Q4 2020 Gildan Activewear Inc Earnings Call
Okay.
Okay.
Ladies and gentlemen, thank you for standing by and welcome to the Q4 'twenty 'twenty Gilligan <unk> Activewear earnings Conference call. At this time, all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session. Please be advised that today's conference is being recorded.
To ask a question during the session you will need to press star one on your telephone if you require any further assistance. Please press star zero I would now like to hand, the conference over to your speaker today Ms. Sophie Algerian. Thank you. Please go ahead.
Thank you Polly good morning to everyone and thank you for joining US earlier. This morning, we issued a press release announcing our results for the fourth quarter on full year 2020.
Company's management's discussion and analysis holiday this financial statement.
It can be filed with Canadian Securities regulatory authorities on the U S Securities Commission Tomorrow Friday, the 26th of February and will be available on our website with me on the call today, we have a bunch them on be our president and Chief Executive Officer, and Rod Harries, Our executive Vice President and Chief financial and administrative officer.
Roger will be providing commentary on our results for the quarter after which a Q&A session will follow.
Today's conference call includes certain statements that may come on.
Looking statements within the meaning of the private Securities Litigation Reform Act of 1995, such forward looking statements involve unknown and known risks uncertainties and other factors, which could cause actual results to differ materially from future results expressed or implied by such forward looking statements.
We refer you to the company's filings with the U S Securities and Exchange Commission and Canadian Securities regulatory authorities that may affect <unk>.
Company's future results and with that I will turn the call over to Rod.
Thank you Sophie.
Everyone. Thank you for joining us on our fourth quarter call and as always we hope everyone is staying healthy and safe.
We're pleased to end 2020 with a strong finish despite the ongoing pandemic and having to successfully navigate through unexpected weather related headwinds in the quarter.
And we're extremely proud of our teams with throughout the year have delivered exceptional operational execution.
From the beginning of the pandemic reacted swiftly putting our people first while maintaining a strong focus on our key priorities, we took the necessary business decisions and actions to strengthen our competitive positioning for the long term and accelerated our efforts under our back to basic strategy.
The work we have done this year it gives us great confidence that we are entering 2021 is fundamentally a stronger company.
Our fourth quarter performance showed a strong sequential recovery from the previous quarter and compared to last year.
We grew sales, 5% increased adjusted operating margin by 120 basis points delivered adjusted EPS growth of 10%.
Generation record free cash flow of $278 million and concluded the year with a strong liquidity position of approximately $1 6 billion.
We also continue to push forward with our back to basic strategy during the quarter with further focus on rationalizing our product portfolio.
Specifically in line with what we previously communicated we are planning to do when we reported to reported results during the fourth quarter. We conducted a detailed strategic review of our retail product offerings and took the decision to rationalize part of our SKU base, which resulted in an inventory charge in the quarter of $26 million.
At the same time, we also took a small charge of $6 million associated with the discontinuance of PPE Skus.
With the streamlining of our product.
Our portfolio of products, including an approximate 60% reduction of our principal SKU base, which we announced previously and now a 70% reduction in our retail Skus, we are confident resulting benefits of eliminating redundancy and complexity in our product offering will drive efficiencies in manufacturing and distribution.
Which in turn will drive lower cost inventory productivity improved service and product availability and drive more profitable growth all key objectives of our back to basic strategy.
So overall, we're pleased with what we have achieved in the quarter, particularly given the circumstances, having to deal with unexpected weather related events.
As many of you have heard in the news in November two back to back Hurricanes severely impacted countries across Central America.
Forcing us to suspend production temporarily at our Rio Nance complex.
There are locations in Honduras and Nicaragua.
Facilities at certain locations remain closed for most of November and part of December as we dealt with the impacts of the hurricanes before starting to reopen and ramp production back up in December.
Our manufacturing team has done an incredible job both by stepping in to provide much needed humanitarian aid to those impacted by the hurricanes and.
And at the same time, bringing back our operations.
As we manage through this disruption we continue to service our customers during the fourth quarter from existing inventories production from other regions and products manufactured early in the quarter in Central America.
Now moving on to the details of our fourth quarter results.
We generated net sales of $690 million up four 8% from last year.
Sales of Activewear, total 538 million up 11, 3% compared to the prior year quarter.
The increase in Activewear sales was largely due to higher overall unit sales volumes and strong and principles product mix, which more than offset lower net selling prices up and principles.
The non recurrence of distributor Destocking that occurred in the fourth quarter in 2019 helped drive the increase in unit sales from principal sold in North America, which was partly offset by lower Pos on a year over year basis due to the COVID-19 related demand environment.
Which also affected international markets.
Although on principles Pos in North America was down compared to last year, we were pleased to see that sell through trends improved sequentially.
You may recall, Pos was down year over year, 15% to 20% on average during the third quarter of 2020.
In the fourth quarter principal Pos fared better down on average just under 10% compared to last year.
Activewear products sold in retail, particularly through online and other channels were also up over last year.
Yeah.
Overall, hosiery and underwear sales in the quarter totaled $152 million down 13% over the prior year quarter.
Strong sell through of our underwear products continued with sales up 20% in the quarter significantly outpacing industry demand as we continue to grow sales private label and our own branded offering products.
While we continue to see weakness in retail sales within the whole jewelry category, which has been more heavily impacted by the current pandemic environment, particularly with the national chains and department stores sports specialty stores.
Now on the margin performance.
We're pleased to see a strong recovery in gross margin compared to the third quarter. This year and more importantly improvement compared to last year.
Before reflecting charges related to our retail SKU rationalization initiative and the small PPE write down which I addressed earlier.
With the reversal of a net insurance gain related to the hurricanes $9 $6 million per quarter. Our adjusted gross margin totaled 25, 8% 330 basis points better than the previous quarter on 20 basis points above our gross margin of 25, 6% last year.
On a sequential basis, the gross margin improvement was largely a reflection of the strong mix, we had in the quarter as we had anticipated.
Stronger mix also drove year over year margin improvement together with the impact of lower raw material costs and the flow through of manufacturing efficiencies from our back to basic strategy.
These positive factors more than offset the impacts of lower average net selling prices as we continue to push forward with our principles pricing strategy as well as COVID-19 related and other period costs in the quarter.
Benefits from our back to basic strategy also helped drive down SG&A costs in the quarter.
SG&A expenses totaled $71 9 million or 10, 4% of sales and were down 6% compared to $76 5 million or 11, 6% of sales in the prior year quarter.
Adding up all these elements, we generated operating income of $78 8 million in the quarter up from $24 3 million last year.
On an adjusted basis operating income came in at $105 7 million, reflecting an operating margin of 15, 3% up from 14, 1% in the fourth quarter of 2019.
Financial expenses of $13 1 million in the fourth quarter were slightly higher than last year due primarily to fees associated with amendments to our debt facilities made earlier in the year and the impact of foreign exchange.
After deducting financial expenses, we reported net earnings of $67 4 million or <unk> 34 per diluted share on.
On adjusted basis net earnings totaled 90 million or 45 cents per diluted share up nine 8% over last year as a result of the higher sales and stronger operating margin performance.
Turning to free cash flow on the balance sheet.
As I mentioned earlier in my remarks free cash flow of 278 million in the quarter reflected record performance, bringing cumulative free cash flow from year to $358 million.
While we did reduce capital expenditures this year free cash flow generation is largely being driven by reductions in working capital as we adjusted inventory levels through the pandemic and in response to our back to basics initiatives.
During the fourth quarter, we also saw inventory levels reflect reduced production related to the hurricanes.
On inventories overall, we ended 2020 with inventory levels of $728 million down 23% from the third quarter and down 31% from approximately $1 1 billion at the end of 2019.
While we will build some of this inventory back in the first quarter, we do expect to run at lower overall average inventory levels going forward than we have historically run with given the benefits from our back from basic strategy.
Given our free cash flow, we reduced our net debt position during the quarter to $577 million down from $862 million a year ago.
Consequently, we ended the year with available liquidity close to $1 6 billion, providing us with strong flexibility as we start 2021.
Our debt leverage ratio was three five times adjusted EBITDA, However for debt covenant purposes, our leverage ratio was one three times.
Given this positioning let me take a moment to address our capital return programs.
We remain committed to returning capital to shareholders through our dividend and share repurchase programs over the long term on while we are currently well positioned from a liquidity perspective.
We're resuming capital returned to shareholders. The company's priority remains to position sternal net debt leverage ratio <unk> ratio within its historical target range of one to two times.
Once we achieve this level and also have good visibility on how the pandemic is evolving we expect our board will review capital return policy.
Looking forward, while we are encouraged by the recovery we've seen on our business I am pleased with our competitive positioning in light of the progress we've made with our back to basic strategy, we remain cautious with our expectations for 2021, given the ongoing impact of COVID-19, and continuing restrictions on social gatherings further.
Our supply chain is stable and ramping back from the fourth quarter hurricane impacts the risk of COVID-19 disruption remains for all companies.
All of these factors contributed to an uncertain outlook.
Consequently, we are not providing detailed guidance for 2021.
However, we can provide some commentary on our expectations based on what we're seeing so far in the market.
In principle Pos in the U S and internationally is currently running slightly weaker during the first quarter compared to what we saw in the fourth quarter and.
And he is overall down about 10% to 15% compared to 2019 levels.
We believe this deterioration from the fourth quarter run rate is the result of second wave lockdowns in various geographies as well as weather related impacts in the U S. Over the last couple of weeks and we would hope to see improvement as we move forward.
In retail we continue to see higher activewear and underwear sales compared to 2020, however sales in the sock category continued to be down year over year.
Accordingly, while overall, we expect to see sales improve from 2020 levels as I said earlier, we remain cautious with our outlook.
On a stronger note we do believe the progress we have made driving our back to basic strategy will continue to strengthen our financial and operating flexibility and support our margins as we continue to drive towards our long term targets.
Now before I comment on cash flow, a small point on our adjusted measures.
Want to remind you that as we continue to assess the full impact of hurricanes on our business and operations, we do expect to recognize additional recoveries in 2021.
Consistent with the treatment of the net insurance gain in the fourth quarter. These future insurance recoveries net of related cost and charge charges will be excluded from our adjusted financial measures.
Finally on cash flow, we're planning on resuming growth capital expenditures in 2021 for a major capacity expansion project in Bangladesh.
We continue to remain excited about the benefits of this next phase of expansion will bring for our business.
Overall, we are projecting total capital expenditures for 2021 run in the range of 4% of sales and also reflecting this level of capital expenditures. Our goal is to generate positive free cash flow for the year.
So in closing, we do expect a better environment with the ongoing rollout of the vaccines in 2021, and we saw last year and are hopeful that we will start to see a more normalized environment emerging as we move through the year into 2022.
Regardless, regardless of how this plays out we do believe the actions that we've taken in 2020 with respect to our back to basic strategy.
Strengthening and reinforcing our competitive positioning.
Fundamentally we believe this will ultimately allow us to take advantage of growth opportunities in our principles retail and international markets. While at the same time driving profitability as we deliver long term value for our shareholders.
Thank you and with that I will turn it back over to Sylvia.
Thank you Ross.
That concludes our formal remarks, and we'll be starting the Q&A session.
I would ask that you limit the number of questions to two so we can address as many colleagues from possible and we'll circle back for a second round of questions.
I'll now turn the call over to the operator from the question and answer session.
Alright.
And as a reminder to ask a question simply press Star then the number one on your telephone keypad. Your first question comes from the line of Brian Morrison with TD Securities.
Good morning mm Rod.
Rod or Glenn can you just talk about where your manufacturing facilities stand right now with respect to the impact from the Hurricanes as everything back on line or then what capacity utilization rate do you plan on running maybe through Q1 are currently and how should we think about period costs as a result going forward.
Oh, well as Josh as two sides of the question.
Well, we're continuing to ramp up we're at a point, where our current capacity right now is <unk>.
Exceeding our Pos requirements, we've got to the point where we've.
Built on production up to surpass the ongoing current Pos trends in the market and on.
We're going to continue to produce at a higher rate than our Pos.
Through this quarter and by Q2, we think we'll be fully caught up.
And that will allow us also at the same time as once we get our production up to these levels.
To take advantage of any upside as we go into recovery into the market in the back half recovery from.
On the pandemic.
Back to normalization. So I think we're in relatively good shape, we're sort of.
We'll be on a better position as we enter Q2.
And I think we will have enough capacity as we look forward to the remainder of the year to capitalize on any material upside to.
Improvements of the pandemic from social gatherings.
And just to add on on the with respect to period costs, Brian. If you look at the capacity levels that we're currently running at as Glenn said, we're running ahead of Pos.
Now, we're running basically at levels, where we don't expect to see any real significant period costs.
Let's say.
<unk> absorption.
We normally have seen as we've moved through the 2020.
<unk>.
Period costs are pretty well behind us all of our period cost for the most part now we're rolling into our inventory.
And we don't expect to see any significant significant impacts as we move through Q1 and into Q2.
Okay. Thank you for that and then just a second question if I can with respect to the big run in commodity price. This year. So we can just go back to sort of caught in 101, I know you're hedged out six to nine months, but are you able to put price increases or cost mitigation to offset this maybe just remind us the percentage of Cogs that are caught in your conversion cosmetic and Eddie.
Recent increases is baked in your 18% long term margin target guidance.
Well, let's say that.
For fiscal 2021, we're very comfortable with our contract position.
Historically as Cardinal has gone up we're able to pass that causes increases to our customers.
So if cotton remains at these types of levels.
We will see price go up as we move them from 2022.
I think that's the way you should look at it so with diagnostics.
Question.
Thanks, very much Glenn.
And your next question comes from the line of Paul Lee Glenn with Citigroup.
Uh huh.
Thank you, it's Tracy filling in for Paul.
You mentioned, the Pos trends, where we're trending somewhat below four Q and I'm wondering if you could parse that out.
Between the current period and fourth quarter by region. So what does that look like in the U S versus fourth quarter, Inc.
Canada and in your other international markets. Thanks.
Well.
Quarter to date.
Rod had mentioned in his commentary we were down around 10% to 15%. So that's pretty much across the board.
The only thing I would add to that is that in the U S. I think early in the quarter we were running.
More similar to.
Q4.
But the weather has been dramatically.
Net across United States, which I think is putting them back on the pls. So I think on our U S market I think it's more.
Like Q4, but having weather impact on the rest of our markets are around that 10% to 15% range.
Got it thanks, and then just just a follow up what's your view of of.
Cotton aside the current pricing environment in your key categories and what are you expecting in terms of pricing and promotions for this year.
Well look we're going to continue to leverage our back to basic strategy, we're going to continue to.
Leverage our manufacturing cost savings I mean, if you look at our old back to basic strategy is focused on growth.
Improving underperforming areas of our Oregon on our operations.
Leverage our cost drive market share increased margins increased returns and increase our return capital to shareholders as per the activation strategies. So we.
We have the luxury to continue being on <unk>.
<unk> aggressively, which we will continue to do this year as we move through this year, our pricing has been pretty stable I would say guys. We.
Once we launched our back to basic pricing strategy, probably we came back early in July we've been continually.
Pricing aggressively.
And our prices.
Moving for US, we think we're getting share our businesses.
Yes.
Performing very well and I think one thing that we have to also look at it is that with the market even being down.
10%, 15% share.
70% of our total market in the United States or the principal market is related.
Related around social gathering so on.
Our market has evolved.
Through ecommerce and we think that as we see this recovery with our continued back to basic strategy.
Optimistic because as we move into 'twenty one into 'twenty two.
Got it thanks very much.
On your next question comes from the line of Vishal Shah with National banks.
Yeah.
Hi, Thanks for taking my questions I was wondering in the quarter. If you could help us understand the impact on sales and even on a gross margin rate of the mix shift.
If you look at the mix in the quarter mix was strong.
In Q4.
So effectively we were up 20 basis points year on year, but the mix impact was 190 basis points, though with strong and as I said in my remarks. It was in line with what we expected. So if we look at where we were in the second quarter mix was a negative impact on margins of 600 basis points.
If you look at where we were in the third quarter was a negative impact of 280 basis points.
As the sales came back as we expected effectively we get the mix impact along with that and so mix turned positive force in the third quarter and I was a big big driver of our margin improvement back to basics also was a big driver. So if you look really at what's going on the mix is coming back and then the back to basics.
Really driving margin improvement as well overall and are you pleased with what we saw on the fourth quarter and again expect that to continue as we move into 2021.
Okay, that's helpful and into Q4.
How much of a factor on mix was fleece and should we expect the seasonality to return back to normal line in 2021.
If you look at if you look at Q4, we did have good fleet sales force has been a good category good category through the pandemic and it continues to be a good category, but overall, we did effectively see I would say broader mix that we were expecting right. We've talked about this in the past as the sales come back we do see.
What we call fringe products effectively coming into the mix and driving margin. So lease was good strong category very good continues to be very good but also with other areas of our business as well, what's driving that mix impact.
Okay, Lastly, basics fashion basics side of our business is also growing at a much faster clip today, which is also providing on this program.
Okay, and just a last one here with respect to back to basics, obviously on the.
The company is making good traction on that and continues to.
How much of that strategy are we starting to see the benefits of now flowing through the P&L as well as their big benefits yet to come or are we kind of early days still.
Well if you look at the.
The strategy overall again I think we're particularly pleased if you look at Q4 and you look at the margin levels that we've been running at both from a gross margin perspective, and an SG&A perspective, effectively we're back to operating margin levels above where we were actually in 2019 in that range, let's say on on lower sales.
So effectively.
The benefits of back to basics are really coming through but they will continue to come through as we go forward as effectively as sales continue to increase all of the benefit from the reduction of the product portfolio that SKU rationalization of the impact that has on manufacturing on distribution all of that.
Play play through so this is the strategy there.
We've said many times really takes us takes the business back to effectively a business model that we know can generate strong sales very good margin performance and very good I would say capital utilization as well as we drive the business forward.
Okay. Thank you congrats on the quarter.
And your next question comes from the line of Stephen Macleod with BMO capitals.
Yeah.
Thank you good morning, guys.
I just wanted to circle around on a couple of things here.
You talked about.
The Q1, Q1 sort of being a little bit weaker share I know you sort of addressed this a little bit on a previous question, but is there are there any specific areas, where you're seeing incremental weakness or is it fairly broad across the board as you as it compares to Q4.
Well no.
Across the board compared to Q4, but I mean honestly I think it's somewhat weather related share what's happening in Texas and the northeast got hammered with back to back snowstorms. So.
When people stop buying this book they stopped coming altogether.
So it's I would say it's across the board, but I would say like I said earlier I think that the market is more like negative 10 in the U S, 10% to 15 ever rounds.
And whether his drove down on February to move down.
The U S market.
On minus 10 to 15 range like we said before.
So we're still.
It's improving.
Okay. Okay. That's.
That's great.
And then I just wanted to follow up on that cotton price inflation, which has been quite dramatic and I understand that you certainly have the ability to pass that through but are you seeing any any any pricing movements on behalf of your competitors or any any demand disruptions or order disruptions from from some of your on principles customers related.
To this price inflation that we've seen on the cotton.
We are the price leader in industry right. So we're going to continue to price your press release showing on people either match would give up market share.
And we're going to continue to do that through the course of this year, we feel very comfortable with our cost position and as we move into next year. If cotton remains on these types of levels.
We will see inflation net of pricing going up on industrial we're going to for the year.
Market on an historically, so the fact that the market.
Even minus 10 to 15 this phenomenon. So our view is that if you look back and our best your presentations 10 years ago, We said to the size of the market was 4 billion. The market has evolved and grown in the last.
Four years of Vesser presentations from these estimated the market can be six $5 billion.
I would say that this market post pandemic is going to be moving up from that level.
And we're also getting the effect of the effective onshoring as well I remember, we're on a business where you can byproduct at once.
By our shirts, if need be changed labels if you have to.
So the fact is is that I think that that's also going to help drive demand.
With the product offering that we have today and the capabilities we have on the market. So on.
All of these things really I think are.
Place too.
Accents on recovery.
I think are very physician.
Okay. That's that's great. Thank you very much.
Your next question comes from the line of <unk> would you be in.
Great. Thank you so much you Don Glenn could you talk a little bit about uhm.
You know you're have a back to basics strategies uhm impacting it you're what you're doing with American apparel and also sort of relate that to your comment about pushing forward with your principles pricing strategy like what what are you seeing that Brandon and and what's the outlook for what specific we'd like the ring sparring kind of fashion to share market.
Well the brand is going to be focused on really more our wholesale VW type business that's for taking the brand.
It's gonna be the fashion segments of our from to work on your principal markets.
We will have some of the products being sold online like you can see on.
On some of the big online retailers.
But it's gonna have a niche is going to be a little bit higher price, it's can be a little bit different.
So we have two brand strategy, we have guilt them, which is really the core brats and American Pearl, which is you know step up with a little bit of <unk>.
Differentiation in the product and fabrication assembly of the government. So it's got a home within Gill then is doing good.
Obviously, it's not the size of where gildon is because we're expense.
Huge history.
Of market share and we also have comfort colors, which is another brand, which is basically again, a little bit more unique because it's karma died. So we have a good brand portfolio, we've narrowed down the eschew base of all of our branch. So that we know we're really focused on on what's going to sell and.
Comfortable with that.
Folio is what we need today to continue driving or back to basic strategy and on the back. The basic strategy is really making sure that we grow as the pillar of our strategy is growth.
The second pillar strategy is making sure that we've pillow and the underperforming parts of our business because how do you get margin expansion and not necessarily by having to raise prices or be more effective is also by taking the margin to lower profitability products you have on your line or complexity out at all ultimately income.
Pieces. The overall mix of your margin without doing anything couple of that we're driving and leveraging on a better cost position because you have less paucity that I'll drive share and.
That's what we feel very comfortable as we move forward margins will continue to move up returns will improve our kind of return on net assets will improve as we.
Form in terms of using less working capital and ultimately that will allow us to return more capital to our shareholders. So.
It's comprehension, we've we've got a good plan, we've got the right products and I think we're position local market.
Got it. Thank you for that maybe right. If I can ask one more question just on on SG&A dollars like how how are you thinking about budgeting you know the the first quarter and for the rest of yours just to help us with our model is a little bit and make sure. We continue to expect the same kind of run rate of estimate dollars that we side for Q verses 2019. This week.
Go into your into.
2021.
Yeah, I mean look at you look at the first quarter of every year right, but are generally it's a little bit lower sales quarter. So are.
Per cent of sales generally goes up right is as far from an SG&A perspective, but if you look at the dollar amount effectively on.
On a on a quarter over quarter basis I mean.
We've done a great job on our SG&A and we're going to stay focused on that as as we go forward, we're working towards that 12% target overall and so that really is we're we're trying to get to when we look at it on a on a full year basis. So if you look at our SG&A. There is I mean, that's the environment normalizes some cost is coming back.
Into the system.
I think you'll see that effectively.
For all companies and look at cost boy related costs, you can travel things are coming back in but we've done a very good job, but I would say J on on our SG&A and we're going to keep it at those levels as we as we move forward.
As we drive towards that 12% target overall.
Got it okay, great. Thank you so much.
And your next question comes from the line of Crisply mid day.
Is starting.
Good morning, Glenn.
Just based on your comments about an expanded addressable in principles market is it fair to assume that you do not necessarily need to see the traditional social gathering or corporate promotional end user segments to fully recover in order for your sales to be back at the prequel to level.
We'll look at we're down to 10% to 15% so.
The answer is we definitely need some type of.
Recovery of social gathering really to take our sales back up to the normalized level, otherwise, we probably be there today.
So that I would say no we need to have that recovery happen.
But if you take the percentage of sales of the.
<unk>.
Social gathering type products on our universe, it used to be 70% of our market right. So.
People are buying products from different places are buying them on line. So there's been a little bit of I didn't go to the local fair to buy my T shirt on to go bite on line, but they bought their share right. So it's not going to be a duplicate.
Increase because at social gatherings start to occur so I would say net net the market will expand.
I think we've got an efficient distribution system general on the overall market.
And time will tell them to see what happens once comprehend things place.
Okay. That's helpful in it and your last Investor day, I seem to remember it and I could be wrong that you mentioned that you had about 20 to 25 per cent market share in the fashion basic.
Basic segment and there's a lot more room to grow do you have that number updated uhm given everything that's happened.
Well, it's growing up and I think we've definitely grown it significantly this year I mean I.
I haven't got the exact number to give you today, but I would say that we definitely have.
Significant growth in the two big areas of growth in our Pls R fleece and fashion basics, that's what's really driving R.
Our unit volume so we definitely for sure grew on driving growth.
Okay. Thanks to work on it.
And your next question comes from the line I flew cannon with Canaccord genuine.
Thanks, Good morning brought I think you've touched on your prepared remarks that you guys are gonna be free cash flow positive you expect to be free casual positive for the year and I know part of that is gonna be running out sort of lower inventory levels. Just as a result of the back to basic strategy, but how should we be thinking about.
I guess your production schedule and how that's going to affect your inventory balance throughout the course of the year is it is it gonna be more normalized and snorkel years, where you're sort of building up that inventory balance in the first half of the year and sort of drawing it down on the back half how should we be thinking about that.
I think that the inventory look for a return on inventory now as for catching up during the hurricane so.
Until we get to Q to basically we're just going on we're going to be on a catch up moving on.
On our business and as we get into the back half.
You said earlier manufacturing capacity.
Is running at a rate which is outstripping the.
The P O S at current levels so.
If that happens on we keep producing these levels were built a little bit of inventory at the end of the year.
And if the market recoveries and we'll probably have similar type of inventories of ourselves on but it is a two up.
Got it and then Glenn I know I know you've touched on this earlier in the call sort of how you're thinking about.
Online and the rest of the addressable market.
Of course of the year, but as the pandemic sort of made you reconsider or view.
<unk> your your channels bit differently than trying to access that customer through online versus other channels of you guys given internally any thought about expanding those capabilities.
Well the thing is is that back in 2018 on when we came to the market and we started our back to basic strategy looked at the market because we just have the retail market and we had a print where market and we should look at the world is emerging which is it's all of a sudden or two markets we're merging into what.
That's what happened this year because the lion's share of all of the sales that are being sold through our distributed network are heading on to online type selling either people buying online from our distribution network that they're servicing online sellers.
The local sprint screen-print.
Fishing guide, let's say for example, Myrtle Beach net.
Sold on line is selling online today on it so.
On the whole World has gone on line and I think that we're still getting the benefit of that without having the costs associated with servicing shipping picking and that's the reason why we we got we got out of last year have shifted a tech to the peace business and focused on our core competency and left Virginia. When we have on our back to basic strategy. So it's definitely working.
We're still.
Being able to address those markets, but we don't have the costs associated with it really.
The individual and what isn't too. So I think that's sort of why we're so confident on our abilities gross sales and reduce costs.
Understood I appreciate it.
Your next question comes from the line, Patricia Baker with Scotia Bank.
Everyone. Thank you for taking my question I Wonder if you could share with us your anticipated timeline with respect to getting your net debt within your targeting range from one to two times.
Well I think if you look at our leverage ratio and.
And do you think about the LTM EBITDA Q2 was a very tough quarter of last year. So I think the first thing you have to look at that Patricia it'll drop away out of the calculation right as we move.
Into cue too so I think that will effectively have a big impact on on bringing the ratio downward three five times on a reported basis at the end of the queue for.
And as we go forward effectively we will see how things play out.
Ultimately we are as we said I think we are very pleased with the way back to basics is running what we're doing with the business. We'll see on the first quarter plays out see we're in the second quarter, but I think that the.
The movement of that EBITDA out of our ratios will have a big impact as we get through to the second quarter.
Okay excellent. Thank you very much from.
And your next question comes from the line of Mister Jam with Stifel.
Hi, This is Peter Mcgoldrick on her gym the morning, as we think about the long term 30 per cent gross margin target what factors are needed to bridge from run right levels. Today is this a function of capacity utilization from existing manufacturing or does it rely on the.
New capacity ramping or more pricing just what other drivers might be required to bill to those targeted 30 per cent levels.
It's just a function of us continuing to drive or back to basic strategy has all the components come together as we maximize our manufacturing continue.
Continue to improve our underperforming areas of our business.
Grow the top line.
Prove our mix.
All of those things combined will allow us to achieve on targeted 30 per cent of gross margin us in the future.
Thanks, then near term as we think about the 10 to 15 per cent incredibles appoint a sale versus 2019 levels.
Can you provide any insight into the view of distributor inventory alignment with these sell through dynamics is there any contemplation near term of restocking or destocking.
Well I would say that the current inventory in the channel is normal low but on a current pass basis. So in other words, which with a negative pass basis for us that's really where we are in the child per day, so if the market.
Would materially come back that would be a little bit more inventory requires ortho sales from the channel on a normal low low level.
Okay. Thank you.
Okay. Thank you.
And I was final question comes from the line of Mark P tree.
C I D C.
Hi, Good morning, I, just wanted to come back to the topic of the end markets and sort of the evolution that you're seeing with your with your sort of find out what the final customer.
And I guess my question is.
Does that shift have implications for the profitability of those products for you or your distributor or does it have other implications with regards to sort of your manufacturing footprint and the efficiency there.
It doesn't it doesn't change anything for us or our customers because we still ship for cases.
Truckloads on mass to our customers, who do the distribution function on that's what they do is where the.
The brand, we do the marketing and manufacturing of our products on our distributors do the distribution function.
So basically for them, it's just going to a different outlet so they're going to <unk> scream printer, it's going to an online scream Ventura Scream entered that it could be the same customers are selling too, but he's now instead of swelling in his in his retail outlet. He is now selling online to consumers right. So it was just a question on the net consumer guest a product, but the <unk>.
On the functionality is total exactly the same it's just a question on islands I.
I was getting into the end user because even though we don't sell necessarily we're more of a <unk> type business. The fact is everything ultimately ends up in the consumer's hands. On this is a question is where do they pick them up.
Does it lead to any shift and mix.
Not really I think the.
The mix is pretty much consistent.
And I think misses more driven by.
Style changes like on our preferences like fleeces become.
Ah casual wear item and that may be be get back to people working at home Leisurewear police, whereas is a growing category. If you look at all the fashion, perhaps that I haven't been getting out of <unk> going on to sweaters and other things because people are working at home and and I think that trend will not change I think that could be also a big driver of our success because.
People are becoming more casual on this work at home, saying basically is.
Is taken off the suit and tie for sure right.
So I think that's one area.
So please there's been a big driver fashion on T shirts, basically is obviously probably category.
The area where.
The basic side of our business I mean, that's really conducive to large gathering on large events.
If you go and look at.
Opening day at the baseball game, I mean, they're not giving away fashion T shirts are giving away.
Our basic byproducts, so that's where it will really get the big push I think on the recovery is when the basic site comes back because of the big gatherings rock concerts.
NASCAR and et cetera et cetera. So.
I think we're we're well positioned we have everything we need we have all the products from about the brands we've got the capacity.
Very excited per Bangladesh coming on which is going to be.
The big evolution from the overall manufacturing of guilt, then which is going to support on international sales.
As well as support from continued fashion basic segment force so.
I think we're well positioned.
Leaning towards that a recovery.
I think we prepared quite well this year.
Relative to all things being equal so.
Recovery and they were gonna be.
And you guys can just touched on it but I just wanted to ask about Bangladesh could you just remind us in terms of the timing of of that being a contributor to to your business.
Yeah, well that's going to support.
It's going to come on in 22, and that's going to support.
Really 23 sales I mean by the time it comes on and 22.
Okay. Thanks, a lot.
Thank you.
And at this time there are no further on your questions.
Okay and are there any closing remarks.
Thank you party again, I think everyone. We thank everyone for joining us this morning.
And we look forward to speaking to your bank accounts.
Great day, Thank you.
Okay. Thank you ladies and gentlemen. This concludes today's conference call. Thank you for your participation you may now disconnect.
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