Q4 2020 Gildan Activewear Inc Earnings Call
Yeah.
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.
And 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 and I would now like to hand, the conference over to your speaker today, Ms Sophie or jewelry and 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 and full year 'twenty and 'twenty, the company's management's discussion and analysis and consolidated financial statements are expected to be filed with Canadian securities regulatory authorities and the U S Securities Commission Tomorrow Friday.
26 of February and will be available on our website with me on the call today, we have a bunch them and be our president and Chief Executive Officer, and Mike Harris, Our executive Vice President and Chief financial and administrative officer Sharp V. Rod 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 and May constitute forward looking statements within the meaning of the U S. 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 <unk>.
Future results.
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.
The company's future results and with that I will turn the call over to Rod.
Thank you Sophie and good morning, 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 from strong finish and despite the ongoing pandemic and having to successfully navigate through unexpected weather related headwinds in the quarter and.
And we're extremely proud of our teams with throughout the year have delivered exceptional operational execution.
From the beginning of the pandemic, we acted swiftly putting our people first.
Containing 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.
<unk> adjusted EPS growth of 10%.
<unk> and 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 our reported results during the fourth quarter. We conducted a detailed strategic review of our retail product offerings and took the decision to rationalize as part of our SKU base.
Which resulted in an inventory charge and 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.
And 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 and our retail Skus, we are confident resulting benefits of eliminating redundancy and complexity and our <unk>.
The offering will drive efficiencies and 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 are pleased with what we've achieved in the quarter, particularly given the circumstances, having to deal with unexpected weather related events.
As many of you heard and the news in November two back to back Hurricanes severely impacted countries across Central America.
Forcing us to suspend production temporarily and our Rio Nance and complex and other.
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 and 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 and Central America.
Now moving onto 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 and 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.
And non recurrence of distributor Destocking that occurred in the fourth quarter and 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.
Oh and principles, Pos and 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.
And the fourth quarter and principles Pos fared better down on average just under 10% compared to last year.
Activewear products sold and retail, particularly through online and other channels were also up over last year.
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% and the quarter significantly outpacing industry demand as we continue to grow sales private label and our own branded offering products.
And we continue to see weakness and 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 and sports specialty stores.
Now on the margin performance.
We're pleased to see a strong recovery and 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 together with the reversal of a net insurance gain related to the hurricanes and $9 6 million and the quarter. Our adjusted gross margin totaled 25, 8% and 330 basis points better than that.
Previous quarter, and 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 and principles pricing strategy as well as COVID-19 related and other period costs and the quarter.
Benefits from our back to basic strategy also helped drive down SG&A costs and the quarter SG.
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 and the quarter up from $24 3 million last year.
And on adjusted basis operating income came in at $105 7 million, reflecting an operating margin of 15, 3% up from 14, 1% and the fourth quarter of 2019.
Financial expenses of $13 1 billion and the fourth quarter were slightly higher than last year due primarily to fees associated with amendments to our debt facilities made earlier and 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.
And on an adjusted basis net earnings totaled 90 million or <unk> 45 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 and the balance sheet.
As I mentioned earlier in my remarks free cash flow of 278 million and the quarter reflected record performance, bringing cumulative free cash flow for the year to $358 million.
While we did reduce capital expenditures this year of 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 and 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 and while we are currently well positioned from a liquidity perspective.
We're resuming capital returned to shareholders. The company's priority remains to position external 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 and how the pandemic is involved and we expect our board will review capital return policy.
Looking forward, while we are encouraged by the recovery, we've seen and 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 and social gatherings further.
And our supply chain is stable and ramping back from the fourth quarter hurricane impacts the risk from COVID-19 disruption remains for all companies.
All these factors contribute to and uncertain outlook and <unk>.
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 and the market.
And principles and the U S and internationally is currently running slightly weaker during the first quarter compared to what we saw in the fourth quarter and as 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 and 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 and the soft category and continue to be down year over year.
Fortunately, while overall, we expect to see sales improve from 2020 levels as I said earlier, we remain cautious with our outlook.
And 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.
Just want to remind you that as we continue to assess the full impact of the hurricanes on our business and operations, we do expect to recognize additional recoveries in 2021.
Consistent with the treatment of the net insurance gain and 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 are planning on resuming growth capital expenditures in 2021 for a major capacity expansion project and Bangladesh.
We continue to remain excited about the benefits. This next phase of expansion will bring for our business.
Overall, we are projecting total capital expenditures for 2021 run and the range of 4% of sales and after 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 and 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 have taken in 2020 with respect to our back to basic strategy.
Our strengthening and reinforcing our competitive positioning.
Fundamentally we believe this will ultimately allow us to take advantage of growth opportunities and and 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 and 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 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 and are currently and how should we think about period costs as a result going forward.
Well as Joshua capacity side of the question.
Well, we're continuing to ramp up and we're at a point, where our current capacity right now is exceeding our Pos requirements and we've got to the point where we've.
Note the production up to surpass the ongoing current Pos trends and the market and.
We're going to continue to produce at a higher rate and 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 and to the market in the back half and there is recovery.
From the pandemic.
Back to normalization. So I think we're in relatively good shape, we're sort of will.
And will be and better position as we enter Q2 and.
And I think we will have enough capacity as we look forward and to the remainder of the year to capitalize and any material upside too.
Improvements of the pandemic and social gatherings.
Okay.
And just add on and that 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 and now we're running basically at levels, where we don't expect to see any real significant period costs.
Let's say.
Period of absorption.
We normally have seen as we've moved through.
The 2020.
Period, so period costs are pretty well behind us.
All of our period cost for the most part and 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 and commodity price. This year. So we can just go back to sort of caught and 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 and your conversion cosmetic and or the.
Recent increases is baked in your 18% long term margin target guidance.
Well, let's say that.
For fiscal 'twenty, and 'twenty, one and we're very comfortable with our contract position.
And historically as cognizant has gone up and we're able to pass that cotton and increases to our customers.
So if cotton remains at these types of levels.
We will see pricing go up as we move into 'twenty and 'twenty two.
I think that's really as you look at it so with diagnostics.
Price and cost.
Thanks, very much Glenn.
And your next question comes from the line of Paul and the glass with Citigroup.
Thank you, it's Tracy filling in for Paul.
I've mentioned, the Pos trends were trending somewhat below four Q and I'm wondering if you could parse that out.
And between the current period and fourth quarter by region and so what does that look like and the U S versus fourth quarter and.
Canada and in your other international markets. Thanks.
Well.
Quarter to date.
Robert mentioned in his commentary, we were down around 10% to 15% and that's pretty much across the board.
The only thing I would add to that is that and the U S. I think early in the quarter we were running.
More similar to.
Q4.
But the weather has been dramatically, but across the United States, which I think is putting them back.
On the Pls, So I think and our U S market I think it's more like Q4, but having weather impacts and 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 and your key categories and what are you expecting in terms of pricing and promotions for this year.
Well look and we're going to continue to leverage our back to basic strategy, we're going to continue to.
Leverage our manufacturing cost savings and then if you look at our back to basic strategy is focused on growth.
Improving underperforming areas of our operations and leverage our cost drive market share increased margins increased returns and increase our return capital to shareholders as for the activation strategy and so we.
We have the luxury to continue doing.
<unk> aggressively, which we can and will continue to do this year as we move through this year, our pricing has been pretty stable I would say that as we.
And once we launched our back to basic pricing strategy, probably we came back early in July we've been continually.
Pricing aggressively.
And that price is.
Moving for US, we think we're getting share our businesses and as.
And.
Forming very well and I think one thing that we have to also look at is that with the market even being down.
10% to 15% share.
70% of our total market and the United States or and the principal market related around social gathering so our market has evolved.
Through ecommerce and we think that as we see this recovery with our continued back to basic strategy and Youre very.
Optimistic because as we move into 'twenty, one and into 'twenty two.
Got it thanks very much.
And your next question comes from the line of Vishal Shah with National banks.
Hi, Thanks for taking my questions I was wondering in the quarter. If you could help us understand the impact on sales and even our gross margin rate of the mix shift.
A few if you look at the mix and the quarter mix was strong and in.
In Q4.
So effectively we were up 20 basis points year on year, but the mix impact was.
And 90 basis points, though was strong and as I said in my remarks. It was in line with what we expect and so if we look at where we were and the second quarter mix was a negative impact on margins of 600 basis points. If you look at where we were and the third quarter was a negative impact of 280 basis points.
And then as the sales came back as we expected effectively we get the mixed impact along with that and so mix turned positive force in the third quarter and I was a big big and 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.
The basics really driving margin improvement as well overall and are you pleased with what we saw in the fourth quarter and again expect that to continue as we move into 2021.
Okay, that's helpful and into Q4.
How much debt factor on mix was fleece and should we expect the seasonality to return back to normal and in 2021.
If you look at if you look at Q4, and we did have good fleet sales fleece has been a good category and a good category through the pandemic and and continues to be a good category, but overall, we did effectively see I would say broader mix that we were expecting right and we've talked about this and the past us and sales come back we do see.
What we call fringe products effectively coming into the mix and driving margin. So lease was good and 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, and the fashion and basics fashion basics side of our business is also growing at.
And at a much faster clip today, which is also providing a mix improvement.
Okay, and just a last one here with respect to back to basics obviously.
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 it separately, because they're big benefits yet to come or we call. It early days still.
Well if you look at.
The debt 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 and SG&A perspective, effectively we're back to operating margin levels above where we were actually in 2019 and that range, let's say 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 right as effectively as sales continue to increase all of the benefit from the reduction of the product portfolio that SKU rationalization and the impact that has on manufacturing on distribution all of that.
Play play through and so this is a strategy.
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 and 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 and with BMO capital.
Thank you good morning, guys.
I just wanted to circle around and a couple of things here.
You talked about.
The Q1, Q1, and sort of being a little bit weaker share I know you sort of addressed this a little bigger and a previous question, but is there are there any specific areas, where youre seeing and incremental weakness or is it fairly broad across the board as you as it compares to Q4.
Well.
Across the board and compared to Q4, but I mean honestly I think it's somewhat weather related and see what's happening in Texas and the northeast got hammered with back to back snowstorms. So.
And when people stop Brian this from the stockpiling altogether.
So as I would say it's across the board, but I would say like I said earlier I think that the market is more like and negative 10, and the U S and 10 to 15 ever rounds.
And whether it's drove down in February and to move down.
The U S market.
Minus 10 to 15 range and we said before.
So we're still right.
It's improving.
Okay. Okay. 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 and principles customers related.
To this price inflation that we've seen and the cotton.
And we're at a price leader and industry right. So we're going to continue to price and press release, so people either match or give up market share.
And we're going to continue to do that through the course.
This year, we feel very comfortable with our cost position and as we move into next year. If cotton remains at these types of levels.
And we'll see inflation net of pricing going up and the industrial we're going to play of the year.
We're well positioned.
We're building up our capacity and really what we're looking forward to is the recovery and the back half of the year, because we should have support and additional growth.
And the recovery happens.
Okay, Great and then maybe just one more if I could on the <unk>.
Call you made some interesting comments about the addressable market exiting the pandemic being even bigger than it was when you were coming into the pandemic.
Have you seen any data points that would change.
Changed that view at all or anything that would give you more confidence that that in fact will be the case.
Well.
And it's got to be it and as a day because.
The market is pretty robust right now.
And social gatherings have not really occurred and they are starting to slowly come back.
But.
And the corporate promotional area and people are still working at home so that whole market has dried up completely.
Travel and tourism is not really from us I can tell you that.
So all of those Little League baseball schools from every event, where the rock concerts and.
All of these events and the driver of our <unk>.
Market and historically, so the fact that the market.
And as even minus 10 to 50 and is phenomenal. So our view is that if.
And you look back and our Investor presentations 10 years ago, We said the size of the market was $4 billion.
Market has evolved and grown and the last.
Fourth years of Investor presentations from these estimate and the market will 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 going to effect the effect of onshore and as well and we were.
We're in a business, where you can byproduct at once.
And by our assurance if need be changed and labels if you have too.
So the fact is that I think that that's also going to help drive demand.
With the product offering and we have today and the capabilities, we have and the market and so all of these things really I think are poised to.
And I'll just.
Actions and recovery.
Very good position.
Okay. That's great. Thank you very much.
Your next question comes from the line of Jay sole with UBS.
Great. Thank you so much Glenn could you talk a little bit about.
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 bread 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 and what we need today to continue driving or back to basic strategy and from the back of the basic strategy is really making sure that we grow as the pillar of our strategy is growth set.
Second pillows or 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 and your line or complexity out with at all and possibly.
Increases the overall mix of your margin without doing anything and a couple of them were driving and leveraging better cost position, because you have less and less city that.
And that will drive share and.
And that's what we felt 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.
Perform in terms of using less working capital and ultimately that will allow us to return more capital to our shareholders. So it's.
It's comprehension, we've we've got a good plan and got the right products and I think we're position local market.
Got it. Thank you for that maybe around if I can ask one more question just on on SG&A dollars like how are you thinking about budgeting you know the the first quarter and and for the rest of your just to help us with our models a little bit and make sure. We continue to expect the same kind of run rate Uhm estimate dollars that we side for Q versus 2019 as we go.
Into your into and <unk>.
2021.
Yeah, and then look at you look at the first quarter of every year right, but generally it's a little bit lower sales quarter. So are.
Our percent of sales generally goes up right is as far from and SG&A perspective, but if you look at the dollar amount effectively.
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 the 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 and 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 and and I think you'll see that effectively.
For all companies and look.
Cost boy related costs, and travel and 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 <unk>.
And starting.
Good morning, and go ahead and.
Just based on your comments about and expanded addressable and principles market is it fair to assume that you do not necessarily need to see the traditional social gathering or corporate promotional and user segments to fully recover in order for your sales to be back at the prequel the level.
We'll look at we're down to 10% to 15% so.
And for US, we definitely need some type of.
Recovery and social gathering really to take our sales back up to the normalized level, otherwise, we probably be there today.
So I would say no we need to have that recovery happen.
But if you take the percentage of sales.
And.
Social gathering type products and our universe.
It used to be 70% of our market right. So.
People are buying products and 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, and I'm Gonna go by and online, but they bought their right. So it's not going to be a duplicate.
Increased because of social gatherings start to occur so I would say net net and the market will expand.
I think we've got an efficient distribution system general and the overall market.
And time will tell them to see what happens once a recovery and takes place.
Okay, that's helpful and and 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% market share in the fashion basic.
Basic segment and there's a lot more room to grow do you have that number and updated given and everything that's happened.
Well, it's growing up and I think we've definitely grown it significantly this year and.
I haven't.
The exact number and give you today, but I would say that we definitely have.
Significant growing and the two big areas and growth and our Pls R fleece and fashion basics and that's what's really driving our our unit volume low so we definitely here for sure and grill and driving growth.
Okay. Thanks for the comment.
And your next question comes from the line and I flew cannon with Canaccord kidney lately.
Thanks, Good morning brought I think you've touched on your and your prepared remarks that you guys are gonna be free cash flow positive you expect to be free cash flow 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 and schedule and how that is.
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 and the first half of the year and sort of drawing it down and the back half how should we be thinking about that.
I think that the inventory look for a return on inventory and now as for catching up during the hurricane So until we get to Q to basically we're just going and we're going to be and to catch up moving on.
On our business and as we get into the back half or like I said earlier and manufacturing capacity.
Is running at a rate which is outstripping the.
You know the Pos's current levels so.
And that happens and we keep producing empties levels were built a little bit of inventory at the end of the year.
And if and market recoveries, and we'll probably have similar type of inventories from high ourselves from others to up.
Got it and then Glenn I know I know you've touched on this earlier and the call sort of how you are thinking about.
On line and the rest of the addressable market.
Of course of the year, but as the pandemic sort of made you reconsider or view your your channels bit differently and trying to access that customer through online versus other channels of you guys given internally and he thought about expanding those capabilities.
The thing is is that back and 2018 and when we came to the market and we started our back to basic strategy and we looked at the market because we just have the retail market and we had a firmware market and we should look at the world is emerging it's all of a sudden or two markets were emerging and so what.
And 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 onto online type selling either people buying online from our distribution network that they are servicing on line sellers.
The local sprint screen-print.
Fishing Guy and let's say for example, and Myrtle Beach.
We never sold on line of selling on line today and so the.
The whole world is gone online and I think that we're still getting the benefit at that but I would have and costs associated with servicing shipping picking and that's the reason why we we got we got out of last year and shifted a tech to the peace business and focused on our core competency and left Virginia, and we have from our back to basic strategy. So it's definitely.
<unk> working we're still.
Being able to address those markets, but we don't have the cost associated with it really.
The.
And what isn't too so I think that's sort of why we're so confident and our ability to gross sales and reduce costs.
Understood I appreciate it.
And your next question comes from the line Patricia Baker Scotia Bank.
And everyone. Thank you for taking my question and I Wonder if you could share with us your anticipated.
Nine line with respect to getting your net debt within your targeted range and one to two times.
Well I think if you look at our leverage ratio and and.
And do you think about the LTM EBITDA Q2 was a very tough quarter of last year. So I think the first day you have to look at that Patricia it'll drop away out of the calculation right as we move.
And to Q too so I think that will effectively and have a big impact on and bringing the ratio downward three and five times and Ah reported basis at the end of the queue for and.
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 sales.
Sales first quarter and plays out and see where and the second quarter, but I think that the.
And the movement of that EBITDA out of our ratios and we'll have a big impact as we get through to the second quarter.
Excellent. Thank you very much right.
And your next question comes from the line of Mister Jim Nothing with Stifel.
Hi, This is Peter MC goldrick on her gym, good morning and.
Uhm 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 and is 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 our back-to-basics 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 our target and 30% of gross margin is and the future.
Thanks, and then near term as we think about the 10% to 15% 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, let's say that the current inventory and 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 and the child per day, so if the market.
Would materially come back that would be a little bit more inventory requires ortho sales and the channel and a normal low low level.
Okay. Thank you.
Okay. Thank you.
And our final question comes from the line of mock Petrie with C. I B C.
Hi, Good morning, I, just wanted to come back to the topic of the and markets and and sort of the evolution that you're seeing with your with your sort of find out what the final customer.
And and I guess my question is.
Does 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. Thanks.
And it doesn't it doesn't change anything for us or our customers because we still ship for cases.
Four truckloads on mass to our customers and the distribution function and that's what they do is where the where the.
Brian, we do and the marketing and manufacturing of our products and and our distributors do the distribution function. So basically for them interest going to a different outlet instead of going to and essays green printer, it's going to and online Scream Ventura Scream entered that it could be it would be the same customers are selling too, but he's now instead of selling and is and is Rita.
Fill out that he is now selling online to consumers right. So it was just the question out the net consumer guest product, but the channel and the functionality is total exactly the same just a question and.
I was getting into the end user because even though we don't sell necessarily we're more of a <unk> type business and the fact is everything ultimately ends up and and consumers hands and it's just a question is where do they pick them up.
Does it lead to any shift and mix.
Not really I think the mix is pretty much consistent.
And I think misses more driven by.
Style changes like our preferences like fleeces become.
Ah casual wear item and that may be be and get back to people working at home Leisurewear police, whereas is a growing category and and if you look at all the fashion, perhaps and I haven't been getting out of suits and ties and going onto 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 and this work at home thing basically is.
And it's taken off to suit and tie for short right.
So I think that's one area.
So please has been a big driver fashion and 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 and 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 will really get the big push I think on the recovery is when the basics items back because of the big gatherings rock concerts.
NASCAR and et cetera, et cetera, and so.
I think we're we're well positioned we have everything we need we have all the products from nothing brands.
And capacity and where.
And very excited from Bangladesh coming on which is going to be.
The big evolution, and the overall manufacturing and killed them, which is going to support of international sales and.
As well as support and continued fashion basic segment force so.
I think we're well positioned.
Leaning towards that a recovery.
And that would be prepared quite well this year.
Relative to all things being equal so.
Recovery and they were gonna be.
And you guys should 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.
Well, that's going to support.
It's going to come on and 22 and discuss.
Sport.
Really 23 sales and by the time it comes on and 22.
Okay. Thanks, a lot.
Thank you.
And at this time, there and no further audio questions.
Okay and are there any closing remarks.
Thank you party and.
I think everyone. We thank everyone for joining us this morning.
And we look forward to speaking to your bank accounts.
And have great day. Thank you.
And thank you and you can do.
Gentlemen, This concludes today's conference call. Thank you for your participation you may now disconnect.
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