 support plans to significantly expand our capabilities, there, which we believe will better position us to execute on growth opportunities going forward.
At the end of the fourth quarter, we decided to move forward with another initiative under our back the basic strategy to significantly reduce our unprintable product line.
Putting our shipped to the piece business and just continuing overlapping and less productive skews between brands.
Which we communicated we were considering when we reported third quarter results and discussed at our Investor Conference last November.
Shipped to the piece business is a much more fragmented smaller volume business, which is not fit with our high volume large scale in principles franchise.
So on did this product line rationalization initiative, we recorded GAAP charges, a 55 million in the fourth quarter, consisting of inventory write downs of approximately 48 million in an up 7 million reversal of course profit in connection with the sales return allowance, which reduced sales by 19 million in cost of sales by 12 million in the quarter.
The sale.
Turn allowance relates to anticipate a product returns associated with some of the skews, we're just continuing which we expect to take back and distributors in 2020.
Now let me take you through further details of our results in the fourth quarter.
Reported sales totaled 659 million down 11% over the prior year quarter, you do a 15% decrease in activewear, well, we generated 484 million of sales.
While sales in the whole injury and underwear category of 175 million were up slightly in the quarter.
And that's sales decline was mainly volume driven and included the negative impact of the projected sales return allowance.
Before accounting for the sales allowance total net sales generated in the fourth quarter amounted to approximately 678 million essentially in line with our expectations at the positive impact on sales lower than anticipated levels of distributor inventory de stocking up and principles during the quarter was offset by the negative impact of weaker market them.
And in retail.
The decrease in activewear sales during the quarter with volume driven and a reflection of Pos softness in principle activewear products, which we saw in the third quarter and which continue through the fourth quarter combined with the distributor inventory de stocking.
In principle active wear volume declines were partly offset by activewear sales volume increases within the retail channel and slightly higher shipments in international markets.
Sales in the hosiery underwear category were up approximately 2 million in the quarter, a strong double digit sales volume growth of underwear.
Which also drove more favorable product mix was largely offset by lower stock sales.
Although demand for men's underwear in the total measure market as reported by NPD retail tracking service was down for the quarter. The strength of our underwear sales was driven by market share gain mainly to our new private label men's underwear program with our largest mass retail customer.
Program rolled out earlier this year and gained additional shelf space during the fourth quarter at the mass retail customer started to further expand the program and adjust doorsteps to better position this private Brad.
Finally sales in hosiery were down in the fourth quarter due primarily to the exit of stock programs in mass compounded by lower your of your industry demand in this category. According to NPD data.
Moving onto margins.
Excluding the 55 million charge related to our back the basic strategy adjusted gross margin in the fourth quarter with 25.6% down 70 basis points compared to 26.3% last year.
The decrease resulted primarily from higher royalty expenses related to sales volume requirements are licensed brand sales, which came in lower than planned and this expense negatively impacted adjusted gross margin by 50 basis points quarter.
For 2020, a license agreement reflects lower volume thresholds.
In addition to higher royalty expenses, we also saw some pressure from higher manufacturing costs related to input costs.
Offsetting some of the gross margin pressure, where cost saving stemming from our manufacturing optimization initiatives from which we will continue to see benefits will flow through in 2020, as well as positive underwear product mix related to higher value underwear sales.
Our restaurant expenses for the first quarter for the fourth quarter was 76.5 million down 17% from last year and as a percentage of sales SGN expenses were 11.6% 80 basis points better than the prior year quarter.
The improvement reflected lower compensation expenses as well as cost benefits, resulting from our ongoing focus on yesterday rationalization.
Given our combined gross margin and SGN a performance adjusted operating margin in the fourth quarter came in at 14.1% up 60 basis points from 13.5% last year.
Adjusted net earnings for the December quarter totaled 83.4 million or 41 cents per share and was down as we projected.
Adjusted net earnings of 88.9 million or 43 cents for sure last year.
The 4.7% decline in adjusted EPS was mainly due to lower sales in the quarter and a decrease in adjusted gross margin offset in part by lower estimated expenses.
Turning to free cash flow for the quarter, we generated 241 million, bringing full year free cash flow to 227 million inline with the guidance range of 200 to 250 million we provided in October.
We spent approximately 21 million on capex in the quarter, bringing total capital investments for the year to approximately 140 million with the majority of the spending related to manufacturing capacity expansion projects.
We repurchased approximately 4.7 million common shares in the fourth quarter for approximately 129 million, bringing our share repurchases under our buyback program in 2019.
8.2 million shares and an overall cost of 287 more.
And lastly, our net debt on December 29 totaled 862 million, bringing our net debt to adjusted EBITDA leverage ratio to 1.6 times well within a year end target leverage range of one to two times.
This brings me to our guidance for 2020, which we initiated today.
We are projecting GAAP diluted EPS of $1.70 to $1.80 and adjusted diluted EPS of $1.85 to $1.95 and projected sales growth for the full year between 2% to 4%.
Adjusted EBITDA is projected to be in the range of 580 to 600 million.
We expect free cash flow of 325 to 375 million and capital expenditures of approximately 125 million for the year, primarily focused on continued investments in manufacturing capacity expansion.
Our income tax rate for the year is projected to be approximately 5%.
Overall project sales in 2020 reflect expected growth across our three key focus areas of in principal retail brands in private brands.
We are projecting sales increases in both active wear and the hosiery and underwear category driven by projected volume growth and favorable product mix offset in part by anticipated unfavorable foreign exchange impacts.
We expect growth in the hosiery and underwear sales category to be driven by projected double digit growth in underwear sales due to retail shelf space gains.
On the Soc side, we're expecting sales to be relatively flat year over year as new higher value program wins, this year offset our exit of less profitable program.
Our guidance assumes a stable global macro environment at this time, we have not reflected in our guidance any material impact related to the Corona virus outbreak in China.
Our in principles business in China currently represents a small portion of our overall our total overall sales.
Further from a supply chain perspective, while we do source some hosiery from China and are working on contingency plans given our inventory levels. At this time, we do not currently foresee any material impact on supply, although we will continue to monitor as a situation evolves.
That covers our 2020 sales guidance.
Adjusted diluted EPS for 2020 reflects our sales growth assumptions projected lower raw material costs over last year.
Back to cost benefits from our optimization initiatives and the benefit of share buybacks from during 2019.
Also GAAP EPS and adjusted EPS guidance reflects the benefit of the Nonrecurrence of the 24 million dollar trade receivables impairment charge, which impacted the first quarter in 2019.
Offsetting these positive factors on earnings is the impact of inflation, which continues to affect various manufacturing input costs as well as the projected increase in ESG snake sensors.
Taking all this into account, we're calling for gross margin expansion together with continued disciplined M&A performance deliver operating margin improvement in 2020 over 29 team.
With respect to estimated restructuring and acquisition related costs in 2020, we're estimating charges of up to $30 million presenting the remaining charges related to the manufacturing and distribution optimization initiatives.
Previously announced primarily in connection with our back the basic strategy aimed at simplifying our business and driving cost improvements across the organization.
Our guidance for 2020 implies an increase in EPS for the first quarter as we Comped at 24 million trade accounts receivable impairment charge.
Excluding the positive year over year variance for the non recurrence of this charge, we expect GAAP EPS and adjusted EPS in the first quarter of 2020 to be down compared to the first quarter of 2019, mainly due to a projected sales declined in the high single digit to low double digit range with SGN expenses remaining relatively flat compared to the first quarter of 29.
Team.
Although we have seen recent improvement in Pos in the North American Unprintable channel, we're not assuming a full recovery and Pos until later in the year and are protecting Pos in the first quarter of 2020 to be down compared to the first quarter last year.
In addition, we expect the level of restocking in the first quarter of the year to be lower compared to the first quarter of 2019.
We're also projecting lower sales in the hosiery and underwear category in the first quarter of 2020.
Mainly due to the impact from the exit the mass sock program and the impact of having to signal rollout of new private brand Sock program in the first quarter of 29 team.
The sales impact on the exit of the mass soft program is expect to be largely offset over the course of 2020 by new Sock program wins shipping later in the year.
So in closing, although 2019 presented challenges we did not allow this to distract us from our plans to fundamentally strengthen our business model.
Over the last two years, we've simplified and strengthened our operations by executing on optimization initiatives related to manufacturing and the front end of our business, including sales marketing and distribution activities.
We also continue to make strategic decisions investments with respect to capacity expansion, both in Central America, and Bangladesh, which will position us well for the future.
Our progress on all these front not only gives us confidence in delivering our 2020 targets, but longer term, we feel good about achieving our profitability targets and our prospects for driving growth in principles.
Heating further.
Penetration with our retail brands, particularly as they gravitate online and growing as a trusted supplier private brands to very well positioned large major customers.
With that I'll turn the call back over to Phil.
Thank you Rod.
That concludes our formal remarks, then we'll be starting to today's session. Please limit the number questions to too. So we can address as many colors as possible and we'll circle back for a second round of questions as time permits a mild turn the call over back to the operator for the question answer session shall go ahead.
As a reminder to ask a question you would need to press star one on your telephone to draw. Your question press. The pound key please standby why the compiled the Q and a roster.
Our first question comes from Paul did use of Citi. Your line is open.
Hey, Thank you guys I.
I think when you first saw weakness in 2019, you wondered if it was more of a macro issue. Perhaps you were kind of a canary in the coal mine, if something bigger going on I'm curious now from where you said how much you feel there theres something happening from a macro perspective hurting business.
Versus something specific to your company or the industry in general thanks.
Well look at its hard for us to tell to be perfectly honest with you.
The area, which is more susceptible to macro changes is the corporate promotional products.
Right so.
So what we've seen so far in Q4 was pretty consistent.
With Q3, we have seen and what I said in our last call is typically with this occurs as USIO pulled back and spending nevertheless, using more 234 quarters. So we basically.
I'll have seen improvement towards the end of Q4, and we are seeing improvements as we go through Q1.
And Pos is.
So negative.
Right.
Thank you.
Our next question comes from Heather Balsky of Bank of America. Your line is open.
Thank you for taking my questions.
First question is just piggyback off a Paul.
Can you just talk a little bit more about the improvement in you're seeing Npls and I think you had said it was down high single digits in the third quarter. So just.
Where where is it now.
Then with regards to your gross margin guidance for the full year can you help us think through the cadence and when the different.
Initiatives you have been placed start to flow through thanks.
As far as Pos and I think maybe even looking at our projection as we go forward into next year.
Our Pos was really down in one category, which is the basic category infrastructure has been our fashion pages for doing well our flu swing while comfort colors is doing well American apparel as well and then the basics segment, we have really two different different product categories.
What we're seeing today is that the heavier weight category, which is really use more in the corporate promotional products segment.
Still down.
But the lighter weight products and that in that area. The midway products are actually improving and we're projecting to come up so.
Overall, that's why we're encouraged with our POS outcome is really was driven by.
Heavier weight basic categories and.
It's still down and dragging down slowly rpos, but we've seen an improvement and we're optimistic as we move through.
2020 were projecting.
For the full year to have fueled positive gross it's going to be a little bit negative in the first half a recovery put a net positive for the full year with all these things.
Yes.
Okay, and if I take the gross margin question. The cadence. So we look at gross margin for the year, we are forecasting expansion.
That expansion is going to be driven by mix in a be driven by lower fiber costs can be driven by our manufacturing cost initiatives, we will see inflation coming through very definitely we see it on labor, we see it men and the materials.
We see it in energy and certain types of energy.
We see it also in other inputs into more profit process.
We also will see the impact of.
We are projecting the negative impact of currency also on our margins for the full year.
That's probably about five cents I would say overall from a currency perspective, and if you look at the cadence of the improvement in gross margin as it unfolds throughout 2020, we expect improvement every quarter right as we moved from Q O Q1 to Q2 Q3 Q4.
I expect to see that improvement effectively flowing through.
And effectively expansion in each of the quarters of the year.
Thank you.
Our next question comes from the shall Shreedhar National Bank. Your line is open.
Hi, Thanks for taking my questions could you give me more color on this royalty expense and.
And how it should impact FY 2020.
Well the royalty expense efficiency was.
We are on our contractual royalty agreements with our license partner.
You know has reduced royalties as we move forward in 2000, Twentys will be no impact as we reported 2020.
But basically the minimums that we had.
2019 weren't Matt.
Higher royalty expense relative to what our projections.
And so without tax incentive plan 19, but as we move into 2020, we have made lower threshold. So we don't expect to have any minimums in March.
Okay, just that most I'll, let Michelle we had lower ozery sales in the fourth quarter than we were projecting overall, we called that out.
It was done with weakness in the category broadly a across the markets and as a result, effectively our sales came in lower than we were anticipated we fell below the threshold or much better position has moved to 2020.
Okay, I understand and just back to the.
The printwear market.
[music].
Is it correct to assume that inventories are actually in balance after the the destocking and is it a is it possible are likely scenario.
What's more likely to happen in 2020, a restocking event or another potential keep talking event, maybe you can give me some color on that.
Look I think we're pretty comfortable with the with inventory in the channel.
I would like we said you know what drove a lot of the excess inventory was successor.
No the price increases over the last couple of years.
That's all flushes. So I mean, that's one of the reasons why Q1.
On the Comping up the sales pace, because with price increases agenda of 18 that were.
Carried into Q1 of a 19, so we think were pretty good position.
With that said our Pos is starting to come back we're projecting a for the full year of positive Pos in the category.
Thank you.
Our next question comes from Subodh Con.
Of RBC capital markets. Your line is open.
Thanks, just a question on the 55 million dollar a the adjustment during Q4, Okay. Maybe walk me through kind of the their logistics or what happened there just I understand why.
Distributors might have sent the product back before.
So instead of selling it and why you maybe wrote down the inventory rather than just kind of pushing it out into the channel just wonder send a kind of the process there.
Okay, well maybe to start off by the whole strategy apart as the basis I think is good starting points and.
Drew over the last five years, you know we've created a lot of complexity in our lines through either the acquisitions when it went into that happening as we ended up with me on fragmented.
Excuse.
Products with small volumes and duplicative.
Sales and most all the brands we have.
So our objective.
As to how to consolidate that and to be more productive and effective.
So.
Two sides and I was one lot of these products were shipped to the piece, which weve, eliminating and we're going to leverage our distributors to let's do that going forward, which we were production question Hey.
Ultimately having less.
Products basically in our line, we feel that we're going to increase our manufacturing efficiency reduce complexity and increased margins.
Ultimately help for us will have a better working capital.
In terms of availability in the company.
Ultimately, what we're going to do is increase or Rona and.
And have the better return for our shareholders and that's ultimately the planned for this activity.
As we look at these SK use when Theres no way of.
Selling with it but no. We're we've always taken what I think his leadership position in the market.
And one of the things maybe we should just take a step back and looked at what the benefit ultimately this is where customers as because if you look at our distribution channel and our customers have been relative let's say for example to online sellers.
The cost of selling online, let's say for example to resellers to consumers is almost $5 units because of the amount of complexity. That's involved in supplying consumers for example, our registry cells.
Sells product for two to $3 right. So we look at how were.
Moving forward.
And the Sri has seen a large increase in both SK you and brands.
Our customers are facing new challenges, let's say for example from.
Hey, just to carry over 30000, skews 10 years ago too as you say so what's happening.
Happening was.
They basically have space restrictions that higher labor labor shortages today, which is affecting everybody is industry.
And the overall costs actually is rolling.
So as we've looked at this and take a leadership position as we come to the slowly and say, Okay look first try and wait three years to get these things I find where we're just per se, but let's fix the problem today.
I will take these goods packed and we'll deal with the just the reselling up these products and get them out of the channels and that's a channel and ultimately what winds up happening is.
We think is we're going to.
And if that our customers by.
Cost reductions sooner than later.
We'll have less costs are receiving shifting put away.
With the less basis for our brands.
And our sales will have better turns on guilt free products sooner than later will have higher margins per square foot our brands within their distribution centers and all overall will prove better customer experience. So we could have done this over a long time and.
Estimated and.
But then pay is the best way to deal with this is to Saul I think our customers problem by making them more effective but also for us to.
To start manufacturing and put us behind us and number one thing you have to understand is when you're dealing with products in the market.
All of sudden if you don't you I was on cell sites large.
How do you how do you service that you'll be out of stock for example, and you got to start making smart make sure it's talk.
So there's no perfect way the sort to say how long will take you get out. That's why is this sort of just let's just.
Thank you it goes back to move on and improve our efficiency and we'll deal with the additional this merchandise, which is factored into our charge of $55 million right. So that's really I guess, we have looked at it. So that's how we're going to become more effective mark more productive higher margins better returns for us, but also we're going to asset.
To our customers and our customers, we're going to her experience and make sure that killed and is.
This takes we are positioned in the industry and make sure that they're driving profitability, but all of our brands.
So I also just like to clarify the charge if that make sure it's clear to everybody rights of the charge in the 55 million dollar charge.
48 million up that relates to inventory provisions for our finished goods by 27 million relates to gross profit that effectively were effectively backing out related to the 90 million dollar sales allowance those goods, we will take back in 2020, but we actually booked the sales allowances the impact into our 2019.
We had called out the charge could be as much as 45 million when we talked about it in Q3 is higher it's the 55 million because we have.
More skews that a effectively we're focusing on than we originally thought and also the impact of that sales allowance, but it's I think effectively we've got a very well contained in the charge and really obviously supports a.
Fundamentals of what's occurring.
Okay. Thanks, and then just on the cash flow side. The Capex for the 2020 guide came in a little bit below what we were at least expecting.
I guess from your perspective is there is a kind of capex. We're planning on spending in 2020 or have you maybe maybe pushed out kind of the build out of Bangladesh is just how you're thinking about the capex spend looking forward because what we've done is look at were by consolidating Mexico were voiding capex people to re purposely not equipment into our existing facilities in Central America increase arc.
Our capacity to support you know what we said it next has 500 million. So that's all in place and Bangladesh basically the big part of our capital expenditure will come next year.
This year, we're doing building infrastructure, you know what should the majority of that someone will start pulling in a in early two.
2021.
And just a quick follow up on that earlier, and so you're able to share the magnitude of the SKU count reduction or 1% or numbers battle.
Well look is pretty large.
But.
More importantly than the skew and today, we think two things one is ever going ahead with a little bit like we said in October but $25 million in sales for the.
This is lost sales of the skews Ms decided contacts.
We also feel that to note with the skews, we will remain and we should support.
All of our sales going forward. So that's why we lenders is 25 million.
The magnitude as a SKU reduction is in the 40, 45% range of all issues.
Thank you.
Our next question comes from Lou Canon of Canaccord. Your line is open.
Thanks, most my questions have been answered already but I did want to follow up on something that was in the press release, where.
Talks about the sales impact from the exit of the mass Sock program is gonna be offset by.
Some new program wins over the remainder of the year. So.
I'm just curious does that wins that you would have had the pass through shipping begins this years that wins that you expect to receive 2020.
Those are new orders up will be assessed as not as you know that the a period.
Okay and is there anyway that you could provide a cadence with the.
Where the timing would be and whether it's more in front half weighted versus a backup.
Well so what we're saying is that you know the loss program you see the exercise of Q1, but the new programs that we've attained are coming in basically.
Uh huh.
And therefore, not an out of all our stock business with Chuck.
What a better nexsan product.
Okay. Thanks.
Our next question comes from Mark Petri see I'd be Sig. Your line is open.
Hey, good morning.
Sorry, I just wanted to clarify I know you've touched on this a couple of times, but I just wanted to clarify what you expect in terms of the the impact to your revenue as a result of this SKU reduction obviously, there was a headwind I think you just quantified at 25 million, but I'm not sure I understood that exactly so could you just walk through the puts and takes there. Please.
So you've got it right mark so that the headwind that we see really that as we move out of the skews read the obviously Glen talked about the reduction in the number of Skus.
What's happening is as that effectively we'll see shifting right from certain skews to other skews because a lot of overlapping skew. So the actual real headwind that we see from this initiative in 2020, which effectively characterized it is about 25 million right. So that's what we're losing a in 2020 as a real.
Both of the initiative because the majority of the sales will continue right. It just effectively moves over to add to more productive.
Distributor skewed so we're not we don't see I would say hmm.
Bigger broader impacts beyond that even though we are taking out a meaningful.
Amount of our skews in the in printable side, obviously drive all of this productivity improvement going forward.
Okay. So have you seen sort of the substitution that you would have expected from your customers over the last couple of months that kind of give you confidence in that 25 million number or whats a reasonable range.
Of outcome in terms of the revenue impact.
Well I mean, I've visited and intraday that we use the revenue impacts as we see those will be below 25 million.
And as Dave because of our focus will be well, we've we've been working on this plan for some time. So we're basically seeing that the current Pos is trending positive.
So we're very encouraged with her overall Pos currently has had earlier.
We're still projecting Pos to be negatives in the first half its actually a little better than we.
Projected but net net Pos will be positive for the full year or so.
Based on all the puts and takes the 25 million headwind I mean, this is sort of ballpark vintage or our plan for 2020.
Okay. Thanks, and then I just wanted to ask what the retail channel you know you called out sort of the slower.
POS trend in Q4, I Wonder if you could just give a little bit more comments in terms of.
Category.
And sort of private brands versus brands and then any change in terms of how retailers are are looking at inventory levels today versus a year ago.
Well I think that's a big us offices open.
I met P.D. as opposed to socks and underwear both categories are relatively calm down for the full year 19.
We obviously, we've seen or Soc business line.
Nation of negative Pos.
Underperformance of our license business and the discontinuing if some of the private label program.
Overstock business.
And and it was or some of the reasons why we loss, we're short little bit before on the flip side or underwear businesses like assay is growing significantly we retain more shelf space. A 2000 is one of the or large mass retailer has set the report which has been very successful.
And we plan to do the balances are stores or.
You too so we're very optimistic.
Our underwear business going forward and we've got a stable spot business as we move into 2020. So we're feeling very group are positioning.
Our online business is also doing very well we have huge growth Q4 in online all of our brands are doing very well online hurt as well. So all the pieces together I think are there, we're really focused or back to basics strategy or is moving on all fronts.
Our retail Anda.
Right.
As we move into that.
Okay and any change in how the retailers are approaching inventory levels.
Oh, no I think of inventories of retire a pretty awesome and then we haven't seen any change.
You know two years ago, we had vicki.
Big changes inventory levels of them in basically we've been very consistent no loss of 24 months.
Okay. Thanks, and then just one other one to clarify is Ah the input cost a tailwind through the course of 2020 Rod you mentioned that margins will sequentially improved through the year, but well that tailwind remain relatively steady through the or is it going to ebb and flow.
Well I mean, we are seeing inflation right as we.
Obviously continue to move into 2020 and that inflation, we see on the labor side, we see it on the energy side, we see it on materials. So I mean, we're assuming that inflation will exist and effectively we'll have to obviously offset that headwind as we move through the year and it basically we'll see in every quarter and then I was like a as we go forward I mean does.
Definitely a consolidation of our manufacturing, which we said, which Mexico into our Central American operations. We said that's because it allows us to.
Margins by 50 basis points.
At this the process is still still undergoing in our Mexican facilities, what would be closed in the first quarter. So you know the being wound down now, but it will be fully closed the first quarter. So a lot of that effect will come towards the end of your words, a margin expansion as we move into.
When do 21.
Okay. Appreciate all the comments thanks a lot.
Our next question comes from Stephen Mccoy BMO capital markets. Your line is open.
Thank you. Good morning, most of my questions have been answered wanted to follow up on two things. The first is with respect to the in principles markets. You know Glenn you talked about Pos still being negative and you expect negative Pos to persist through the first half the year.
Just talk a little bit about what your visibility is for the back half to get to an outlook for net net positive.
Yes for the year.
Well first of all.
Negative so far.
Through you know this just 20 times this year, which is really the small as part of the year right. So we said we've seen in the trailing four weeks basically obviously, a pretty good improvement in our POS who were very encouraged a noted to be pretty honest with you.
The area, there's only one area that we still have negative Pos which he just breaking this down a little bit which as you know our heavy weight.
Decent T shirt. So all the other categories were actually doing really well I mean, her passion and future business well leased is still a very positive comfort colors is doing extremely well is doing very well. So you everything is performing like even in the basics segment last year, we were negative and all of our categories.
Today than it did weighed categories actually trading positive.
And the only area that were actually down is in our heavy weights and that's not so much could be a trend and you know in weights of products was unnecessarily a fashion person pay six or seven.
Heavier weight shirt that we that we sell and a lot as time goes to the corporate promotional products segment basically so we think that its turning and we're we're up we're cautiously optimistic and.
We'll see how things have turned out but.
We can't tell where we'll go I mean, we only tell the trend and as we put in place.
And with our SKU reductions were really focused on.
Sure that in our service levels or.
Improving so all in all we should be at night.
Okay. That's so that's helpful. Thank you and then on the gross margin. You cited you started your expectation or sort of or sort of your long term goal of getting achieving or 30% gross margin target.
Is it are you still expecting to sort of hit that run rate run rate as you exit 2021.
Yes.
I still are focused.
Okay, that's right and maybe similarly on the SGN as percentage of sales.
Yes, I mean, what would drive where our target for the yesterday as a 12%.
If you look it up last year 2019, we had driven down pretty closely to that we will see some increased in our as today. This year effectively but again all rescue named performance. We think is a is being has been and we'll continue to be very strong that we're very comfortable with that target.
And in terms of the timing of that target as that similarly, similar timing with the gross margin.
Correct.
That's right.
You very much like you.
Our next question comes from Chris Lee Jarden. Your line is open.
Hi, Good morning, everyone that first question just going back to the the Corona virus I. Appreciate the fact that you know you guys have limited sourcing exposure to China in China, It's not a big market overall like I guess my question is Glen do you expect where are you starting to see some impact on some of the the end user demand in in the U.S.
Side, I'm thinking maybe perhaps the tourist industry or anything that has a potential impact from the buyers.
Well you know what I think theres two things in terms of.
As for that is no.
Secondly works both ways is that you know typically people that would travel abroad may not be traveling abroad with what is the local impart stay at home and you know who the beach, Florida by T shirts, right. So you know I think that all the puts and pace in terms of.
Tumors buying souvenir type products, I mean, I'm not really concern I think the one thing that we have you need to look at and if you look at some of the reporting of other people in industries.
There's been supply disruption.
Particularly because you know 40% of the world's apart from China.
You know that I think we're well positioned actually in our manufacturing in Central America.
Particularly in our private brand strategy to support customers that may not want to travel to parts of the world's who to support.
Or growth initiatives.
Factor because you know people know back in their minds when things are gone I pod. What's the story. So you know all the puts and takes I think we haven't actually that its work for opportunities at this point, but I think that's a that's something that we also in the back minds.
Uh huh.
In the long term. So you know it's hard to say because you know this thing user broader control and maybe a little bit effect, but no. Our guidance is based on what we see today and what the environment as Ah.
Yeah.
Okay. That's helpful and maybe a couple of quick ones for Rod.
With respect to yield guidance, I guess guidance, how much share buyback if anything it's reflected in your EPS guidance.
Generally we've got that in the high end of the guidance, Chris I'd right. So effectively if you look at.
Track record on share buyback as being very good over the last four or five years, we've been very happy to announce the 5% a new program this year and effectively we expect that unfold during the year Oh.
Obviously, we'll see exactly what the environment looks like as we move through the year, but I had a way to think about it is it's in the high end.
Okay, and then just your capex intensity of 4% to 5% for this year is that sustainable over the next two to three years as you build out your capacity in Bangladesh.
Yeah, that's our focus is running at 4% to 5% I know we outlined that we spoke in November at the Investor Conference in really see that's our run rate over the next few years.
Oh, great, especially if not for the year. Thank you.
Good.
Our next question comes from Brian Morrison of TD Securities. Your line is open.
Hey, good morning, right can I just go back to the operating leverage for 2020, I'm trying to reconcile the guidance and the operational efficiency drivers for 2020, and what I mean is when I look at the Dollarssixty six starting point and then add back heritage the impact to the buyback your 3% topline growth next year I, just don't see too much factored into operational fish efficiencies I think as I noted driver of growth. So.
When I look at the FX and inflation headwind in the inherited just a tailwind.
What are the key drivers of this 80 basis points of leverage forecast for this year I think it's a good portion of its got to be the 50 basis points from off though and then did you say 2021, you will achieve the 30% target for the whole year or is that you'll achieve it during the year on what really kicks you went to get either 30% for 2021.
Look I think it feels we look at.
Shifting to 30% target obviously, we feel very good about that we're focused on it because we've got all of the fundamental drivers right that were working away on him. When we said that we will achieve that exit run rate for 2021. So all of these strategies are are playing out over time. If you look effectively very definitely we see our manufacturing cost initiatives all.
Our overall back the basic strategy.
Really driving a increased towards that target right, we have called it out.
Previously that the effectively the overall impact if that strategy is probably around 200 basis points and we very definitely see all of that coming through right as we move.
Towards through this year in and then also into a into 2021.
So that's a very definitely a driver.
We see Nixon's obviously will will will drive the overall the topline will drive the or the bottom line as well so I would say all the elements are in place.
In order to allow us to to get to that or the target them. We're going after take some time. We've obviously got a finished the movement of Mexico, we've got to effectively.
He drives the various initiatives, we've got inflation that we've got to deal with right as we yeah as we move through this year and we'll see what it'll it looks like order out for 2021, I think we feel very good about effectively all of the elements coming together to drive that and maybe just had one more point to that there's not all of our SKU rationalization in terms of the impact on our man.
Factoring has not been.
Felt at this point in time, so you know that's another area.
Improved gross margin as we would just.
Manufacturing I said before that the Mexican operation closure in most of that will be only hitting us in Q4 of 'em really impact.
2021, and enter area of opportunity was too is that our Bangladeshi spansion well, what we said to investors that we're supporting a lot of our international growth.
Through Central American Isoclast Levered fans with that I will also be another opportunity forces and margins as we push more product from Bangladesh's in those markets, which would be better conducive from duties and so forth in some of the markets for selling so you know all these things that we're doing our continuing right.
Further improvements on our our gross margins as we before it showed so it's a constant theme right. We're committed to making sure that we achieved our goal.
And we're putting things in place in making the hard decisions to make sure that we achieved goes away and the 2021.
22.
Just a quick follow up has there been any a inefficiencies with your transition of your manufacturing operations and just to confirm you're going to get to a 30% gross margin with a low single digit growth rate.
Correct.
And sorry, any color Clinton has there been any inefficiencies at the manufacturing transition.
Oh no inefficiencies.
I'll hit or hose reel operation, we have we're in a process of you know so wrapping up Rio Nance you six.
And I'm you know, we feel very comfortable with.
Our position manufacturing are still look anything ounces at this companies focus has been manufacturing optimization. The one right. So that's why do where the global low cost manufacturer. So we just don't soon or were those.
In fact, we're constantly making sure that we're driving for performance and we feel very comfortable we were just hundred investor trip in Honduras and.
The expansion plans, we expanded rear Nancy fiber span arena as well.
We expanded greenhouse you too as we speak you know what consulting all that Mexican equipment. So these are things that are really in our sweet spot and all they do is give us leverage and lower cost. So it's not rocket science for so we're very comfortable and we haven't.
And you know the one thing that I think is relevant though is the resuscitation my favorite patients is very relevant everywhere.
No transportation cost ice chemicals.
Patients, who so no I don't underestimate the inflation. So this is with us.
As we continue driving these initiatives, we're going to be able to offset inflation and a higher margins to better returns for shareholders I appreciate the color Glenn.
Thank you.
Our next question comes from Jim Duffy of Stifel. Your line is open.
Thank you good morning, guys, Glenn I wanted to dig in some on your comments around the in print schools business and Pos how much of the in principle businesses that heavyweight category. That's under pressure. If you exclude that you know what type of growth rates are you seeing from the balance of the in principles business.
Well, we're seeing good growth rates everywhere else to be perfectly how's your fashion businesses up strong or fleece is very strong still a comfort colors a him and all these are very strong horse last year. The the big impact was both on the basic segments really there's three different shirts, we haven't had second to bid wage one heavyweight.
We've seen the two midway shirts, you don't really bounced back actually.
POS perspective, and the only area that's really down I was is our heavyweight categories for the Pos has actually improved.
And I'm you know, we will see what happens as we go forward and that could be somewhat also just a weight change in industry. Because you know fashion shirts roll later, we insurers are four I'm sure it's versus nor are heavy categories of six I'm sure. So it might be just more of a category things and I.
Product thing, but we'll see how it goes but the trends is good.
We are no slightly ahead of what we anticipated as we as we projected for up to this year and netting that we're going to pause Pos for full year.
Position.
Okay understood I'm trying to understand how big is said heavyweight category for you hold over.
It's probably around the overall around 50% or.
Business in two years like that.
Okay. Thanks, that's helpful. And then you have the double digit growth to looking forward to an underwear can you talk about the revenue mix between underwear and socks when that was written underwear category.
Well. This there are some business will be flat or for I'm sure.
And all the increase in that category.
Oh, good strong growth in the we're where we see in a.
Right right very optimistic whether underwear growth next year.
[noise], how big is the underwear, though Glenn.
Like Okay. We don't we don't break that out with you look at the category you know as as we ended up 19.
Socs will be flat and all the growth in that category on next year would be underway.
Okay, and then Rob last one from me can you talk about inventory targets soon so for year end in the cash flow and how that should progress across here.
Yeah. If you look at from an overall perspective from an inventory standpoint I mean.
The one.
If you look at a our inventory levels effectively.
We were we've been building them really over the last quarter and we continue to build them really is this was a 20 year, where we build inventory right as we as we get ready for the Steven.
Actively as you and you look no I mean effect will we will build this quarter.
We will effectively build a little bit into the second quarter, and then I think you'll see a probably at the way to think about it is probably flat through the remainder of the year effectively I mean, we want to make sure that Oh, we have we have good availability of goods to support that Pos growth that will improve as the as we go through the back back.
For the year, so effectively if I would say you you will see if you've seen a build and effectively we're at that level the up a little bit in the second order then flat as we as we go through the remainder of the year.
Thank you.
There are no further questions like to turn the call back over to Sofia Gerald for any closing remarks.
Thank you Michelle This concludes our comp again, thank you all for joining US. This morning, and we look forward to speaking t. so have a great.
Ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.
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