Q4 2021 Gildan Activewear Inc Earnings Call

February 23, 2022

[music].

Ladies and gentlemen, thank you for standing by and welcome to the Q4 2021 deals <unk> Activewear earnings Conference call. At this time all participants are in a listen only mode. After the speakers' opening remarks, there'll be a question and answer session.

To ask a question. During this session you will need to press Star then one on your check some telephone.

If anyone should require assistance during the conference. Please press Star then zero suites and operator.

Please be advised that today's conference is being recorded.

I would like to hand, the call over to Sophie <unk>, Vice President Investor Relations. Please go ahead.

Thank you Michelle.

Good morning, everyone and thank you for joining US earlier. This morning, we issued a press release announcing our earnings results for the fourth quarter and full year of 2021.

Company's management discussion and analysis and consolidated financial statements are expected to be filed with the Canadian securities and regulatory authorities and the U S. Securities Commission Tomorrow, the 24th of February and will be available on our website.

Joining me on the call. This morning are Glen <unk>, President and Chief Executive Officer of Gilead, and Rod Harries, Our executive Vice President and Chief financial and administrative officer in a moment, Rob will take you through the results for the quarter and a Q&A session will follow afterwards.

I would like to remind you that certain statements included in this conference call may.

Constitute forward looking statements within the meaning of the U S. Private Securities Litigation Reform Act of 1995, such.

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 the company's future results and now I will turn it over to you Ron.

Thank you Sophie.

Good morning, and thanks for joining us today.

At this time last year, when we reported our fourth quarter results. We express confidence that we were entering 2021 is a fundamentally stronger company.

We now believe our results and accomplishments for this year very strong strong evidence of that.

We finished the year with record top and bottom line performance in the fourth quarter, leading to record sales earnings and free cash flow for the full year.

Simply put thanks to the strong efforts expertise and focus of our whole team, we navigated through a still challenging environment in 2021 to deliver on our core objective of our back to basic strategy, which was to remove complexity from our business. So we can better leverage our world class vertically integrated manufacturing system to better so.

For our customers.

By delivering on this objective we were able to capitalize on improving demand during 2021 at margin levels much stronger than pre pandemic levels.

We also delivered on our capital deployment priorities and as you saw from today's earnings announcement, we are now moving forward with the gilden sustainable growth strategy with well defined initiatives to enable us to deliver strong performance over the next three years, which I will cover after I take you through the details of the quarter.

So let's get started do.

During the fourth quarter, we generated record net sales of $784 million up 14% from last year with activewear sales of $627 million up, 17% and hosiery and underwear sales of $157 million up 3%.

The overall sales increase was primarily due to higher sales volumes and net selling prices inactive word partly offset by product mix due to the timing of fleece sales compared to last year.

Higher activewear sales volume were driven primarily by higher year over year point of sales and to a lesser extent by the impact of some distributor restocking in the North American and principles channel, Although I would emphasize that inventory levels in the channel continue to remain well below 2019 pre pandemic levels.

If we look at sales relative to pre pandemic levels total net sales were up 19% above the fourth quarter in 2019, driven by higher unit sales volumes net selling prices and stronger mix in activewear, partly offset by lower stock sales volume.

Volume growth in activewear reflected the continuing positive trend of higher Pos in the North American and printable channel higher sales of activewear through retail channels combined with the positive impact of the non recurrence of distributor inventory destocking that occurred in the fourth quarter of 2019.

We continue to see a lag in demand versus pre pandemic levels with an international sales given the impact of the omicron variant and lockdowns in various regions.

Moving onto our gross margin where performance remained strong we generated gross margin of 29, 2% in the quarter up 670 basis points.

On an adjusted basis gross margin of 36% was up 480 basis points compared to last year.

The strong improvement over 2020 was driven by higher net selling prices and manufacturing efficiencies stemming from our back to basics initiatives.

The positive impact of these factors more than offset inflationary pressure on raw materials and other manufacturing costs.

And the mix impact from the timing of fleece sales compared to the prior year.

Relative to 2019, we saw a strong improvement in adjusted gross margin in the quarter up 500 basis points.

The increase was due to higher net selling prices favorable product mix and back to basics efficiencies, which more than offset higher raw material and manufacturing costs.

Fourth quarter SG&A expenses came in at 80 million $9 million above the fourth quarter of last year, due mainly to higher volume driven distribution expenses and higher variable compensation.

As a percentage of sales SG&A expenses were 10, 3%, which was slightly better than last year.

Compared to the fourth quarter of 2019, SG&A expenses as a percentage of sales improved by 130 basis points.

Strong sales and gross margin performance together with our continued focus on SG&A translated into operating income in the quarter of $177 million or 22, 6% of sales a significant increase from $79 million or 11, 4% of sales last year.

The increase in operating margin included the net benefit of a 32 million impairment reversal related to our hosiery cash generating unit for which we had recorded an impairment charge last year, and which now has been reversed to the full extent possible given the significantly improved economic environment and outlook for this category.

On an adjusted basis, which excludes this benefit operating income of $160 million was up $55 million over last year and adjusted operating margin of 24% in the quarter was up 510 basis points from 15, 3% in 2020.

Consequently, we generated record net earnings of 174 million and EPS of <unk> 89 per diluted share in the quarter up from net earnings of $67 million and 34 in 2020.

Adjusted net earnings and adjusted EPS in the quarter totaled $149 million 76.

For $90 million and <unk> 45 last year.

With another record quarter. This year, we also set a new full year record with EPS of $3 <unk> per diluted share and adjusted EPS of $2 72 per share up 64% over 2019.

Moving on to free cash flow of $116 million, we generated in the fourth quarter brought our full year free cash flow to $594 million also a record level and up from $358 million last year the.

The increase reflects strong earnings improved working capital management, and the timing of insurance collections related to the 2020 hurricanes, partly offset by higher capital expenditures.

At year end, our net debt position stood at $530 million down from $577 million at the end of 2020, and our leverage ratio was <unk> seven times adjusted EBITDA below our target range of one to two times.

During 2021, we were pleased to be able to reinstate dividend payments and share repurchases and in aggregate, we returned more than $335 million of capital to shareholders during the year.

This morning, we were also pleased to announce a 10% increase in our quarterly dividend.

And with our current share repurchase program now almost complete our debt leverage below our target range and strong confidence in our ability to generate free cash flow. Today. We also announced that we are increasing our share repurchase plan from 5% to 10% of our float.

So overall, we accomplished a great deal in 2021.

But more importantly, as we look back to the launch of our back to basic strategy, we delivered what we envision from this plan.

We simplified and focused our business, allowing us to deliver adjusted operating margin expansion of close to 500 basis points.

And our Rona, which is return on net assets improved by more than 800 basis points. During the 2018 to 'twenty one period.

It also put us in a position to continue to expand our capacity in Central America and the Caribbean.

And resume our expansion plans in Bangladesh, where we are now rapidly moving forward with the construction of the first of two large scale textile and sewing facilities.

In addition, our clear focus allowed us to push forward with reinforcing our vertically integrated supply chain model through broadening our existing yarn capabilities with the acquisition of frontier yarns in December .

We're very pleased with this acquisition, which is now, allowing us to further internalized yarn production and support our textile expansion plans in Central America and the Caribbean.

So today, thanks to the back to basics, we stand at a less complex more focused and competitively advantage organization.

<unk> than we have ever been and well positioned for sustainable growth.

This leads me to the last area I'd like to cover in our opening remarks.

During the fourth quarter, we completed a comprehensive strategic planning process to define the underlying initiatives that will support our next phase of growth under what we call the gilden sustainable growth strategy.

<unk> back to basics will always remain in our core under the <unk> sustainable growth strategy.

Our efforts now turn to building on our strong foundation to drive organic top and bottom line growth through three key pillars capacity expansion innovation and ESG.

Under this revised strategy, we believe that by leveraging our competitive advantage as a low cost vertically integrated manufacturer and executing on projected capacity expansion plans delivering superior quality value driven innovative products to our customers and through our leading ESG practices, we can drive strong organic revenue.

Growth profitability and effective assay utilization to deliver compelling shareholder value creation.

To this end, we announced in our press release today that under the gilden sustainable growth strategy our outlook over the next three years based on everything we're seeing today and assuming a continued global recovery reflects net sales growth at a compound annual growth rate in the 7% to 10% range, while maintaining operating margins in the <unk>.

10% to 20% range.

Further to support our long term growth and vertical integration, we're expecting investments in capital expenditures as a percentage of sales to be in the range of 6% to 8% over this period.

Finally at the same time as we're investing in our business. We're also planning to continue to return capital to shareholders through dividend growth and through continued share repurchases in line with our 1% to two times leverage framework and valuation considerations.

So overall, our complete plan to grow our business and to deliver strong shareholder value and ESG performance, which we plan to provide more detail on at our virtual Investor Day now scheduled for March 29.

So let me close here with how I started my remarks.

Last year, when we reported our year end results, we expressed our confidence that we were entering the new year as a fundamentally stronger company.

Today, we reiterate that sentiment with even greater conviction.

And with that I will now turn it back over to utility.

Thank you rod before moving to the Q&A session.

Session I ask that you limit the number of questions to two and of course, we'll circle back for a second round of questions if time permits.

I'll now turn the call over back to the operator to start the question and answer session. Michelle go ahead.

As a reminder to ask a question. Please press Star then one if your question has been answered and you'd like to remove yourself from the queue.

Okay.

First question comes from colleges with Citi. Your line is open.

Hey, Thanks, guys.

Curious on the 7% to 10% sales CAGR over the next three years, how much of that do you think will be sort of consistent growth in that range versus maybe more lumpy based on the way and the additional capacity comes in.

And also would love to know how much of that seven to 10 do you think of as being unit increases versus <unk>.

Pricing and then second if you could just talk about the pricing environment in activewear, just generally and how you look at your price gaps versus the competition and the rest of the market right now.

Okay. Paul Thanks for the question. So if you look at the CAGR of the 7% to 10% over the next three years.

As we look year on year I think we see good growth rate as we go through through each of the years, we have capacity coming on in Central America, effectively which will support this year and next year, we have the capacity coming on in Bangladesh, which we're working to bring online.

Basically at the end of this year beginning of next year, which will support 24. So we have a good cadence of capacity rolling out to support I would say good growth as we move through the years of.

This year, we will see I would say strong growth overall, because we will have volume growth and to a certain extent, we have a bit of price coming through but I would say our whole plan is to expand our capacity and effectively be able to use that in the marketplace in a market, where we do see strong demand for our products over there.

Next number of years, if you do look at the breakdown between unit volume and price really is volume that's driving the plan over the three years. That's what we're really focused on and I think you know that effectively competitively. We think that if you look at the way we run our business model. We really are focused on volume, we're really focused on <unk>.

<unk>.

Versus price and if you look at overall, our activewear business is very very strong over this period, we're seeing across all of the different areas that we sell in the marketplace.

If you look at the principal side, you look on the retail side really in all areas.

Activewear growth is very very strong through the forecast period.

Regarding the pricing in the market.

Two things I think a relatively important one.

We did not raise price to cover his total inflation, because we're leveraging our low cost manufacturing sites, which has been.

The backbone to our success is making sure that we're leveraging our cost structure. So the price that we did take was really.

Function of reducing the amount of promotional spending that we do so we have quite a lot of typically promotional spending and Paul.

Incorporated in our pricing strategy, so by reducing that Thats, what really is allowing us to get more price offsets. We did take some some price increases, but the bulk of all the price. We're taking in 2022 was a reducing promotional spending.

We continue to widen the gap versus us versus the competition I think theres, a big bigger gap.

Where our products are being sold today and Thats what were some portion of our unit volume and leveraging our low cost manufacturing.

And the bulk of our core T shirts are just north of $2. Even after all of the inflation. So when you look at where we're competitively priced we think that.

We're poised to continue to take significant market share and that's why we're so bullish on the next three years.

Great. Thank you good luck guys.

Thank you Paul.

Our next question comes from Vishal for that with National Bank. Your line is open.

Hi, Thanks for taking my question I'm wondering if you could provide us with insights on trends quarter to date, and maybe the impact of corn and how that's led into the restocking situation for the dealers.

Okay, well, let me just first of all clarify the restocking because thats a little bit of a misnomer because.

We did have a little bit of restocking, but the truth is is that none of that inventory is actually in our distributors' warehouses, because when we look at the inventory in the channels, including.

Once we bill it it's in the channel as far as we're concerned.

Today, the lead times to get product into the channel.

Has taken a lot longer because of.

Great disruption and labor, which strengthen our customers so.

Our actual inventory in the four walls of our distributors is probably lower on a year over year basis, but the actual channel has a little bit more inventory.

Supporting.

Coming to them basically because product is selling relatively snug.

POS is very strong I mean, so those two combinations basically an artist shows are selling as fast as they receive the product.

Okay, and that quarter quarter to date trends and the impact of Ami corn, maybe the quarter to date trends, yes. The trends are look our remaining pretty strong.

We're going to have on this one.

It's probably made somewhat of a little besides effected more to be honest with you.

Our manufacturing.

We have a lot of people out.

In the U S and Central America, but I think that's behind US right now it was probably about a month in January just after Christmas.

There was somewhat away, but I would say in <unk>.

Where we stand today.

Pretty much behind us except for international which is still <unk>.

<unk> North America.

Okay.

In the past.

There was thoughts on this online market and how they shop online.

Online markets, which grew substantially during COVID-19 is that didn't fade away substantially it may suggest the market size expansion. Just wondering if you could give us some updates on the online market and what youre seeing out there.

We're looking at what we said in our last call is that we believe that the market has grown substantially since 2019.

We continue to believe that.

There is.

Our Pos is very strong and so that that whole online aspects of the market continues to itself.

Really what we're starting to see now is the benefit of social gatherings in our basic product coming back to market. So.

As we see the Pos on a patient starting to really grow the combination of these two things has really put us in a good position to significantly increase our Pos as we move into 2022 and 24.

Sure.

Thank you.

Okay.

Our next question comes from Mark Petrie with CIBC. Your line is open.

Hey, good morning, actually Glenn I, just wanted to follow up on your comment with regards to promotions and pricing.

For this year and going forward.

We've seen some industries that are sort of exiting the pandemic with higher gross margins as a result of strong demand and and structural or semi permanent shifts away from promotional spending I'm. Just curious if you think that's something that that will sort of structurally remain in the industry for the foreseeable future.

Or in your business, maybe not the industry, but your business.

Look at it as long as business remains robust, obviously youre going to yield the best return you can for your shareholders, which is what we're doing.

A lot of the.

Promotional.

Lack of promotional spending is really offsetting the higher cost of raw materials. So.

And that's how we set our pricing so we wouldn't have to really adjust our pricing in the future. So we have.

Net good price list and then it was based on.

What we thought would be certain price of cotton and then as cotton moves up basically we've reduced the amount of promotional spending and then it.

And wants to move down again.

Or just increase the amount of promotional spending if needed now thats also a function of depending on how strong demand is in the market.

Or do we get margin expansion, but I think we're in a very good position.

To adapt to raw material, because that's really the only thing that fluctuates on our cost of goods sold.

Manufacturing costs are going down this year I mean, we're leveraging our back to basics, what we're producing more volume in the four walls.

All the things that we've done to simplify our business is actually improving our cost structure, which is offsetting.

A lot of the labor cost inflationary areas, but raw materials. The one that we really don't control as you can see what raw material selling yet so I think we're in a good position. So if raw materials come down, we'll just promote a little bit more than that.

Where it is now we're very happy with our pricing strategy.

Okay. Thanks, and just a follow up I guess on that.

Think of this shift in approach with regards to sort of navigating the volatility or ups and downs in cotton pricing.

Potentially reduces the risk of sort of revaluation.

And volatility in distributor ordering patterns as cotton moves up and down.

Correct.

Why wouldnt, we set our prices we set it up.

At a range, where we have that flexibility really so the answer is that we don't foresee any.

NAV valuations come.

Comes back down to normalized levels.

And just to add to that Mark I would say is we've given our outlook and we've reflected what we're thinking.

That does reflect obviously that over three years it could be a change ultimately in underlying commodity prices, but we've reflected that overall in our in our view given the way, we're running the business and the things that <unk> set.

Understood and I just wanted to sneak in one more.

Just first regarding the EBIT margin range of 18% to 20% what sort of pushes you up or down in that range in any given period is it is it sort of sales leverage over time, and we think that margin can increase over the three year period or or do you expect it to be pretty stable and it's more just about short term factors like <unk>.

Mix of raw material cost that could affect you in any given year.

I would say, it's mix and raw material costs that could affect us over in the European and the timing of those events over time, yes.

Things that will move within the quarters effectively I mean, a good example of that is if you look it at.

That the comp that we have this quarter for example, coming into Q1 versus last year, we had.

The big benefit from a carton.

Assistance payment that we received $18 million, that's 250 basis points. So you have things moving through your numbers as you go quarter to quarter, Mark, but I think given the bottle that we're running we've been very clear about our ability to effectively run in this range and so I would say we feel good about delivering on that over.

The three consistently over the three year period.

Understood I appreciate it and all the best.

Our next question comes from Luke Hannan with Canaccord Genuity. Your line is open.

Yes. Thanks, Good morning, Glen I, just I had one for you under the back to basics program. You guys have made a lot of progress under that clearly it's being reflected in your financial results now, but how do you ensure that you avoid becoming overly complex from a SKU perspective going forward, while also making sure that youre and if any of them enough.

To meet your customers' needs.

Well, that's that's the secret sauce that I think is.

We've rationalized our brands. So we have three brands going forward, which we think we can cover the market with.

And that's down from five.

So that's a good example of SKU rationalization and focused right. So.

And that.

It allows us to run with less working capital to support better service and everything else to go with it so.

I think we havent dialed in.

When you have less Skus, you can provide better quality and what's what are.

Key to success has been as all of us to improve our quality and which we're doing right now we have a lot of new innovation.

Thats happening right now to.

Improve our products principally of them.

Softness I mean whenever the boutiques. So we're focused and that's the cable package basically youre.

Your focus on what you have to do to make it the best.

And not to be all over the place so we're really.

Continuing to I think leverage our strategy.

We're going to take time of what we do in <unk>.

We're very comfortable in our unit growth projections.

Our outlook over the next few years.

Okay. Thanks, and for my follow up we did see inventory tick up.

Sequentially.

And year over year, and I'm curious to know how much of that was higher volumes versus higher cost and then what are your expectations near term as far as building inventory I know the distributors are choosing inventory right now so I'm just curious to know what's going to that's going to look like in terms of your own books.

Yes, if you look at inventory on it.

I mean, there was a bit of a build and you would expect that right. If you look at what's going on from a from a cost perspective overall, I mean, a bit of unit volume, but we're running tight on inventory.

As we as we run through the various quarters.

As we get through this year as we bring on capacity.

We effectively.

Bring on yarn production really as it comes up we will have the opportunity to build our inventories a bit but I think as you consume inventories are staying tight as we run through.

<unk> thousand 22.

Two into 'twenty, three and Thats inventories everywhere, maybe is the way to think about it.

Okay I appreciate the color. Thank you very much.

Our next question comes from Stephen Mccloy with BMO capital markets. Your line is open.

Thank you and good morning, guys.

Just wondering if you could give a little bit of color on what youre seeing in the activewear segment as it relates to some of the end markets.

Particularly some of the southern markets that sort of lagged like corporate travel sounds like that wondering if you can give an update on how those markets have trended in Q4 and on a year to date basis.

Well I think that they are starting to pick up Permian.

Other than the wave of omicron.

Happen towards the end of last year, beginning of the year I mean things were somewhat picking up I mean, there was a lot of the trade shows canceled in early January that would have probably affected business, but overall, we're very.

Bullish on the outlook and then we think this is all behind us right now.

For us I mean, that's really the key because.

We've seen a large.

Growth in the market and the market has grown and the pieces have grown and are still doing very well and then.

Once we get past that promotional.

Corporate promotional tools.

Tourism and all the other things that go with it and social gatherings, which have come back but not back fully.

That's going to be a big part of our success in one of the other areas that we've seen.

So significant growth as our fleece category, which is.

Lifestyle change of people wearing more sweatshirts and Thats also been a big driver.

Overall revenues.

During 2021 so.

We're feeling very comfortable with.

Our outlook Activewear is growing and it's not just in the.

<unk> market obviously.

Seeing a lot of near shoring coming back.

People servicing retailers.

Our global lifestyle customers are.

Looking to grow with us.

So we're poised to think in every one of the.

Areas that we really.

Service, except for international which is probably the only one that's a little bit at this point disappointing, but that's I think we will take care of itself once.

And the one time become sort of.

Beige so.

Everything is running on full cylinders.

That's great. Thank you.

And then I just wanted to pick up a little bit on the innovation comment.

Could you sort of cited it as a key pillar of of your sustainable growth strategy.

Can you just talk a little bit about sort of what that means in terms of the product that youre that youre offering considering.

You have also embarked have embarked on a strategy to reduce the SKU count.

Right. So our innovation is going to be is that for every product that we sell were going to sell the best products in the market by definition I think that's the way to look at it. So if you look at the competitive product in the market.

We're going to make sure that our products are better.

The quality and features than anything else being sold so we have different categories. You know, we have our basics fashion et cetera. So our fleece. So we're going to continue to reinvest in our low cost manufacturing basically to support what we think is innovation and also innovation is also involved in our manufacturing processes.

It will allow us to continue reducing costs because that's also been a key pillar in terms of what we're doing in new ways and that's also embedded in our ESG strategy in terms of consumption obviously.

Consume less water will consume less energy. So thats also part of our innovation strategy. Some innovation is not just about product, but it's also about our whole footprint of our manufacturing.

Okay. That's that's very helpful. Okay. Thanks. Thank you look forward to the Investor day.

Our next question comes from Jay sole with UBS. Your line is open.

Great. Thank you so much I wanted to ask about share buybacks bought.

Bought back a lot of stock in <unk>. It looks like you bought back quite a bit of stock already here in Q1.

Raised the amount of shares you could buy back what's the plan going forward for the.

The rest of this quarter and this year.

Yes, so Jay we talked about the strong.

Free cash flow generation that we've had as a business and the strong balance sheet that we have and we've been very clear that when we look at our balance sheet. We do want to run in that one to two times leverage range. So effectively as we go forward, we will look at managing our share buyback program.

In line with our framework as we have done for many many years now really when you when you look at it. So I think as you as you go forward. We had we saw the opportunity our leverage is low as we as we finished the year at seven times below the low end of that range and we did make good progress in the program that we put in place we started.

Mid year last year, and so now were really upping that program and Thats, what I would say you can consider as our <unk>.

Program forward for 2022.

Again, we expect to execute on that program, given where our balance sheet is and what our free cash flow generation is and then as we go forward into into 'twenty three 'twenty four well, obviously continue to manage that in line with with what we see but given our free cash flow generation the way we.

Feel like we're in a very good position to invest in organic growth, which is the driver of the business, which is really everything that we do.

While at the same time, though keeping a strong eye on on return of capital. So I think we feel good about all of them.

Got it okay. Thank you and if I can ask one more can you just elaborate a little bit about how.

Port congestion.

Impacting the business obviously.

Probably doesn't use a whole lot of.

The west coast ports for delivering goods, but can you just explain that.

That dynamic can you elaborate on what youre seeing there and if it's been an issue at all.

Well, we have a small portion of our business, obviously that but.

That comes from Asia, but we don't necessarily use west West coast ports.

But freight costs have gone up and we've seen quite a bit of inflation.

Hopefully when we do bring in from from Asia.

But the bulk of our production is really almost domesticated which is we arent coming from United States.

Gross Central American comes back.

We haven't seen any real.

Issues, except for lack of truckers things like that which is basically.

Trucking in the United States is very tight.

You mentioned earlier that.

Our lead time to our customers I mean, although our regulatory challenge has gone up a bit but that inventories in fact inventory distributors four walls has actually gone down so.

That's a good indication of.

The types of.

Freight issues, let's say for example that are happening right now.

The market still remains very tight in the United States, which is also the other factor so but overall I think look at where we're managing our costs I think we're in relatively good shape, we don't rely on.

Outside factors, we're vertically integrated obviously, and we're able to manage our supply chain.

Our next question comes from Brian Morrison with TD Securities. Your line is open.

Thanks, very much good morning, Glenn you mentioned that the average price for sure. It was now $2 I just want to clarify wariness the price level relative to the pandemic our pre pandemic, we significantly above are we in line, whereas where do we compare.

Well our pricing on our like our basic pricing, let's say for example, <unk> have gone from their R&D.

The high single dollars lets see the $1.

75 or something.

They are just north of $2 a day, so pricing has gone up but hasn't gone up significantly really if you look at the end user price.

That could be absorbed our price increases can be absorbed quite easily in the market.

And fashion T shirts have moved up a little bit too on our side, but.

Our competitors have taken a lot.

More price than we have in our gap relative to us and the competition has grown substantially relative to the premium diamond levels. So for US I think we're.

Pretty good position leveraging our low cost manufacturing.

We could take more price if we wanted to I would say, but we're going to do is we're going to continue to focus on unit volume growth.

And bringing on.

We have the capacity.

As we leverage the acquisition of frontier and we move into the back half of this year, we're going to have a substantial increase in our volumes.

Really as we move into 'twenty three so we're pretty excited about our positioning.

Okay, and then changing gears when I look at your 7% to 10% growth outlook has just got phase one of Bangladesh and the equipment transfer to Honduras are they both operating at 100%.

And do you see any outsized growth from any of your key verticals through this forecast whether it be private label or fashion basics.

The forecast I think we have right now is <unk>.

Based on the capacity that we communicated to you before.

Which as you know.

Bangladesh, one and the Repurposing of all of the equipment. We have in Central America that we said were bring on approximately $1 billion. In revenue. This is what we stated in previous calls so that capacity is being in place the capacity that's in Central America.

As in place today.

<unk>.

Bangladesh is going to be complete sometime towards the end of this year and we'll start at the beginning of Q1 next year.

So thats all in place and I think in going in.

We refer to as our Capex, which is the 6% to 8% that Capex is really going to support the next big incremental approach with some of that capex will be bringing on obviously Bangladesh.

But it will be supporting really the next wave of.

Our capacity expansion at the same time, allowing us to continue driving our vertically integration not just in.

In North America, but as well as in Bangladesh.

Our goal right now is to continue I mean, we've got line of sight on the next three years of the question is what happens after that and Thats. The bulk of our spend is basically going to be supporting additional capacity expansion and vertical integration.

Okay can I squeeze one more into just in terms of yarn supply since the acquisition of frontier you did have some of the industry in general had some notable labor shortages and impacting production across the board.

Are you still seeing this since the acquisition of frontier for the industry and if so is it leading to market share gains.

Well I think that the.

The thing is is that there is capacity is tight ratio there is.

And Thats just not in North America, that's globally, I mean, I think that the.

Business is tied to during the pandemic a lot of facilities closed down not just in North America, but I think globally.

The global tightness of raw material is there for sure.

We acquired frontier, where just phasing out of our sales.

They had.

Which will happen sometime by Q2, and then as we enter into Q3 Q4, we'll have all of that volume available to us to continue wrapping up our capacity basically to support incremental revenues in the back half of the year and as we move into.

'twenty three so things are still tight for us, but we are producing more today than we did this time last year, obviously, because our plants are producing bedroom.

But we're in a position I think that we will have to see continued growth and optimizing our manufacturing and we're also looking at continuing increasing our capacity as we speak so all of that combined we feel very comfortable with the availability of our yard and I think of our growth as we move into the.

Back half of this year into 2003.

Thanks very much.

Our next question comes from <unk> Khan with RBC capital markets. Your line is open.

Alright, great. Thanks, and good morning, just I guess a bit of a high level question on the industry outlook I know you've addressed the time in the past at somewhere between kind of call. It four 5% to $6 billion and then with the additional demand that we've seen through the pandemic and I think you called out that work from home demand is still there and do you have an updated view on what the Tam looks like.

Today and.

Presumably it's gone significantly larger given topline growth rate that you're targeting is above kind of a stroke of levels. Just wanted some color on that.

Well, what we said.

Close enough.

We thought that the market size of about $6 5 billion and we think that that market has grown substantially since then.

And we've done a lot of research and Thats something that were going to call out at our Investor day is really to bring more insight into the size of the market.

Done a lot of market research.

Which confirm that the market has grown substantially so.

We'll discuss that on our in our Investor day.

Okay, Great and then as we look I guess in terms of the kind of the fashion basics side and historically I think the number you quoted in the past was something like 25% market share and I guess within the margin guide that you're providing over the next two hours on the topline and what role is fashion basics kind of play in both the top line and on the margin side and maybe any goals you have.

For market share capture on that side of the business.

Well look at it there's two fundamental huge areas of growth. Obviously, one is fashion and hazardous fleece, which does our fleece business is growing substantially as we speak.

The capacity that we're bringing on in Bangladesh, which is too large state of the art.

The facilities will be geared and dedicated to 100%, making fashion T shirt. So we have a huge wave of capacity coming on.

We have a low side of the cost curve basically so that's our commitment to grow our fashion basics and then as we look at the growth of our fleet production.

Reorienting our existing.

This year in Central America to basically take on the demand and capabilities supporting incremental fleets. So I think we're in a pretty good position to capture the two large drivers of what we think is industry demand.

Our basics are typical basics and then they will grow at a slower clip.

But we've got.

Quite a large market share there so we don't really see.

A big growth in the patient category, it's really going to be a function of that.

Fashion basics in our fleece that will drive the top line growth over the next few years.

Okay, and then I guess just on the inventory among the distributors that you noted in the press release being below pre pandemic levels.

Do you foresee a bit more of a restocking event or sort of is this just in time type of replenishment something you expect will continue or should we expect over the course of 'twenty two.

We think thats definitely further.

Short Vasu fiduciary I mean inventories are going to maintain.

So that's that's a fact I mean, what I've said is that although we've got more inventory what we call the channel, but there are a lot of inventories on actually physically in our distributors at four walls right now. So therefore four wall inventory is probably half of what it was in 19.

So inventory is relatively tight.

There will be some probably ultimately catch up to just because we think that any number one the market is growing.

And inventories are relatively low.

Which was effective service a little bit but the point is is that it's almost a good problem, but we will definitely be a small cash up towards the end of the year probably.

Great. Thank you.

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

Hi, Good morning. This is Peter Mcgoldrick on for Jim Thanks for taking my question.

I was curious on the frontier yarns acquisition.

Could you help us better understand the income statement influence across line items, and how that contributes to the new multiyear outlook.

So if you look at frontier yarn.

And the acquisition as Glenn said, we're very pleased about it really drives our capability on a go forward basis from a yarn perspective.

Effectively it just gets rolled into our into our asset base.

Manufacturing.

Assets that are effectively show on our balance sheet.

We pick up some inventory actually there was an inventory question earlier in the call and Youll see some of the increases reflected.

Related sorry, two to frontier and then as we go forward effectively we still have some third party sales.

It will come from frontier through the first half of the year, but generally that will be reflected in our cost of goods is not going to go into our into our revenue line. So I would say frontier well you really have to think about from a frontier perspective visits.

<unk> to provide us with the yarn to provide us with the ability to support our textile facilities and ultimately where you.

We're taking frontier to drive volume and also we are improving frontier to reduce cost as we go forward. So that we can drive that volume, but also maintain the margin profile that we want so.

And also to support the growth like our fleece category for example, a new technology that we use that they have a large footprint in that which is <unk>, which makes low pill multiple fleets, which is not as readily available. So we're expanding that.

We're doing what we can and it's also going to help us integrate our others other facilities as well because.

Now we operate nine large textile plants, we consume almost half of the domestic cards in the United States.

And allow us to basically.

Leverage our existing facilities by streamlining and further leveraging our back to basics. So we had three skus are in the plant, where we've probably got one SKU because we'll just move some of the Skus that are planned. So overall and also theres room for a little bit of investments in some of the things that we're doing in terms of automation.

But overall look at their plants will equal yield.

Very good returns to us it will help us to grow our top line basically and supports everything that we need to.

Growing and hit our objectives over the next few years.

Okay. Thank you.

And then just switching to more near term oriented I was curious on the gross margin outlook within the context of the cost increases rolling through on price positioning.

How this progresses directionally and then.

How does that fit in within the new multiyear outlook for 18% to 20% given your achievement of 30% gross margin in 2021.

Yes, I mean, if you look at the gross.

Gross margin as we go forward as we look at where we were and what the various impacts are I mean, we're really running the business on as our operating margin rate I think that's maybe the first place to start and we've been very clear about what we can deliver with.

With respect to the 18% to 20 I think when you look at that 18 to 20 then.

Look at gross margin and you look at SG&A, our SG&A performance has been very good.

And you can see that now we're running down the sort of 10 10, 5% levels and then you obviously you back up from there to what we expect from a gross margin perspective. So.

There will be some pressure on gross margin as we as we move through the year. If we look at effectively what's happening with raw materials, what's happening with inflation. If you look at the amount of price that we.

Taking a look in 2022 for example, the amount of price that is unfolding for us probably in the sort of mid to single digit range.

High single digit range.

And we are seeing inflation and.

Cotton prices coming through that effectively.

Reasonably significant.

No.

I would say you would expect some gross margin pressure as we move forward from that high level that we finished it in.

2021.

And so you will see some pressure as we move through the year, but then that'll be offset with some SG&A leverage and again I think we feel very confident about our ability to deliver margins inside the 18% to 20% range. We've given you.

Thank you.

Our next question comes from participate there with Scotiabank. Your line is open.

Well, thank you and good morning, most of my questions have been asked.

But I'm just wondering if you could talk a little bit about what youre seeing in retail in Q4, and maybe going forward.

Well retail is.

Continuing to be strong.

There has been a little bit of.

Let's say slowdown from stimulus checks I mean, they would probably be the only thing I would say is in retail where there is very robust we're spending money.

But generally saw walnuts.

Earnings report I mean, there has been very well and so overall retailers continuing to.

To do well.

Okay, and then just on the softness.

Internationally.

I understand that Omnicom had an impact there just curious what before the onset of omnicom were starting to see any slight improvements in that market.

Pretty much where it had been in Q2 in Q2.

It was growing at a rate of double digits basically every year up until Covid right. So, let's just start there and then once COVID-19 hit that basically was similar to the U S. And then it really never recovered so it's down 25.

Percent, depending on which market it is relative to <unk>.

19 level still.

Probably China being a little bit worse.

More structure.

Lockdowns in Europe .

But still both of them.

Yes, if you look at the numbers Patricia.

As Glenn said it I mean, it has been down pretty significantly I was a little bit of improvement in Q3, but not much. It was still down pretty heavily and effectively then when the Q4 came along in the omicron, we saw sort of a reversion back to where it had been so it really there has been a big diverse very divergent I would say between what we're seeing in the U.

And we're seeing internationally the U S has been.

Obviously recovered progressively strong getting stronger and international really we just haven't seen that uptick yet.

So just looking at your three year plan have you assumed at some time in that three year period International gets back to where it was.

Kind of a permanent permanent lower base.

No I think that's going to come back, but look it you got to remember international is still a low base to start with right. So it's not as relevant.

So we think it's going to come back in the fundamentals of our core business in international markets is really revolves around travel tourism.

Because this is pretty much what drives a lot of those markets.

So when that happens I think the markets, we're 100% bounce back.

We think shorter term in the U S. Right now I think we have obviously we're very.

Both the outlook for.

The North American market, because it's not only.

What we're relying on the consumer spending and consumer demand side of it but it's also the onshoring.

I'm trying to get closer to the market and just in time et cetera et cetera. So.

Which is related around our retail customers and as well as our G&P customers. So I think we're in relatively good shape.

Europe will come back.

Eventually as.

On the sides.

Excellent. Thank you for that.

Yes.

Our next question comes from Chris Li with Chardan. Your line is open.

Hi, good morning, everyone.

I was wondering if you can share with us roughly what percentage of your activewear sales, our fleece and fashion basics and what does that mean in terms of your market share in the expanded Tam.

I don't think we really give that information out Chris, but I would say that look at fleece and fashion basics too.

The fastest growing categories.

Obviously basics are we have we've always had a large share basis. So it's not growing at the.

At the same clip because I think the one time moving 5% share of the basic category. So.

But our fashion basic and our fleets are both big growth drivers.

At <unk>, there's not a lot of competition right I mean, you need to be vertically integrated manufacturer and probably have a pretty good capital structure to be able to support for lease.

So theres really nobody in our industry that really has.

The capabilities of substantially growing it like we are so I think we're in a good position we're capitalizing on.

Large portion of the market growth.

And.

We see a big big growth in front of us.

Okay. That's helpful. And then my other questions in the past you've mentioned that if the distributor inventory, which will recover back to pre pandemic level that would translate to roughly 150 to 200 million of incremental revenue is that still a fair assessment.

That will happen I think eventually over time I mean for two reasons one is that.

Inventories are so low today that we have to continue to replenish and bring product back into their channels.

The second thing is I think the market's growing so you need more units to support the growth of the market. So for both of those reasons I would say, 100% that inventory eventually it will come back into the market.

The question is when I mean that.

I don't think it will be fully happened in this year, maybe next year that could be something that could happen.

Okay, great. Thanks, and good luck thank.

Thank you.

There are no further questions I'd like to turn the call back over to Sophie <unk> for closing remarks.

Michelle.

Once again, we would like to thank you for your participation today and we look forward to speaking to you. Soon I would also like to remind you that as Rod mentioned, we will be holding our virtual investor day on Tuesday March 29.

Days will be issuing a press release to provide you with the details for the registration of the event. So once again, thank you and have a wonderful day. Thank you.

This concludes the program you may now disconnect.

[music].

Okay.

[music].

Ladies and gentlemen, thank you for standing by and welcome to the Q4 2021 Delta Activewear earnings Conference call.

At this time all participants are in a listen only mode. After the Speakers' opening remarks, there'll be a question and answer session.

Good question during the session you will need to press Star then one on your touch some telephone.

If anyone should require assistance during the conference. Please press star zero to reach an operator.

Please be advised that today's conference is being recorded.

I'd like to hand, the call. It was it sounds the Algeria, Vice President Investor Relations. Please go ahead.

Thank you Michele.

Good morning, everyone and thank you for joining US earlier. This morning, we issued a press release announcing our earnings results for the fourth quarter and full year of 2021, the company's management's discussion and analysis and consolidated financial statements are expected to be filed with the Canadian securities and regulatory authorities and the U S Securities.

Commission Tomorrow, the 24th of February and will be available on our website.

Joining me on the call. This morning are Glenn <unk>, President and Chief Executive Officer of Gilda and Rod Harries, Our executive Vice President and Chief financial and administrative officer in a moment, Rob will take you through the results for the quarter and a Q&A session will follow afterwards.

I would like to remind you that certain statements included in this conference call may.

Constitute forward looking statements within the meaning of the U S. Private Securities Litigation Reform Act of 1995, such.

We refer you to the company's filings with the U S Securities and Exchange Commission and Canadian Securities regulatory authorities that may affect the company's future results and now I will.

Turn it over to you right.

Thank you Sophie.

Good morning, and thanks for joining us today.

This time last year, when we reported our fourth quarter results. We express confidence that we were entering 2021 is a fundamentally stronger company.

We now believe our results and accomplishments for this year very strong strong evidence of that.

We finished the year with record top and bottom line performance in the fourth quarter, leading to record sales earnings and free cash flow for the full year.

Support our customers.

By delivering on this objective we were able to capitalize on improving demand during 2021 at margin levels much stronger than pre pandemic levels.

We also delivered on our capital deployment priorities and as you saw from today's earnings announcement, we are now moving forward with the Golden sustainable growth strategy with well defined initiatives to enable us to deliver strong performance over the next three years, which I will cover after I take you through the details of the quarter.

So let's get started.

During the fourth quarter, we generated record net sales of $784 million up 14% from last year with activewear sales of $627 million up, 17% and hosiery and underwear sales of $157 million up 3%.

The overall sales increase was primarily due to higher sales volumes and net selling prices inactive were partly offset by product mix due to the timing of fleece sales compared to last year.

Higher activewear sales volumes were driven primarily by higher year over year point of sales and to a lesser extent by the impact of some distributor restocking in the North American and principal channel, although I would emphasize that inventory levels in the channel continue to remain well below 2019 pre pandemic levels.

Volume growth in activewear reflect the continuing positive trend of higher Pos in the North American and principles channel higher sales of activewear through retail channels combined with the positive impact of the non recurrence of distributor inventory destocking that occurred in the fourth quarter of 2019.

While we continue to see a lag in demand versus pre pandemic levels with an international sales given the impact of the omicron variant and lockdowns in various regions.

Moving on to our gross margin where performance remained strong we generated gross margin of 29, 2% in the quarter up 670 basis points.

On an adjusted basis gross margin of 36% was up 480 basis points compared to last year.

The strong improvement over 2020 was driven by higher net selling prices and manufacturing efficiencies stemming from our back to basics initiatives.

Positive impact of these factors more than offset inflationary pressure on raw materials and other manufacturing costs.

And the mix impact from the timing of fleece sales compared to the prior year.

Relative to 2019, we saw a strong improvement in adjusted gross margin in the quarter up 500 basis points.

The increase was due to higher net selling prices favorable product mix and back to basics efficiencies, which more than offset higher raw material and manufacturing costs.

Fourth quarter SG&A expenses came in at $89 million above the fourth quarter of last year, due mainly to higher volume driven distribution expenses and higher variable compensation as.

As a percentage of sales SG&A expenses were 10, 3%, which was slightly better than last year.

Compared to the fourth quarter of 2019, SG&A expenses as a percentage of sales improved by 130 basis points.

The increase in operating margin included the net benefit of a 32 million impairment reversal related to our hosiery cash generating unit for which we had recorded an impairment charge last year, and which now has been a reverse to the full extent possible given the significantly improved economic environment and outlook for this category.

Consequently, we generated record net earnings of 174 million and EPS of <unk> 89 per diluted share in the quarter up from net earnings of $67 million and 34 in 2020.

Adjusted net earnings and adjusted EPS in the quarter totaled $149 million and 76.

For 90 million and <unk> 45 last year.

With another record quarter. This year, we also set a new full year record with EPS of $3 <unk> per diluted share and adjusted EPS of $2 72 per share up 64% over 2019.

Moving on to free cash flow to $116 million, we generated in the fourth quarter brought our full year free cash flow to $594 million also a record level and up from $358 million last year the.

The increase reflects strong earnings improved working capital management, and the timing of insurance collections related to the 2020 hurricanes, partly offset by higher capital expenditures.

During 2021, we were pleased to be able to reinstate dividend payments and share repurchases and in aggregate, we returned more than $335 million of capital to shareholders during the year.

This morning, we were also pleased to announce a 10% increase in our quarterly dividend.

So overall, we accomplished a great deal in 2021.

But more importantly, as we look back to the launch of our back to basic strategy, we delivered what we envision from this plan.

We simplified and focused our business, allowing us to deliver adjusted operating margin expansion of close to 500 basis points.

And our Rona, which is return on net assets improved by more than 800 basis points. During the 2018 to 'twenty one period.

It also put us in a position to continue to expand our capacity in Central America and the Caribbean.

And resume our expansion plans in Bangladesh, where we are now rapidly moving forward with the construction of the first of two large scale textile and sewing facilities.

We're very pleased with this acquisition, which is now allowing us to further internalize the arm production and support our textile expansion plans in Central America and the Caribbean.

So today, thanks to back to basics, we stand at a less complex more focused and competitively advantage organization stronger than we have ever been and well positioned for sustainable growth.

This leads me to the last area I'd like to cover in our opening remarks.

While back to basics will always remain in our core under the <unk> sustainable growth strategy.

Our efforts now turn to building on our strong foundation to drive organic top and bottom line growth through three key pillars capacity expansion innovation and ESG.

Growth profitability and effective assay utilization to deliver compelling shareholder value creation.

To this end, we announced in our press release today that under the Guild and sustainable growth strategy our outlook over the next three years based on everything we're seeing today and assuming a continued global recovery reflects net sales growth at a compound annual growth rate in the 7% to 10% range, while maintaining operating margins in the 18.

To 20% range.

Further to support our long term growth and vertical integration, we are expecting investments in capital expenditures as a percentage of sales to be in the range of 6% to 8% over this period.

So let me close here with how I started my remarks.

Last year, when we reported our year end results, we expressed our confidence that we were entering the new year as a fundamentally stronger company.

Today, we reiterate that sentiment with even greater conviction.

And with that I will now turn it back over to you Sophie.

Thank you rod before moving to the Q&A.

And I ask that you limit the number of questions to queue and of course, we'll circle back for a second round of questions as time permits.

I'll now turn the call over back to the operator to start the question and answer session. Michelle go ahead.

As a reminder to ask a question. Please press Star then one if your question has been answered and you'd like to remove yourself from the queue press the pound key.

Our first question comes from colleges with Citi. Your line is open.

Hey, Thanks, guys.

On the 7% to 10% sales CAGR over the next three years, how much of that do you think will be sort of consistent growth in that range versus maybe more lumpy based on when the additional capacity comes in.

And also would love to know how much of that seven to 10 do you think of as being unit increases versus <unk>.

Pricing and then second if you could just talk about the pricing environment in activewear, just generally and how you look at your price gaps versus the competition and rest of the market right now.

Okay.

Okay. Paul Thanks for the question. So if you look at the CAGR of the 7% to 10% over the next three years.

Basically at the end of this year beginning of next year, which will support 24. So we have a good cadence of capacity rolling out to support I would say good growth as we move through the years of.

Sure.

<unk> price and if you look at overall, our activewear business is very very strong over this period, we're seeing across all of the different areas that we sell in the marketplace.

If you look at the principal side, if you look on the retail side really in all areas Act.

Activewear growth is very very strong through the forecast period.

Regarding the pricing in the market.

Two things I think a relatively important one.

<unk>.

We did not raise price to recover the total inflation, because we're leveraging our low cost manufacturing slots, which has been.

The backbone to our success is making sure that we're leveraging our cost structure. So the price that we did take was really.

Function of reducing the amount of promotional spending that we do so we have quite a lot of typically promotional spending.

Incorporated in our pricing strategies and by reducing that Thats, what really is allowing us to get more price offsets. We did take some some price increases, but the bulk of all the price. We're taking in 2022 was by reducing promotional spending.

We continue to widen the gap versus us versus the competition I think theres, a big bigger gap.

Where our products are being sold today and that's why we're so bullish on our unit volume and leveraging our low cost manufacturing and.

The bulk of our core T shirts are just north of $2. Even after all the inflation. So we are looking forward competitively price we think that.

We're poised to continue to take significant market share and Thats why were so bullish on the next three years.

Great. Thank you good luck guys. Thanks.

Before.

Our next question comes from Vishal <unk> with National Bank. Your line is open.

Hi, Thanks for taking my question wondering if you could provide us with insights on trends quarter to date, and maybe the impact of Ami corn and how that's led into the restocking situation for the dealers.

Okay, well, let me just first of all clarify the restocking because thats a little bit of a misnomer because.

We did have a little bit of restocking, but the truth is is that none of that inventory is actually in our distributors' warehouses, because when we look at the inventory in the channels, including.

Once we bill it it's in the channel as far as we're concerned.

And today, the lead times to get product into the channel.

<unk> has taken a lot longer because of.

Great disruption and labor of our strengths and our customers. So.

Our actual inventory in the four walls of our distributors is probably lower on a year over year basis, but the actual channel has a little bit more inventory.

Supporting.

Coming to them basically because product is selling relatively generic.

POS is very strong I mean, so those two combinations basically and our distributors are selling is positive received broader.

Okay and quarter quarter to date trends and the impact of army core maybe the core trends, yes, theres the trends look our remaining pretty strong.

Half omicron.

It's probably made somewhat of a little of a size effected more to be honest with you.

Our manufacturing.

A lot of people out.

In the U S and Central America, but I think that's behind US right now is probably about a month in January just after Christmas that they're somewhat away, but I would say and where.

Where we stand today.

It's pretty much now behind us except for international which is still lagging North American.

Okay.

In the past.

There was thoughts on this online market and how this if this online online markets, which grew substantially during COVID-19 is that didn't fade away substantially. It may suggest the market size expansion. Just wondering if you could give us some updates on the online market and what youre seeing out there.

We're looking at what we said in our last call is that we believe that the market has grown substantially since 2019.

We continue to believe that there.

There is.

Our Pos is very strong.

So that that will online aspects of the market continues to itself.

Really what we're signing to see now is the benefit of social gatherings in our basic product coming back to the market. So.

As we see the Pos even on our patient experiences.

Really grow.

Combination of these two things has really put us in a good position to significantly increase in our Pos as we move into 2022 and 2024.

Thank you.

Okay.

Our next question comes from Mark Petrie with CIBC. Your line is open.

Hey, good morning, Glenn I, just wanted to follow up on your comment with regards to promotions and pricing.

For this year and going forward.

Or in your business, maybe not the industry, but but your business.

I'll look at it as long as business remains robust, obviously youre going to yield the best return to <unk> shareholders, which is what we're doing.

A lot of the.

Promotional.

Lack of promotional spending is really offsetting the higher cost of raw materials. So.

And that's how we set our pricing so we wouldn't have to really adjust our pricing in the future. So we have.

Our net good price list and then.

Was based on.

What we thought would be a certain price of cotton and then as cognate moves up as we've reduced the amount of promotional spending and then it.

Must move down again.

We're just increased amount of promotional spending if needed now thats also a function of depending on how strong demand is in the market.

Or do we get margin expansion, but I think we're in a very good position.

To adapt to raw material, because that's really the only thing that fluctuates on our cost of goods sold.

Our manufacturing costs are going down this year I mean, we're leveraging our back to basics, what we're producing more volume in the four walls.

All of the things that we've done to simplify our business is actually improving our cost structure, which is offsetting.

A lot of the labor cost inflationary areas, but.

Raw materials, the one that we really don't control and you can see what raw material selling out. So I think we're in a good position. So if raw materials come down just promote a little bit more on and Thats, where it is now we're very happy with our present strategy.

Okay. Thanks, and just a follow up I guess on that do you think this shift in approach with regards to sort of navigating the volatility or ups and downs in cotton pricing.

Potentially reduces the risk of sort of revaluations.

And volatility in distributor ordering patterns as cotton moves up and down.

Correct them and that's why when we set our prices we said it.

At a range, where we have that flexibility really so the answer is that we don't foresee any.

These valuations cotton it comes back down to normalized levels.

And just to add to that Mark I would say is we've given our outlook and we've reflected what we are thinking that.

Understood and I just wanted to sneak in one more.

Just regarding the EBIT margin range of 18% to 20% what sort of pushes you up or down in that range in any given period is it is it sort of sales leverage over time, and we think that margin can increase over the three year period or or do you expect it to be pretty stable and it's more just about short term factors like mix or raw.

Cereal costs that could affect you in any given year.

Our test mix and raw material costs, it could affect us over in the European and the timing of those events.

Yes.

Some things that will move within the quarters.

Actively I mean, a good example of that is if you look at.

At the comp that we have this quarter for example, coming into Q1 versus last year, we had a.

The big benefit from a carton.

Assistance payment that we received $18 million, that's 250 basis points. So you have things moving through your numbers as you go quarter to quarter, Mark, but I think given the bottle that where we're running we've been very clear about our ability to effectively run in this range and so I would say we feel good about delivering on that.

Over the three consistently over the three year period.

Understood I appreciate it and all the best.

Yes.

Our next question comes from Luke Hannan with Canaccord Genuity. Your line is open.

To meet your customers' needs.

Well, that's the secret sauce.

<unk>.

We've rationalized our brands. So we have three brands going forward, which we think we can cover the market with.

And that's down from five.

So that's a good example of SKU rationalization and focused right. So.

And that.

It allows us to run with less working capital to support better service and everything else to go with it so.

I think we have a dialed in.

When you have less Skus, you can provide better quality of months what are.

Key to success has been as all of us to improve our quality and which we're doing right now we have a lot of new innovation.

That's happening right now to improve.

Improve our products principally of them.

Softness I mean, whenever we would take so we don't we're focused and that's the cable package basis.

Your focus on what you have to do to make it the best.

And not to be all over the place so we're really.

Continuing to I think leverage our strategy.

We're going to stay tight on what we do.

Very comfortable in our unit growth projections and our outlook over the next few years.

Okay. Thanks, and for my follow up we did see inventory tick up.

Sequentially.

And year over year, and I'm curious to know how much of that was higher volumes versus higher cost and then what are your expectations near term as far as building inventory I know the distributors are chasing inventory right now so I'm just curious to know what's going on that's going to look like in terms of your own books.

Yes, if you look at inventory on it.

As we as we run through the various quarters.

As we get through this year as we bring on capacity.

We effectively.

Bring on yarn production really as it comes up we will have the opportunity to build our inventories a bit but I think as you consume inventories are staying tight as we run through.

<unk> thousand 22.

Two into 'twenty, three and Thats inventories everywhere, maybe is the way to think about it.

Okay I appreciate the color. Thank you very much.

Our next question comes from Stephen <unk> with BMO capital markets. Your line is open.

Thank you and good morning, guys.

Just wondering if you could give a little bit of color on what youre seeing in the activewear segment as it relates to some of the end markets.

Particularly some of the southern markets has sort of lagged like corporate travel stuff like that wondering if you can give an update on how those markets have trended in Q4 and on a year to date basis.

Well I think that they are starting to pick up Permian.

Other than the wave of omicron.

Happened towards the end of last year, beginning of the year I mean things were somewhat picking up I mean, there was a lot of the.

Trade shows canceled in early January .

Have probably affected business, but.

Overall, we're very.

Bullish on the outlook and then we think this is all behind us right now.

And for US I mean, that's really the key because.

We've seen a large.

Growth in the market and the market has grown and the pieces have grown are still doing very well and then.

Once we get back that promotional.

Corporate.

<unk> tourism and all the other things that go with it and social gatherings, which have come back but not back fully.

I think that's going to be a big part of our success in one of the other areas that we've seen.

So significant growth as our fleece category, which is.

Lifestyle change of people worry more sweatshirts and that's also been a big driver of our overall revenues.

During 2021 so.

We're feeling very comfortable with.

Our outlook Activewear is growing and it's not just in the program.

<unk> market obviously.

Seeing a lot of near shoring coming back.

People servicing retailers.

Our global lifestyle customers are looking to grow with us.

So we're poised I think in every one of the areas that we really.

Service, except for international which is probably the only one that's a little bit at this point disappointing, but that's I think we will take care of itself once.

And over time become sort of a.

So.

Everything is running on full cylinders.

That's great. Thank you.

And then I just wanted to pick up a little bit on the innovation comment.

Sort of cited it as a key pillar of of your sustainable growth strategy.

Can you just talk a little bit about sort of what that means in terms of the product that youre that youre offering considering.

You have also embarked have embarked on a strategy to reduce the SKU count.

Right. So our innovation is going to be is that for every product that we sell were going to sell the best product in the market by definition I think that's the way to look at it. So if you look at our competitive product in the market.

We're going to make sure that our products are better.

The quality and features than anything else being sold so we have different categories, we have a basis of our fashion and et cetera. So our fleece. So we're going to continue to reinvest in our low cost manufacturing basically to support what we think is innovation and also innovation is also involved in our manufacturing processes.

Which will allow us to continue reducing costs because that's also been a key pillar in terms of what we're doing that's new ways and that's also embedded in our ESG strategy in terms of consumption. Obviously, we consume less water will consume less energy. So that's also part of our innovation strategy. Some innovation is not just about products, but it's also.

But our whole footprint of our manufacturing.

Okay. That's that's very helpful. Okay. Thanks. Thank you look forward to the Investor day.

Our next question comes from Jay sole with UBS. Your line is open.

Great. Thank you so much I wanted to ask about share buybacks.

Bought back a lot of stock in <unk>. It looks like you bought back quite a bit of stock already here in Q1.

Raised the amount of shares you could buy back what's the plan going forward for <unk>.

The rest of this quarter and this year.

Yes, so Jay we talked about the strong.

Free cash flow generation that we've had as a business and the strong balance sheet that we have and we've been very clear that when we look at our balance sheet, we do want to run in that 1% to two times leverage range. So effectively as we go forward, we will look at managing our share buyback program.

In line with our framework as we have done for many many years now really when you when you look at it. So I think as you as you go forward, we saw the opportunity our leverage is low as we as we finished the year at seven times below the low end of that range and we did make.

Good progress in the program that we put in place we started mid year last year and so now were really upping that program and Thats, what I would say you can consider as our <unk>.

Program for <unk> for 2022.

Again, we we expect to execute on that program, given where our balance sheet is in order of free cash flow generation is and then as we go forward into into 'twenty three 'twenty four well, obviously continue to manage that in line with with what we see but given our free cash flow generation the way we.

Feel like we're in a very good position to invest in organic growth, which is the driver of the business, which is really everything that we do.

While at the same time, though keeping a strong eye on on return of capital. So I think we feel good about all of them.

Got it okay. Thank you and if I can ask one more if you could just elaborate a little bit about how.

Port congestion.

Impacting the business obviously.

Company, probably doesn't use a whole lot of.

West Coast ports for delivering goods, but can you just explain that.

That dynamic and elaborate on what Youre seeing there and if it's been an issue at all.

Well, we have a small portion of our business, obviously that but.

That comes from Asia, but we don't necessarily use west West coast ports.

But freight costs have gone up and we've seen quite a bit of inflation globally.

But we do bring in from from Asia.

But the bulk of our production is really almost domesticated which is we arent committee United States.

Of course, the Central American comes back.

We haven't seen any real.

Issues, except for lack of truckers things like that which is basically.

Trucking in the United States is very tight it's you had mentioned earlier that.

Our lead time to our customers I mean, although our inventory channel has gone up a bit but not that inventories in factory inventory at our distributors four wall doesn't actually rundown. So.

That's a good indication of.

The types of.

Trade issues, let's say for example that are happening right now, but in the labor market is still remains very tight in the United States, which is also the other factor so but overall I think look at where we're managing our costs I think we're in relatively good shape, we don't rely on.

<unk>.

Outside factors, we're vertically integrated obviously.

We're able to manage our supply chain.

Got it okay. Thank you so much.

Our next question comes from Brian Morrison with TD Securities. Your line is open.

Thanks, very much good morning, Glenn.

Glenn you mentioned that the average price per share. It was now $2 I just want to clarify wariness the price level relative to the pandemic, our pre pandemic, we significantly above or are we in line, whereas where do we compare.

Well our pricing on our like our basic pricing, let's say for example teams have gone from there arent.

The high single dollars, let's say of our dollar.

75, or something like 19, and they are just north of $2. A day. So we are pricing has gone up.

Has it gone up significantly really.

Look at the end user price.

That could be absorbed our price increases can be absorbed quite easily in the market.

And fashion T shirts have moved up a little bit too on our side.

Our competitors have taken a lot.

More price than we have in our gap relative to lessen the competition has grown substantially relative to the premium download levels. So for us I think we're.

On a pretty good position leveraging our low cost manufacturing.

We could take more price if we wanted to I would say, but what we're going to do is we're going to continue to focus on unit volume growth.

And bringing on.

We have the capacity.

As we leverage the acquisition of frontier and we move into the back half of this year, we're going to have a substantial increase in our volumes.

Really as we move into 'twenty three so we're pretty excited about our positioning.

Okay, and then changing gears when I look at your 7% to 10% growth outlook has just got phase one that Bangladesh and the equipment transfer to Honduras are they both operating at a 100%.

And do you see any outsized growth from any of your key verticals through this forecast whether it be private label or fashion basics.

Well.

The forecast I think we have right now is.

Based on the capacity that we communicated to you before.

Which as you know.

In Bangladesh, one and the Repurposing of all of the equipment, we have in Central America that we send to bring on approximately $1 billion. In revenue. This is what we stated in the previous call. So that capacity is being in place the capacity that's in Central America.

Is in place today.

And.

Bangladesh is going to be complete sometime towards the end of this year and we'll start at the beginning of Q1 next year.

So that's all in place and I think in going in and what we refer to as our Capex, which is the 6% to 8% that capex is really going to support the next big incremental approach with some of that capex will be bringing on obviously Bangladesh.

But it will be supporting really the next wave of our capacity expansion at the same time, allowing us to continue driving our vertically integration not just us.

In North America, but as well as in Bangladesh. So.

Our goal right now is to continue I mean, we've got a line of sight on the next three years and the question is what happens after that and Thats. The bulk of our spend is basically going to be supporting additional capacity expansion and vertical integration.

Are you still seeing this since the acquisition of frontier for the industry and if so is it leading to market share gains.

Well I think that the.

The thing is is that there is capacity is tight ratio there is.

And Thats just not in North America, that's globally, I mean, I think that the.

Business is tied to during the pandemic a lot of facilities closed down not just in North America, but I think globally.

The global tightness of raw material is there for sure.

We acquired frontier, where just phasing out of our sales that they had.

Which will happen sometime by Q2, and then as we enter into Q3 Q4, we'll have all of that volume available to us to continue.

Wrapping up our capacity basically to support incremental revenues in the back half of the year and as we move into.

'twenty three so things are still tight for us, but I mean, we are producing more today than we did this time last year, obviously, because our plants are producing bedroom.

Back half of this year into 2003.

Thanks very much.

Our next question comes from <unk> Khan with RBC capital markets. Your line is open.

Today and.

Presumably it's gone significantly larger given topline growth rate that you're targeting is above kind of a stroke of levels. Just wanted some color on that.

Well, what we said.

Close enough.

Dominic we thought that the market size of about $6 5 billion and we think that that market has grown substantially since then.

And we've done a lot of research and Thats something that were going to call out at our Investor day is really to bring more insight into the size of the market.

Done a lot of market research.

Which confirm that the market has grown substantially so.

We'll discuss that on our in our Investor day.

Okay, Great and then as we look I guess in terms of the kind of the fashion basics side and historically I think the number you quoted in the past with something like a 25% market share and I guess within the margin guide that you're providing over the next two hours on the topline and what role is fashion basics kind of play in both the top line and on the margin side and maybe any goals you have.

For market share capture on that side of the business.

Well, there's two fundamental huge areas of growth, obviously, one is fashion and hazardous fleece, which because our fleece business is growing substantially as we speak.

The capacity that we're bringing on in Bangladesh, which is too large state of the art.

The facilities will be geared and dedicated to 100%, making fashion T shirt. So we have a huge wave of capacity coming on which will be at the low side of the cost curve basically so thats our commitment to grow our fashion basics and then as we look at the growth of our fleet production.

Reorienting our existing.

This year in Central America to basically take on the demand and the capabilities to supporting incremental fleets. So I think we're in a pretty good position to capture the two large drivers of what we think is industry demand are.

Our basic sorry in our typical basics and then they'll grow at a slower clip.

But we've got.

Quite a large market share there so we don't really see.

A big growth in the basic category, it's really going to be a function of that.

Fashion basics in our fleece that will drive the top line growth over the next few years.

Okay, and then I guess just on the inventory among the distributors that you noted in the press release being below pre pandemic levels.

Do you foresee a bit more of a restocking event or sort of is this just in time type of replenishment something you expect will continue or should we expect over the course of 'twenty two.

We think thats definitely further.

Short pursuit in the future I mean inventories are going to maintain.

So inventory is relatively tight.

There will be some probably ultimately catch up to just because we think that the number one the market is growing.

And inventories are relatively low.

Which was affected service a little bit, but I mean, the point is that it's almost a good problem, but we will definitely be a small cash up towards the end of the year probably.

Great. Thank you.

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

Hi, Good morning. This is Peter Mcgoldrick on for Jim Thanks for taking my question.

I was curious on the frontier yarns acquisition.

Could you help us better understand the income statement influence.

Across line items, and how that contributes to the new multiyear outlook.

Yeah.

So if you look at frontier yarn.

And the acquisition as Glenn said, we're very pleased about it really drives our capability on a go forward basis from a yarn perspective.

Secondly, it just gets rolled into our into our asset base right. It's Matt.

Manufacturing.

Assets that effectively show on our balance sheet.

We pick up some inventory actually there was an inventory question earlier in the call and Youll see some of the increases reflected.

As related sorry to two.

To frontier.

And then as we go forward effectively we still have some third party sales that will come from frontier through the first half of the year, but generally that will be reflected in our cost of goods is not going to go into our into our revenue line. So I would say frontier well you really have to think about from a frontier perspective visits.

Its ability to provide us with the yarn to provide us with the ability to support our textile facilities and ultimately where we're taking frontier to drive volume and also we are improving frontier to reduce cost as we go forward. So that we can drive that volume, but also maintain the margin.

We'll file that we want so.

And also to support the growth like our fleece category for example of using technology that we use that they have.

Large footprint and that pushes <unk>, which makes.

Low pill, multiple fleece, which is not as readily available so we're expanding that.

We're doing what we can and it's also going to help us integrate our others other facilities as well because.

Now we operate nine large textile clients, we consume almost half of the domestic causes the United States.

And allow us to basically.

Leverage our existing facilities by streamlining and further leveraging our back to basics. So we had three skus in our in the plant, where we've probably got one SKU because we'll just move some of the Skus that are planned. So overall and also there is room for a little bit of investment in some of the things that they were doing in terms of automation.

But overall look at their plants will equal yield.

Very good returns to us it will help us to grow our top line basically and supports everything that we need to.

Growing and hit our objectives over the next few years.

Okay. Thank you.

And then just switching to more near term oriented I was curious on the gross margin outlook within the context of the cost increases rolling through on price positioning.

How this progresses directionally and then.

How does that fit in within the new multiyear outlook for 18% to 20% given your achievement of 30% gross margin in 2021.

Yes, I mean, if you look at the.

Gross margin as we go forward as we look at where we were and what the various impacts are I mean.

We're really running the business on as our operating margin rate I think that's maybe the first place to start and we've been very clear about what we can deliver.

With respect to the 18% to 20 I think when you look at that 18 to 20 then.

Look at gross margin and you look at SG&A, our SG&A performance has been very good.

And you can see that now we're running down sort of 10 10, 5% levels and then you obviously you backup from there to what we expect from a gross margin perspective. So.

We're taking I mean, if you look into 2022 for example, the amount of price that is unfolding for us probably in the sort of mid to single digit range.

High single digit range.

And we are seeing inflation and.

Cotton prices coming through that effectively.

Reasonably significant.

No.

I would say you would expect some gross margin pressure as we move forward from that higher level that we finished it in.

2021.

Thank you.

Our next question comes from participate <unk> with Scotiabank. Your line is open.

Thank you and good morning, most of my questions have been asked and answered, but just wondering if you could talk a little bit about what youre seeing in retail in Q4, and maybe going forward.

While retail is.

Continuing to be strong.

Theres been a little bit of.

Yeah.

Let's say slowdown from stimulus checks I mean, it'd probably be the only thing I would say is in the retail where it was very robust if we're spending money.

But generally saw Walmart's earnings report I mean, there has been very well and so overall retailers continuing to.

But to do well.

Okay, and then just on the softness.

Internationally.

Totally understand that Omnicom had an impact there just curious what before the onset of omnicom, we starting to see any slight improvements in that market.

Pretty much where it had been in Q2 in Q2.

Well.

It was growing at a rate of double digits basically every year up until Covid right. So let's just start there and then once COVID-19 has it basically was similar to the U S. And then it really never recovered.

Down 25.

<unk>, depending on which market it is relative to <unk>.

19 level still.

China being a little bit worse.

More structure.

Lockdowns in Europe .

But still both of them.

Yes, if you look at the numbers Patricia.

As Glenn said I mean, it has been down pretty significantly I was a little bit of improvement in Q3, but not much. It was still down pretty heavily and effectively then when the Q4 came along in the omicron, we saw sort of a reversion back to where it had been so it really there has been a big diverse very divergent I would say between what we're seeing in the U.

And we're seeing internationally the U S has been.

Obviously recovered progressively strong getting stronger and international really we just haven't seen that that uptick yet.

So just looking at your three year plan have you assumed at some time in that three year period International gets back to where it was.

Kind of a permanent permanent lower base.

No I think that's going to come back, but looking back I remember international is still a low base to start with right. So it's not as relevant.

So we think it's going to come back in the fundamentals of our core business in international markets is really revolves around travel tourism.

Because this is pretty much what drives a lot of those markets.

So when that happens I think the market's we 100% bounce back.

We think shorter term in the U S. Right now I think we have obviously we are very <unk>.

Bullish about the outlook for.

The North American market, because it's not only.

What we're relying on the consumer spending and consumer demand side of it but it's also the onshoring and people trying to get closer to the market and just some time et cetera et cetera. So.

Which is related around our retail customers and as well as our G&P customers. So I think we're in relatively good shape.

But I think Europe will come back.

Eventually.

On the sides.

Excellent. Thank you for that.

Our next question comes from Chris Li with Chardan. Your line is open.

Hi, good morning, everyone cleanups.

I was wondering if you can share with us roughly what percentage of your activewear sales, our fleece and fashion basics and what does that mean in terms of your market share in the expanded Tam.

I don't think we really give that information out Chris, but I would say as I look at fleece and fashion basics artist to.

Fastest growing categories.

Obviously basics are we have we've always had a large share of basis. So it's not growing at.

At the same clip because we haven't I think at one time, the 95% share of the basic category.

But our fashion basic and our fleets are both big growth drivers.

At <unk>, there's not a lot of competition, either being you need to be vertically integrated manufacturer and probably have a pretty good capital structure to be able to support for lease.

So theres really nobody in our industry that really has.

The capabilities of substantially growing I think we are so I think we're in a good position we're capitalizing on.

Large portion of the market growth.

<unk>.

We see a big big growth in front of us.

Okay. That's helpful. And then my other questions in the past you've mentioned that if the distributor inventory, which will recover back to pre pandemic levels that will translate into roughly 150 to 200 million of incremental revenue is that still a fair assessment.

That will happen I think eventually over time I mean for two reasons one is that.

Inventories are so low today that we have to continue to replenish and bring product back into their channels, but the second thing is I think the market's growing so you need more units to support the growth of the market. So for both of those reasons I would say, 100% that inventory eventually it will come back as a market.

The question is when I mean that.

I don't think it will be fully happened.

This year, maybe next year that could be something that could happen.

Okay, great. Thanks, and good luck thank.

Thank you.

Okay.

There are no further questions I'd like to turn the call back over to Sophie <unk> for closing remarks.

Michelle.

Once again, we would like to thank you for your participation today and we look forward to speaking to you. Soon I would also like to remind you that as Rod mentioned, we will be hosting our virtual investor day on Tuesday March 29.

Days will be issuing a press release to provide you with the details for the registration of the event. So once again, thank you and have a wonderful day. Thank you.

This concludes the program you may now disconnect.

Q4 2021 Gildan Activewear Inc Earnings Call

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