Q4 2019 Earnings Call
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Nice to hand, the conference over to Sophie Argiriou. Please go ahead.
Okay.
Good morning, everyone and thank you joining us earlier. This morning, we issued a press release announcing our results for the fourth quarter and the full year 2019 companies management discussion and analysis holidays financial statements are expected to be filed 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 humanity, our president and Chief Executive Officer, and not having our executive Vice President and Chief financial and administrative <unk>.
Short me, Rob I'll be providing commentary on the results for the corner and also our business outlook when he's planning that's Michelle mentioned afterwards, well you any discussion.
Hey, today's conference call include certain statements that may constitute forward looking statements.
And 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 future resolved expressed or implied by such forward looking statement. We refer you to the company's filing.
Securities and Exchange Commission.
Ladies Securities regulatory authority that may affect the company's future recall and with that I'll turn the call over twox.
Thank you Sophie good morning, everyone.
Reported net sales adjusted EPS oldest largely in line with the expectation you said you end up over.
All the results for 2019 winding up with the most recent guidance we provided.
As we finished the year, we were pleased with the overall progress we made on our back the basic strategy. During 2019, staying 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 targets.
If you recall two years ago, we embarked on a buck 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 execute on a plans early in 2018, when we realigned our organizational structure and consolidated our business segment 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 hosiery and Soc operations, while at the same time wrapping up our Rio Nance you 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 by exiting our shipped to the piece business and discontinuing 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.
Shifting to the piece business is a much more fragmented smaller volume business, which does not fit with our high volume large scale in principles franchise.
So I wanted 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 Internet 7 million reversal of gross 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 skill.
Turning allowance relates to anticipated product returns associated with some of the skews, we're just continuing and which we expect to take back from 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 due to a 15% decrease inactive where where we generated 484 million of sales.
While sales in the hosiery and underwear category of 175 million were up slightly in the quarter.
The net sales decline was mainly volume driven and included the negative impact of the on 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 their expectations at the positive impact on sales of lower than anticipated levels of distributor inventory Destocking has been 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 of in principle activewear products, which we saw in the third quarter in which continue through the fourth quarter combined with the distributor inventory destocking.
In principle activewear 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 on 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 from our men's underwear in the total measure market as reported by MPD 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.
This program rolled out earlier this year and gained additional shelf space during the fourth quarter as the mass retail customers started to further expand the program and adjust store steps 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 year over year industry demand in this category. According to NPD data.
Moving on to margins, excluding the 55 million charge related to our back the basic strategy adjusted gross margin in the fourth quarter was 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, our 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.
I asked you to 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 SGN a rationalization.
Given our combined gross margin and SNA 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 from adjusted net earnings of 88.9 million or 43 cents per share 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 SGN 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 at 8.2 million shares at an overall cost of 257 model.
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 our yearend 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 million 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 and private brands.
We're projecting sales increases in both activewear, 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 hose reel 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 critical 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.
Hectic 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 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 SG Nay census.
Taking all this into account, we're calling for gross margin expansion together with continued disciplined M&A performance to deliver operating margin improvement in 2020 over 2019.
With respect to estimated restructuring and acquisition related costs in 2020, we're estimating charges of up to a $30 million representing the remaining charges related to the manufacturing and distribution optimization initiatives previously announced primarily in connection with our backs. The basic strategy aimed at simplifying our business and driving costs.
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 2019, mainly due to a projected sales decline in the high single digit to low double digit range with SGN expenses remaining relatively flat compared to the first quarter 2019.
Yeah.
Although we have seen recent improvement in Pos in the North American Unprintable channel, we're not assuming a full recovery in Pos until later in the year and are projecting 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 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 brands Sock program in the first quarter of 2019.
The sales impact from the exit of the mass Sock program is expected 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 funding 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 fronts 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 of private brands to very well positioned large major customers.
With that I'll turn the call back over to filter.
Thank you Rob.
That concludes our formal remarks, and we're deciding to Q in a fashion. Please limit the number questions to to silicon addresses many colors as possible and we'll circle back for a second round of questions as time permits I'll now turn the call we'll come back to the operator.
Question answer session shall go ahead.
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Our first question comes from Paul accused of Citi. Your line is open.
Hey, Thank you guys.
I think when you first saw weakness in 2019, you wondered if it was more of a macro issue. Perhaps you were kind of Canary in the coal mine of something bigger going on I'm curious now from where you said how much you feel there is 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 was more susceptible to macro changes the corporate promotional products category.
So what we've seen so far in Q4 was pretty consistent.
With two three we have seen and what I said in our last call is typically when this occurs is USIO pulled back and spending.
Never last using more 234 quarters, so we basically.
I 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 taco that more about the improvement you're seeing npls and I think you're kind of its down high single digits in the third quarter. So just.
Where whereas it now.
And then with regard to your gross margin guidance for the full year can you help us think through the cadence in when the different.
Initiatives you have in place start to flow trial. Thanks.
We will as far as Pos and I think maybe even looking at our projection as we go forward into next year.
Our Qs was really down in one category, which is the basic category infrastructure, our fashion pages for do as well our solutions, while comfort colors is doing well American apparel as well.
And the basics segment, we have really two different different product categories.
We will we're seeing today is that the heavier weight category, which is really use more in the corporate promotional products segment.
Thats still down.
But the lighter weight products in that in that area of the midway products are actually improving and we're projecting to come up so.
Overall, that's why we're encouraged with our Pos owed on this really was driven by.
Our heavier weight basic categories.
It's still down and drag it down slowly our Pos, but we've seen an improvement and we're optimistic as we move through.
2020 were projecting at least for the full year to have fueled positive growth is going to be a little bit negative in the first half.
Our reported net positive for the full year when all these things.
Yes.
Okay. If I take the gross margin question. The game. So we look at gross margin for the year, we are focused forecasting expansion.
That expansion is going to be driven by mix in the be driven by lower fiber costs driven by our manufacturing cost initiatives, we will see inflation coming through very definitely we sit on labor, we see it men and the materials.
We see it in energy and certain types of energy.
And we see it also in other inputs into our product process.
We also will see the impact of than we were projecting the negative impact of currency also on our margins for the full year.
Yes, probably about five cents I would say overall from a currency perspective, and if we look at the cadence of the improvement in gross margin as.
All throughout 2020, we expect improvement every quarter right as we moved from Q O Q1 to Q2 Q3, Q4, we expect to see that improvement effectively flowing through.
And effectively expansion in each of the quarters of leader.
Okay.
Our next question comes from the shall Shreedhar of National Bank. Your line is open.
Hi, Thanks for taking my questions could you give any more color on this royalty expense and.
And how it should impact FY 2020.
Well the royalty expense of efficiency was.
The we are on our contractual royalty agreements with our licensed to partner.
Has reduced royalties as we move forward and 20 Twond has to be no impact as we move towards 2020.
Basically the minimums that we had.
29 gene weren't Matt. So we have we don't higher royalty expense relative to what our projections.
So thats tactical plan on you, but as we move into 2020, we have a lower threshold. So we don't expect and have any minimums in March.
Did that no fellow show, we have 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 across the markets and as a result, effectively our sales came in lower than we were anticipated we fell below the threshold, where we're much better position is moving to 2020.
Okay, I understand and just back to the.
Printwear market.
Is it correct to assume that inventories are effectively in balance after the.
The Destocking and is it is it possible are likely scenario.
To what's more likely to happen in 2020, a restocking event or another potential keep talking event, maybe and maybe some color on that.
Look I think we're pretty comfortable with the with inventory in the channel.
What we said what drove a lot of three excess inventory was successor.
No the price increases over the last couple years.
That's all flushes cell phone I mean, that's one of the reasons why in Q1.
The comping of the sales pace because that price increases agenda of 18 that were.
Carried into Q1 of a 19, so we think were pretty good position.
With us at our Pos business start to come back we're projecting for the full year of positive Pos in and the Premier category.
Thank you.
Our next question comes from Subodh Khan of RBC capital markets. Your line is open.
Okay. Thanks, just a question on the the 55 million dollar the adjustment during Q4 can you walk me through kind of the logistics. So what happened there is I understand why.
Distributors might affect the product back before.
So instead of selling it and why you maybe were down the inventory rather than just kind of pushing it out into the channel just wonder sand kind of the process there.
Okay, well maybe to start off by the whole strategy. Apart Activations, we think is as good starting point and.
Drew over the last five years, we've created a lot of complexity in our lines through either the acquisitions.
100 happening as we ended up with today how fragmented.
SK use.
Products with small volumes and duplicative.
Sales amongst all the brands we have.
So our objective.
Whereas two to consolidate that and to be more productive and effective.
So.
Two sides in our was one one 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 reductions I should say.
Ultimately having less.
Products basically in our line, we feel that we're going to increase our manufacturing efficiency.
It was complexity increased margins.
Ultimately help for US, we'll have better working capital.
In terms of availability in the company.
And ultimately what we're going to do is increase or Rona and.
And have the center.
Return for our shareholders and Thats ultimately the planned for this activity.
As we look at these SK use when Theres no easy way of.
Yes.
Dealing with it but we're we've always taken what I think as a leadership position in the market and one of things maybe we should just take a step back and look at what the benefit ultimates exists where customers as because you have you looked at our distribution channel and our customers when 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 and thats involved in supplying consumers for example, our registry cells resells product for two to $3 right. So we look at how were.
We're moving forward.
Industry has seen a large increase in both S.K. you and brands.
Our customers are facing new challenges on say for example from.
Hey interest to carry over 30000, skews 10 years ago, two hundreds of thousands usage so what's within that happening was.
Basically have spaces restrictions in higher labor labor shortages today, which is affecting everybody is industry.
And the overall costs actually is growing.
So as we've looked at this and take a leadership position as we come to the slowly and say, okay look as planned we three years to get these things with Iceland over his first it looks as fixed the problem today.
Take these goods pack and we'll deal with the just the reselling of these products and kind of matter channels and Thats, a channel and ultimately what winds up happening news.
I think is we're going to.
And if that our customers by labor cost reductions sooner than later.
Over the have less costly receiving shifting put away.
We have less space to support our brands.
And our sales will have better turns on builds on products sooner than later.
We'll have higher margins per square foot, all our brands within their distribution centers and all and overall will improve.
What are the customer experience. So we could have done this over a long time and.
Crash native and a San Jose is the best way to deal with this is to Saul I think our customers problems by making them more effective but also for us to.
To start manufacturing and put us behind us.
Now the one thing Thats understand is what you're doing with products in the market.
The sudden if you don't view I was sell size large than how do you have you service that you'll be out of stock. For example, then you got to start making size March to make sure that stock.
So there's no perfect way to sort of sale, how long will take you could have escalators to sort of just lets us.
Thank you Skus back move on and that and improve our efficiency and we'll deal with the on dispositions. This merchandise, which is active in square charges on $55 million milestone.
It's really I guess, we have looked at it so that that we're going to become more effective mark more productive higher margins better returns for us, but also we're going to asset onto our customers and our customers in and further improve their experience and make sure that killed vendors.
This takes we are positioned the industry and make sure that they're driving profitability with all of our brands.
So I also just like to clarify the charges to make sure it's clear to everybody rights of the charge in the $55 million charge.
48 million of 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 sales allowance those goods, we will take back in 2020, but we actually booked the sales allowances the impact into our 2019.
Numbers.
We had called out the charge could be as much as 45 million when we talked about it in Q3 is higher is to 55 million because we have.
More skews that 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.
The 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 it 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 how are you thinking about the capex spend looking forward because what we've done is look at were by consolidating Mexico were avoiding capex, which will be purposely not equipment into our existing facilities in Central America the increase arc.
Our capacity to support you know, what we said an excess I want to millions. So that's all in place and Bangladesh basically is a big part of our capital expenditure will come next year.
This year, we're doing building infrastructure, you know what should the majority of equipment will start pulling in the in early two.
2021.
And just a quick follow up on that earlier answer you're able to share the magnitude of the SKU count reduction, 9% or numbers battle.
Well look as pretty large.
But.
More importantly than the SKU within the dependency we think that two things one is that we're going ahead with a little bit as we said in October both $25 million and sales for.
The.
This is lost sales of this skews pathetic contacts.
We also feel that smells with the skews, we will remain and we should support.
Bulk of our sales going forward. So thats why we limited to 25 million.
The magnitude as a SKU reduction there is a 40, 45% range of all issues.
Thank you.
Our next question comes from Lou Canon of Canaccord. Your line is open.
Thanks, most of my question's 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 going be offset by.
Some new program wins over the remainder of the year. So.
Im just curious does that wins that you would have had the pass through shipping gives us this years that wins that you expect to receive 2020.
Those are new orders that will be assessed as noted in yields in the a period.
Okay and is there anyway that you could provide cadence with the.
Where the timing would be whether it's more front half weighted versus a backup.
Well so overseeing is at the last programs, we see the effects of that in Q1, but the new programs that we obtain are coming in basically.
That may June and therefore, net net of all our soft business, we're projecting flat.
With a better mix and product.
Okay. Thanks.
Our next question comes from Mark Petri CNBC. 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 exactly so could you just walk through the puts and takes there. Please.
So you've got right Mark so that the headwind that we see really but as we move out of that skews read the obviously Glen talked about the reduction the number of Skus.
What's happening is as that effectively we'll see shifting right from certain skews to other skews because we want to overlapping SKU. So the actual real headwind that we see from this initiative in 2020, which effectively characterize it is about 25 million right. So that's what we're losing.
In 2020 as a result of the initiative because the majority of the as 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.
Bigger broader impacts beyond that even though we are taking out a meaningful amount of our skews in the unprintable side, obviously drive all of this productivity improvement going forward.
Okay. So have you seen sort of 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 of outcome in terms of the revenue impact.
We're a minute visited intraday that we use the revenue impacts as we see those will be below 25 million.
Within the days were because of our focus will be we've we've been working on this plan for some time. So we're basically seeing that the 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 years. So.
Based on all the puts and takes the 25 million headwinds I mean, this is sort of active jeweler our plan for 2020.
Okay. Thanks, and then I just wanted to ask what the retail channel 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.
Represents a big us offices open.
PD at both the socks and underwear both categories are relatively.
Now for the full year 19.
We obviously, we've seen our Soc business I am 19 automation of negative Pos.
Underperformance of our license business and the discontinued when we have some of the private label program.
Overstock business.
And those are some of the reasons why we loss.
For short little bit in Q4 on the flip side, our underwear businesses when capacity is growing our significantly we retain more shelf space.
In 2020 of the our large mass retailer has Chester a floor, which has been very successful.
And we plan to do the balances are stores.
Sometime in Q2, 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 good position. Our online business is also doing very well we have huge growth in Q4 and online all of our brands are doing very well.
On line.
Yes, we incurred as well so all the pieces together I think are there.
We're really focused our fact based strategy.
Moving on all fronts.
Our retail management, where initiatives are comfortable as we move into my point.
Okay and any change in how the retailers are approaching inventory levels.
No I think of inventories of retailer pretty awesome, and then we haven't seen any change.
Two years ago, we had.
The changes inventory levels of them in basically with Missouri consistent now.
Yes, a 24 months.
Okay. Thanks, and then just one other one to clarify is.
The input cost a tailwind through the course of 2020 Rod you mentioned that margins will sequentially improved through the year, but will that tailwind remain relatively steady through the year or is it going to ebb and flow.
Oh, I mean, we are seeing inflation rate 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 the 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.
As we go forward it means a benefit or consolidation of our manufacturing, which we said, which Mexico into our central American operations, We said thats because it allows us to improve margins by 50 basis points that this due process is still still undergoing in our Mexican facilities will be closed in.
In the first quarter. So it'll be one was down now, but it will be fully post in the first quarter. So a lot of that effect will come towards the end of year and this is Bruce.
Margin expansion as we move into.
When the 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 as with respect to the principles markets.
When you talked about Pos.
Still being negative and you expect negative Pos to persist through the first half the year can you just talk a little bit about what your visibility as for the back half to get to an outlook for net net positive.
Yes for the year.
Well first of all.
It's negative so far.
You know this discipline time, this year, which was 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 we're very encouraged.
I would it be pretty honest with you.
The area, there's only one area that will have negative Pos which he to strengthen is down a little bit which is you know our heavy weight.
This issue and so all the other categories were actually doing really well and your passion and future business doing well leases to a very positive comfort colors is doing extremely well is doing very well. So you everything is performing rate even in the basics segment last year, we were negative in all of our categories.
Today, the midway categories actually trading positive.
And the only area that were actually down is in our heavyweight and that's that's somewhat could be trends in.
Weights of products was unnecessarily a fashion versus six or seven.
Heavier weight shirt that we that we sell.
A lot of that goes to the corporate promotional products segment basically so.
I think that.
It's turning and we're we're up we're cautiously optimistic and.
We'll see all things in turn out that.
We can't tell us where we'll go I mean, we only have helped the trend 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.
[music].
Okay. That's so that's helpful. Thank you and then on the gross margin. You stated you cited 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.
Let's turn our focus Steve.
Okay, that's right and maybe a 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 at last year 2019, we had driven down pretty closely to that we will see some increase in our SG nay this year effectively but again, our asking a performance. We think is has been 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 timeline with the gross margin.
Correct.
That's right. Thank you very much thank you.
Our next question comes from Chris Lee John Your line is open.
Good morning, everyone that first question just going back to the.
The Corona of Irish I. Appreciate the fact that you guys have limited sourcing exposure to China in China is not a big market overall.
I guess my question is Glen do you expect where are you starting to see some impact on some of.
The end user demand in the U.S. side, I'm thinking maybe perhaps the tourist industry or anything that has.
Potentially impact from the buyers.
Well you don't want to think that Theres two things in terms of.
As for that is now.
Secondly works both ways that you know typically people that would travel abroad may not be traveling abroad with what is the local theme park stay at home and.
The beach in Florida by T shirts, right. So I.
I think that all the puts and pace in terms of.
Consumers buying souvenir type products, I mean, I'm not really concern I think the one thing that we maybe you need to look at and if you look at some of the recording of other people Ministry is.
There's been supply disruption.
Particularly because you know 40% the doors apart from China.
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 who to support.
Their growth initiatives this big factor because.
People have acted reminds will take us economy icon, what's the story. So you know with all the puts and takes I think we haven't factored into that its work through our opportunities at this point. Thanks.
That's something that we also in our minds.
Huh.
In the long term. So you know it's hard to say because you know this thing user broader control and maybe we'll be in effect, but no. Our guidance is based on what we see today.
And what the environment as a as.
Okay. That's helpful and maybe couple of quick ones for Rod.
With respect to your guidance EPS guidance, how much share buyback if any is reflected in your EPS guidance.
Generally we've got that in the high end of the guidance Chris side right. So effectively if you look at.
Our track record on share buyback is 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.
Obviously, we'll see exactly what the environment looks like as we move through the year, but I had the 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 a focus is running at 4% to 5% I mean, we outlined that we spoke in November at the Investor Conference in really see that's our run rate over the next few years.
Okay, 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 dollar 66, starting point in an add back heritage the impact of 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 and then heritage to 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 all style and then did you say 2021, you will achieve the 30% target for the whole year or is that you achieved during the year and what really kicks you indicated that 30% for 2021.
Well I think it feels we look at them.
Turning 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 playing out over time, if you look effectively very definitely we see our manufacturing cost initiatives.
Overall back to basics strategy.
Really driving increased towards that target right, we called it out.
Previously that effectively the overall impact that 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 it also into way into 2021.
So thats very definitely a driver.
We see mix is obviously will will will drive the overall the topline will drive the.
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 the target. The we're going after it takes some time, we've obviously got a finished the movement of Mexico, we've got to effectively.
A driver the various initiatives, we've got inflation that we've got to deal with right as we as we move through this year and we'll see what it looks like for for 2021 thing 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 is that our SKU rationalization in terms of the impact on our menu.
Factoring has not been.
Health at this point in time, so that's another area.
Improved gross margin as we reduced.
Manufacturing I said before that the Mexican operation closure in most of that will be only hitting us in Q4, but really the impact.
It would be one and yet our area of opportunity was too is that our Bangladeshi spansion, what we said to investors that we're supporting a lot of our international growth.
Through Central American Express.
Leverage Bangladesh that 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 all of these steam so we're doing our continuing driving further improvements on our.
Surgeons as we look forward. So it's a it's a constant theme right we're committed to making sure do we achieve our goal.
And we're putting the things in place in making the hard decisions to make sure that we achieved those but and this will be 21.
Me too.
Okay. Just just a quick follow up has there been any 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 is there any follow up on have there been any inefficiencies at the manufacturing transition.
And efficiencies.
How that arose reoperation, we've we're in the process of so ramping of Rio Nance you six.
And we feel very comfortable with.
Our position manufacturing are still looked adding ounces at this company is focus has been manufacturing optimization. The one right. So as weather with a global low cost manufacturer. So we just don't sooner rules.
Back we're constantly making sure that we're driving for performance and we feel very comfortable we we just had investor trip in the in Honduras and.
The expansion plans, we expanded rear Nancy fiber expand arena as you and we expanded green answer too as we speak.
Our 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 in that we have.
And one thing that I think is relevant though is the resuscitation, Mike labor inflation is very.
Wasn't everywhere.
No transportation costs chemicals.
There's a lot of inflation too so.
Another us made the inflation this is with us.
As we continue driving these initiatives, we're going to be able to offset inflation and the higher margins too and better returns for shareholders I appreciate the color.
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 principles business and Pos how much of the in principle businesses that heavyweight category. It's under pressure. If you exclude that what type of growth rates are you seeing from the balance of the im proud to this business.
Well, we're seeing good growth rates everywhere else to be perfect. How's your fashion businesses up strong our fleece is very strong still a comfort colors. A I mean, all these are very strong horse.
Last year, the the big impact was both on the basics segment really there's three different shirts, we haven't had second to bid wage when heavyweight.
We've seen the two midway shirts really bounced back actually.
POS perspective, and the only area. That's really down now is is our heavyweight category. So the Pos has actually improved.
And.
We'll see what happens as we look forward.
And that could be somewhat also just to weight change in industry because.
Ash ensures roll labor, which are sort of four I'm sure it's versus nor our heavy categories to six centers or it might be just more of the category than a product thing, but we'll see what goes but the trends is good we.
We are slightly ahead of what we anticipated as we as we projected for two this year and that we're going to AWS Pos for FLIR.
Hi position.
Understood I'm trying to understand how big is set heavyweight category for you all over.
It's probably around though overall around 50% or.
Business and seizures Linda.
Okay. Thanks, that's helpful. And then you have the double digit growth you were looking forward to an underwear can you talk about the revenue mix between underwear and socks when that was written underwear category.
Well basically our SaaS business will be flat for.
Sure.
And all the increase in that category.
Hi, good strong growth in the we're where we see in a.
Right right very optimistic whether underwear growth next year.
How big is the underwear, though glide.
Okay, well, we don't break that out with you look at the category.
As as we ended up 19.
Socs will be flat and all the growth in that category on next year will be underwear.
Okay, and then rather less one for me can you talk about inventory targets soon so for year end and cash flow and how that's your progress across here.
Yeah, if you look at.
From an overall perspective from an inventory standpoint, I mean.
The one if you look at our inventory levels effectively.
We were we've been building them really over the last quarter and we continue to build them really it's just at the time of the year, where we build inventory right as we as we get ready for this evening.
Actively as you as you look no I mean effect will we will build this quarter.
We will affect that we 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.
We have we have good.
Billability of goods to support that Pos and growth that will improve as the as we go through the back back half of the year.
Actively 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 quarter, 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.
Our call again, thank you all for joining us this morning, I'm down we look forward to speaking team.
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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Ladies and gentlemen, thank you for saying Goodbye and walking through the Q4 doesn't like team going back to <unk> earnings Conference call.
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After the speakers presentation, there will be a question answer session.
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I would like to hand, the conference over to Sophie Argiriou. Please go ahead.
Hi.
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 the full year 2019.
Managements discussion and analysis of consolidated financial statements.
Our expected to be filed with the Canadian Securities 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 you might see our president and Chief Executive Officer, and <unk>, Our executive Vice President and Chief financial and administrative up.
Shortly rock, we'll be providing commentary on the results for the quarter and also a this outlook for 2020, that's Michelle mentioned afterwards, well into my next question.
Today's conference call include certain statements that may constitute forward looking statements.
Many of the U.S. Private Securities Litigation Reform Act like 95, such forward looking statements involve unknown and known risks uncertainties and other factors, which could cause actual results to differ materially future results expressed or implied by such forward looking statement.
Turning to the company's filings with the U.S. Securities Exchange Commission and Canadian Securities Regulatory authority that may affect the company's future result, and with that I'll turn the call over trot.
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.
All the results for 2019 winding up with the most recent guidance we provided.
As we finished the year, we're pleased with the overall progress we made on our back the basic strategy. During 2019, staying 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 targets.
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 hosiery and Soc operations, while at the same time wrapping up our refinancing six textile facility in Honduras.
Thinking longer term, we also acquired land in Bangladesh during 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 on with another initiative under our back the basic strategy significantly reduce our unprintable product line by exiting our ship to the piece business and discontinuing 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.
Shifting to the piece business is a much more fragmented smaller volume business, which has not fit with our high volume large scale in principles franchise.
So I wanted 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 and an up 7 million reversal of gross 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.
The allowance relates to anticipated product returns associated with some of the skews. We're just continuing on which we expect to take back from 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.
Percent decrease in active work well, we generated 484 million of sales.
While sales in the hosiery and underwear category of 175 million were up slightly in the quarter.
The net sales decline was mainly volume driven and included the negative impact of the on projected sales return allowance.
Before accounting for the sales allowance all net sales generated in the fourth quarter amounted to approximately 678 million essentially in line with our expectations at the positive impact on sales of lower than anticipated levels of distributor inventory de stocking up in print the goals during the quarter was offset by the negative impact of weaker market.
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 in which continue through the fourth quarter combined with the distributor inventory de stocking.
In principle activewear 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 on underwear category were up approximately 2 million in the quarter as strong double digit sales volume growth of underwear.
Which also drove more favorable product mix was largely offset by lower stock sales.
Although demand from our 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 into our new private label men's underwear program with our largest mass retail customer.
This program rolled out earlier this year and gained additional shelf space during the fourth quarter as the mass retail customers started to further expand the program and adjust doorsteps to better position this private Brett.
Finally sales in hosiery were down in the fourth quarter due primarily to the exit of stock programs in mass compounded by lower your your industry demand in this category. According to NPD data.
Moving onto margins.
Including the 55 million charge related to our back the basic strategy.
Adjusted gross margin in the fourth quarter was 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 agreements 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.
I asked you to expenses for the first quarter.
Quarter was 76.5 million down 17% from last year and as a percentage of sale SGN expenses were 11.6%.
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 SJ rationalization.
Given our combined gross margin and SDMA 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.
4.7% decline in adjusted EPS was mainly due to lower sales in the quarter and the decrease in adjusted gross margin offset in part by lower SGN 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 at 8.2 million shares at an overall cost of 257 model.
And lastly, our net debt on December 29th totaled 862 million, bringing our net debt to adjusted EBITDA leverage ratio. So 1.6 times well within our year end target leverage range of one to two types.
This brings me to our guidance between 20, which we initiated today.
We are projecting GAAP diluted EPS of $1.70 to $1.80.
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.
Clearly focused on continued investments in manufacturing capacity expansion I.
Our income tax rate for the year is projected to be approximately 5%.
Overall project sales in 2020 reflects expected growth across our three key focus areas of in principal retail brands and private brands.
We are projecting sales increases in both activewear, and the hosiery and underwear category driven by projected volume growth and favorable product mix.
Set in part by anticipated unfavorable foreign exchange impacts.
We expect growth in the hosiery 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 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 Percy 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.
During 2019.
Also GAAP EPS and adjusted EPS guidance reflects the benefit of the non recurrence of the $24 million 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 to deliver operating margin improvement in 2020 over 2019.
With respect to estimated restructuring and acquisition related costs in 2020, we're estimating charges of up to a $30 million representing 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 costs.
Asked improvements across the organization.
Our guidance for 2020 implies an increase in EPS for the first quarter as we comp 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 decline in the high single digit the low double digit range with SGN expenses remaining relatively flat compared to the first quarter of 2019.
Yeah.
Although we have seen recent improvement in Pos in the North American and principles 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 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 sought program in the first quarter of 29 team.
The sales impact on the exit of the mass Sock program is expected be largely offset over the course of 2020 by new sought program when 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 few years, we've simplified and strengthened our operations by executing on optimization initiatives related to manufacturing and the funding 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, the very well positioned large major customers.
With that I'll turn the call back over to Sophie.
Thank you Rob.
That concludes our formal remarks I want to be starting to today's session. Please limit the number of questions to too. So we can address as many callers asked all and we'll circle back for a second round of questions as time permits I'll now turn the call over back to the operator.
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 Keith Please standby 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 think wouldn't you first saw weakness and 2019 you wondered if it was more of a macro issue. Perhaps you were kind of Canary in the coal mine of something bigger going on I'm curious now from where you said how much you feel there's something happening from a macro perspective hurting business.
As versus something specific to your company or the industry in general thanks.
Well look at its hard for us to tell that we purposely hospice you.
The area, which is more susceptible to macro changes is the corporate promotional products.
Category.
So what we've seen so far in Q4 was pretty consistent.
With two three we have seen and what I said in our last call as typically with this occurs as USIO hold back and spending Nevertheless, using more 234 quarters. So we basically.
I have seen improvement towards the end of Q4, and we are seeing improvements as we go through Q1.
And Pos is starting to come back so negative.
Yes.
Thank you.
Our next question comes from Heather Balsky of Bank of America. Your line is open.
Hi, 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 you're seeing Npls, Adam I think your attendance was down high single digits in the third quarter. So just.
Where whereas it now.
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 our to first Ralph thanks.
As far as Pos and I think maybe if im 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, our fashion patients for whom while our flu swing while comfort colors is doing well American apparel as well.
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.
Thats still down.
But the lighter weight products in that in that area, the midway products actually improving and we're projecting to come up so.
Overall, that's why we're encouraged with our POS outcome. This really was driven by.
Our heavier weight basic category and.
It's still down and drag it 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 fewer positive growth, it's going to be a little bit negative in the first half.
Recovery put a net positive for the full year with all these things.
Uses.
Okay, and if I take the gross margin question again, so we look at gross margin for the year, we are forecasting expansion.
That expansion is going to be driven by mix going to be driven by lower fiber costs.
By our manufacturing cost initiatives, we will see inflation coming through very definitely we see that in labor, we see it men and the materials.
We see it in energy and certain types of energy.
And we see it also in other inputs into enterprise.
Yes.
We also will see the impact of lower.
We're 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 we look at the cadence of the improvement in gross margin as.
All throughout 2020, we expect improvement every quarter right as we move from Q O Q1 to Q2 Q3 Q4.
We expect to see that improvement effectively flowing through.
And effectively expansion in each of the quarters of leader.
Thank you.
Our next question comes from Michel Shreedhar of National Bank. Your line is open.
Hi, Thanks for taking my questions could you give any more color on this royalty expense and.
And how it should impact FY 2020.
Well the royalty expense efficiency was.
The we are hunch, our contractual royalty agreements with our licensed to partner.
Has reduced royalties as we move forward in 2020 is what will be no impact as we move towards 2020.
But basically the minimums that we had.
29, Jean Marc Matt, So we have higher royalty expense relative to what our projections.
And so that Texas 19, but as we move into 2020, we have a lower threshold. So we don't expect to have any minimum margin.
Okay, just that no color. So we had lower both results in the fourth quarter than we were projecting overall, we called that out.
It was done with weakness in the category broadly 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.
Is it correct to assume that inventories are actually in balance after the.
The Destocking and is it 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.
Like we said what drove a lot of the excess inventory was successes.
No the price increases over the last couple of years.
Yes, Thats all flush itself I mean, that's one of the reasons why in Q1.
Operating of the sales pace because that price increases in terms of 18 that were.
Carried into Q1 of a 19, so we think were pretty good position.
Our Pos is starting to come back we're projecting for the full year of positive Pos in Printwear category.
Thank you.
Our next question comes from Subodh Khan.
Of RBC capital markets. Your line is open.
Okay. Thanks, just a question on the the 55 million dollar the adjustment during Q4, Okay. Maybe walk me through kind of the logistics of what happened there just I understand why.
The distributors might have sent the product back before.
So instead of selling it and why you maybe what down the inventory rather than just kind of pushing it out into the channel just wonder send the kind of the process there.
Okay, well maybe to start off by the whole strategy apart as the basis I think is good starting point and.
Drew over the last five years, we've created a lot of complexity in our alliance releases the acquisitions I want to 100 happening as we ended up with a man.
SK use.
Products with small volumes and duplicative.
Sales amongst all the brands we have.
So our objective.
What is two to consolidate that and to be more productive an effective.
So.
Two sides and I was one lot of these products were shifted cities, which weve, eliminating and we're going to leverage our distributors to do that going forward, which we reductions I shouldn't say.
Ultimately having less.
Products basically in our lives, we feel that we're going to increase our manufacturing efficiency.
It was complexity increased margins.
Ultimately help for US, we'll have better working capital.
In terms of availability in the company.
And 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 easy way of.
Yeah.
Dealing with it but no. We're we've always taken what I think as a leadership position in the market and one of things maybe we should just take a step back and looked at what the benefit ultimately this to our customers as because if you look at our distribution channel and our customers have been relative let's say for example to online.
Sellers.
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 resells product for two to $3 right. So.
We look at how we're we're moving forward.
The industry has seen a large increase in both S.K. you and brands.
Our customers are facing new challenges, let's say for example from.
Hey, just to carry out 30000, skews 10 years ago, two hundreds of thousands used today, so what's happening.
Happening was.
They basically have space restrictions that higher labor labor shortages today, which is affecting everybody is industry.
And our 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 of these products and get them out other 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 will offer more cost reductions sooner than later.
Over the last costs are receiving shifting put away.
We'll be less space to support our brands.
And our sales will have better turns on guilt free products sooner than later.
I'll have higher margins per square foot, all our brands within their distribution centers and all and overall will prove better customer experience. So we could have done this over a long time.
Fascinated and an attendance today is the best way to deal with this is to so I think our customers problems by making them more effective but also for us to.
To start manufacturing and puts us behind us and number one think I understand is when you're dealing with products in the market.
All of sudden that view I was so size large.
How do you how do you service that you'll be out of stock. For example, then you got to start making size March to make sure that stock.
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 look at let's just.
Thank you Skus bad move on and improve our efficiency and we'll deal with the all that additional this merchandise, which is factored into our charger $55 million much home.
That's really I guess, we have looked at it. So that's that we're going to become more effective mark our productive higher margins better returns for us, but also we're going to asset onto our customers and our customers we're going through their experience and make sure that goes on is.
This takes we are positioned 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 charge.
48 million of that relates to inventory provisions for our finished goods, but we 7 million relates to gross profit that effectively were effectively backing out related to the 90 million dollar sales, allowing those goods, we will take back in 2020, but we actually booked the sales allowances the impact into our 2019.
Numbers.
We had called out the charge could be as much as 45 million when we talked about it in Q3 is higher in the 55 million because we have.
More skews that 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.
The 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 how are you thinking about the capex spend looking forward because what we've done is look at were by consolidating Mexico were avoiding capex people jewelry purposely not equipment into our existing facilities in Central America the increase arc.
Our capacity to support you know, what we said an excess of 500 million. So that's all in place and Bangladesh basically the pick part of our capital expenditure will come next year.
This year, we're doing building infrastructure, which.
Joining me this open will start pulling in the in early two.
2021.
And just a quick follow up on the earlier I'm, sorry, you're able to share the magnitude of the SKU count reduction or <unk> percent or numbers at all.
Well look is pretty large.
But.
More importantly than the SKU and today, we have two things one is that we're going ahead with a little bit as we said in October both $25 million in sales for the.
This is lost sales of the skews and this has had an contacts.
We also feel that's an open skews, we will remain in we should support.
The bulk of our sales going forward. So thats why were limited to 25 million.
The magnitude as a SKU reduction is in the 40, 45% range of all issues.
Okay.
Thank you.
Our next question comes from Lou Canon of Canaccord. Your line is open.
Thanks, most of my question's been answered already but I did want to follow up on something I was in the press release, where.
Talks about the sales impact from the exit of the mass Sock program is going to offset by.
Some new program wins over the remainder of the year. So.
Im just curious do you have is that wins that you would have had the pass through shipping gives us this years that wins that you expect to receive 2020.
Those are new orders that will be assessed as noted in.
The a period.
Okay and is there any way that you could provide cadence with the.
Where the timing would be whether it's more front half weighted versus.
Yes.
Well, so over saying is that they lost program you see the exit Q1, but the new programs.
And our coming in basically.
Nature.
And therefore, not an out of all our soft business, we're projecting flat.
With a better mix and product.
Okay. Thanks.
Our next question comes from Mark Petri of CNBC. 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 exactly so could you just walk through the puts and takes there. Please.
So you've got right Mark so that the headwind that we see really that as we move out of that skews read the obviously Glen talked about the reduction in the number of Skus.
What's happening is Ed that effectively we'll see shifting right from certain skews to other skews because we want to overlapping SKU. So the actual real headwind that we see from this initiative in 2020, which effectively characterize it is about 25 million right. So that's what we're losing.
In 2020 as a result 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.
Bigger broader impacts beyond that even though we are taking out a meaningful.
Amount of our skews and the Unprintable 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 visited and intraday that we use the revenue impacts as those will be below 25 million.
Dennis today because of our focus will be 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 our overall Pos currently has had earlier.
We're still projecting Pos to be negatives in the first half its actually doing a little better than we.
Projected but net net Pos will be positive for the full year. So.
Based on all the puts and takes the 25 million headwinds I mean, this is sort of all active jeweler our plan for 2020.
Okay. Thanks, and then I just wanted to ask what the retail channel you called out sort of the slower rate.
Yes 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.
Im NPD at both the socks and underwear both categories are relatively.
Down for the full year 19.
We obviously, we've seen our stock business online.
Information of negative Pos.
Underperformance of our license business and the discontinued when we have some of the private label program.
Overstock business.
And.
Some of the reasons why we loss.
For short move into Q4 on the flip side, our underwear businesses when capacity is growing significantly we retain more shelf space.
2020 of the.
Our large mass retailer has shuster a floor, which has been very successful.
And we plan to do the balances are stores.
Sometime in Q2, so we're very optimistic.
But our underwear business going forward and we've got a stable swap business as we move into 2020. So we're feeling very good positioning our online business is also doing very well we have huge growth in Q4 and online all of our brands are doing very well.
Online.
Yes, what occurred as well so all the pieces together I think are there.
We're really focused.
Strategy.
Moving on all fronts.
Our retail where initiatives are comfortable as we move into my point.
Okay and any change in how the retailers are approaching inventory levels.
Oh no at this time inventories of retailer pretty awesome, and then we haven't seen any change.
You know two years ago, we had.
The changes inventory levels of them in basically this is very consistent now loss of 24 months.
Okay. Thanks, and then just one other one to clarify is.
The input cost tailwind through the course of 2020, Rod you mentioned that margins will sequentially improved through the year, but will that tailwind remain relatively steady through the year 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.
As we go forward I mean, the benefit or.
Consolidation of our manufacturing, which we said, which Mexico into our Central American operations, We said that will allow us to.
Margins by 50 basis points that this the process is still still undergoing in our Mexican facilities will be closed in.
In the first quarter, so it'd be wound down now, but it will be fully closed in the first quarter. So a lot of that effect will come towards the end of your words.
Margin expansion as we move into a 2021.
Okay. Appreciate all the comments thanks.
Our next question comes from Stephen Mccoy BMO capital markets. Your line is open.
Sure.
Thank you. Good morning, most of my questions have been answered wanted to follow up on two things.
The first as with respect to the in principles markets.
Glenn you talked about Pos.
Still being negative and you expect negative Pos to persist through the first half the year can you just talk a little bit about what's your visibility as for the back half to get to an outlook for net net positive.
Yes for the year.
Well first of all.
It's negative so far.
From.
At this point in time this year, which is really the small as part of the year right. So we said we've seen in the trailing four weeks space. The obviously a pretty good improvement in our POS we're very encouraged.
No risk, we previewed honest with you.
The area, there's only one area that we still have negative Pos, which strengthens down a little bit which as you know our heavy weight.
This issue and so on your categories were actually doing really well in your passion and future business is doing well leased is still a very positive comfort colors is X doing extremely well is doing very well. So you everything is performing that even in the basics segment last year, we were negative in all of our categories.
Today, the midway categories actually trading positive.
The only area that were actually down is in our heavyweight and that's that's somewhat could be a trend in.
It wasn't products, it's not necessarily a fashion versus basics you said, it's the heavier weight shirt that we that we sell.
Most of the corporate promotional products segment basically so.
Thanks.
It's turning and we're we're cautiously optimistic and.
We'll see how things have turned out that.
We can't tell where we'll go I mean, we only tell the trend as we put in place.
And with our SKU reductions were really focused on making sure that.
Service levels or.
Improving.
So all in all we should be in that.
[music].
Okay. That's so that's helpful. Thank you and then on the gross margin. You cited you cited 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.
A stellar focused.
Okay, that's right and maybe a 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 at last year 2019, we had driven down pretty closely to that we will see some increase in our SG nay this year effectively but again IRS unit performance. We think is has been 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 timeline with the gross margin.
Correct.
That's right. Thank you very much thank 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 of Irish I. Appreciate the fact that you guys have limited sourcing exposure to China in China is not a big market overall.
I guess my question is Glen do you expect where are you starting to see some impact on some of.
The end user demand in the us side I'm thinking maybe perhaps the tourist industry or anything that has.
Potential impact from the buyers.
Well you know what I think that Theres two things in terms of.
As for that is now.
Secondly works both ways is that.
Typically people that would travel abroad may not be traveling abroad, and what does the local impart stay at home and.
The Beach, Florida by T shirts, right. So.
I think that all the puts and pace in terms of.
Consumers 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 recording of other People's industries.
When supply disruption.
Particularly because you know a 40% of the world's power comes from China.
I think we're well positioned is 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 who to support.
Their growth initiatives.
Accurate because.
People are back in their minds will take us economy. Our conduits story. So you know all the puts and takes I think we haven't actually that's where our opportunities at this point. Thanks.
That's something that we also in our back mines.
This year.
In the long term.
So you know it's hard to say because you know this thing user.
To control and maybe a little bit in effect, but no. Our guidance is based on what we see today.
And what the environment is.
Yes.
Okay, and that's that's helpful and maybe couple of quick ones for Rod.
With respect to your guidance EPS guidance, how much share buyback if any of this reflected in your EPS guidance.
Generally we've got that in the high end of the guidance Chris side right. So effectively if you look at.
Our track record on share buyback as being very good over the last four or five years weve very happy to announce the 5%.
New program this year and effectively we expect that unfold during the year.
Obviously, we'll see exactly what the environment looks like as we move through the year, but I had the way to think about it is 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 45% we outlined that we spoke in November at the Investor Conference in really see that's our run rate over the next few years.
Okay, Great best of luck for the year. Thank you.
Yes.
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 dollar 66, starting point in an 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 and then heritage the tailwind.
What are the key drivers of this 80 basis points of leverage forecast for this year I think of a good portion of its got to be the 50 basis points from all style and then did you say 2021, you will achieve the 30% target for the whole year or is that you achieved during the year on what really kicks you tend to get either 30% for 2021.
Look I think if we look at them.
Moving 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 when we said that we will achieve that exit run rate for 2021. So all of these strategies are playing out over time, if you look effectively very definitely we see our manufacturing cost initiatives all.
Our overall back to basics strategy.
Really driving increased towards that target right, we had called it out.
Previously that we the overall impact that 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 and then also into way into 2021.
Thats very definitely a driver.
We see mix is obviously will will will drive the overall topline will drive the.
The bottom line as well so I was that all the elements are in place.
In order to allow us to to get to that the target that we're going after take some time. We've obviously got a finished the movement of Mexico, we've got to effectively.
A driver the various initiatives, we've got inflation that we've got to deal with right as we as we move through this year and we'll see what it'll it looks like for AD for 2021 thing 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 is that all of our SKU rationalization in terms of the impact on our menu.
Factoring has not been.
Health at this point in time, so that's another area.
Gross margin as we reduced.
Manufacturing.
I said before that the Mexican operation closure as most of that will be only hitting us in Q4 of them really impacts.
2021.
The other area of opportunity was too is that our Bangladeshi spansion, what we've said to investors now we're supporting a lot of our international growth.
Through Central America, So as we leverage and 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 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 look forward. So it's a it's a constant seem right we're committed to making sure that we achieve our glow.
And were put into things in place in making the hard decisions to make sure that we achieve those but in the 2021.
Okay. Just just quick follow up has there been any 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 follow up on that they've been in the inefficiencies at the manufacturing transition.
No and efficiencies.
Ill hit or Whos Reoperation, we've we're in a process of so wrapping up Rio Nance you six.
And we feel very comfortable with.
Our position manufacturing there are still look anything ounces at this company is focus has been manufacturing optimization. They won right. So that's why would a global low cost manufacturer. So we just don't sit on our rules.
Just back 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 we're now see five expanded arena as.
We expanded greenhouse you too as we speak.
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 one thing that I think is relevant though is the resuscitation might refer patients is very.
Relevant everywhere.
No transportation cost chemicals.
Patients who suffer from.
I don't underestimate the inflation. So this is with us.
As we continue driving these initiatives, we're going to build to offset inflation than a higher margins to that of returns for shareholders. I appreciate the color Glenn.
[music].
Our next question comes from Jim Duffy of Stifel. Your line is open.
Thank you good morning, guys.
I wanted to dig in some on your comments around the principles business and Pos how much of the in principle businesses that heavyweight category. It's under pressure. If you exclude that what type of growth rates are you see from the balance of the apprentices business.
Well, we're seeing good growth rates everywhere else, but the perfect How's your fashion businesses up strong or fleece is very strong still comfort colors. A I mean, 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 certain to bid ways one heavyweight.
We've seen the two midway shirts really bounced back actually.
POS perspective, and the only area that's really down now is.
Is our heavyweight category. So the Pos has actually improved.
And.
We'll see what happens as we go forward.
And that could be somewhat also just a weight change in industry because.
Ash ensures roll later reinsurers are four I'm sure it's versus nor are heavy categories of six I'm sure. So it might be just more categories they've done a product thing, but we'll see how it goes but the trends is good.
We are slightly ahead of what we anticipated as we as we projected for two this year and now we're going to positive Pos for FLIR.
Position.
Understood I'm trying to understand how big is set heavyweight category for you all over.
It's probably around overall around 50% or.
Business and seizures.
Okay. Thanks, that's helpful. And then you have the double digit go to looking forward to an underwear can you talk about the revenue mix between underwear and socks within that was written underwear category.
Well. This there are soft business will be flat for.
Sure.
And all the increase in that category.
Hi, good strong growth in the we're where we see in no.
Right very optimistic motor underwear growth next year.
How big is the underwear, though Glenn.
Okay, well, we don't break that out with you look at the category.
As as we ended up 19.
Socs will be flat and all the growth in that category on next year will be underwear.
Okay, and then rather less ones from me can you talk about inventory targets soon 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 our inventory levels effectively.
We were we've been building them really over the last quarter and we continue to build them really at the time of the year, where we build inventory right as we add as we get ready for the season.
Actively as you if you look no I mean effect will we will build this quarter.
We will affect that we 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.
We have we have good.
Visibility of goods to support that Pos and growth that will improve as the as we go through the back back half of the year.
Definitely 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 quarter, 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.
Our call again, thank you all for joining US this morning, and we look forward to speaking to you 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.