Q4 2022 HanesBrands Inc Earnings Call
Okay.
Yeah.
Good day and thank you for standing by welcome to the Hanesbrands fourth quarter 2022 earnings Conference call.
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I would now like to hand, the conference over to your Speaker today T C Robillard, Vice President of Investor Relations. Please go ahead.
Yeah.
Good day, everyone and welcome to the Hanesbrands quarterly Investor Conference call and webcast.
We're pleased to be here today to provide an update on our progress after the fourth quarter of 2022.
Hopefully everyone has had a chance to review the news release, we issued earlier today.
The news release updated Faq document and the replay of this call can be found in the investors section of our Hanes Dot Com website.
On our call today, we may make forward looking statements either in our prepared remarks or in the associated question and answer session. These.
These statements are based on current expectations or beliefs and are subject to certain risks and uncertainties that may cause actual results to differ materially. These.
These risks include those related to current macroeconomic conditions.
Consumer demand dynamics, the inflationary environment cyber security and our previously disclosed ransomware incident, and any ongoing impact of the COVID-19 pandemic.
These risks also include those detailed in our various filings with the SEC, which may be found on our website as well as in our news releases.
The company does not undertake to update or revise any forward looking statements, which speak only to the time at which they are made.
Unless otherwise noted today's references to our consolidated financial results and guidance exclude all restructuring and other action related charges and speak to continuing operations.
Additional information, including a reconciliation of these and other non-GAAP performance measures to GAAP can be found in today's news release any references to 2019 reflect rebased 2019 results consistent with prior disclosures and can be found on our Investor Relations website.
With me on the call today are Steve <unk>, Our Chief Executive Officer, Michael <unk>, Our Chief Financial Officer, and Scott Lewis, Our Chief Accounting Officer.
For today's call, Steve and Michael will provide some brief remarks, and then we'll open it up to your questions I.
I'll now turn the call over to Steve.
Thank you T C.
Morning, everyone and welcome.
For the quarter Hanesbrands delivered sales that were above the high end of our forecast and adjusted operating profit and earnings per share that were essentially at the midpoint of our range I'd like to start by thanking all of our associates around the world. The global operating environment has been anything but easy over the last three years. However, despite the significant.
<unk> and uncertainty.
Dedication and hard work, we have been able to deliver for our consumers serve our retail partners.
We need to progress on our full potential plan.
Grateful and proud of their tremendous efforts.
While I'm pleased we delivered on our guidance under difficult operating conditions, we expect the macroeconomic challenges impacting consumer demand and the Langer.
<unk> pressure from inflation to continue in 2023, particularly in the first half.
Consistent with the mindset, we have adopted since my first day, we're not standing still we will continue our proactive approach remain agile and continue to adapt.
Focusing on the things, we can control and taking action allows us to manage through short term challenges while at the same time continue to implement our long term transformation strategy.
To that end there are three important topics I'd like to discuss today.
The near term actions, we're taking towards reducing our leverage and strengthening our balance sheet.
Second the path to higher margins and operating cash flows as the year unfolds, including actions to mitigate near term macro related challenges and third an update on the implementation and progress of our full potential plan.
Let me walk you through each of these beginning with our strategic actions to strengthen the long term financial foundation of the company.
Today, we announced we're shifting our capital allocation strategy, eliminating the dividend and committing to reducing debt.
To be clear investing in the business and our full potential growth plan remains the priority for capital allocation.
And we believe we are well positioned to fund these investments through operating cash flow.
What's changing is the allocation of our free cash flow.
I will now fully direct toward accelerating debt reduction.
This decision was not made lightly and we believe that a meaningful reduction in our debt will drive significantly higher shareholder returns long term.
We also updated our credit facility amendment to provide greater near term flexibility given the uncertain macroeconomic environment.
Michael will discuss this further in his section.
In addition to these actions we expect to refinance our 2024 maturities in the first quarter of this year subject to market conditions.
Turning to margins and cash flow.
We see the path to higher margins and operating cash flow as the year unfolds. The lower cost inventory. We're currently producing should begin to hit our P&L in the second half, particularly in the fourth quarter.
We'll anniversary last year's time alcohol, and we're well positioned to benefit from the actions, we're taking to help mitigate the near term macro related challenges.
Looking at our mitigation actions last year, we set an aggressive target to reduce our inventory units by the end of 2022, which we accomplished.
This created a short term drag on second half gross margins as we took time out in our manufacturing facilities. However by taking this action. We believe we are well positioned to release working capital and drive operating cash flow this year.
We also began an expanded upon a number of cost savings initiatives, including exiting unproductive facilities consolidating sourcing vendors and aggressively managing SG&A.
Looking to 2023, we're building on these initiatives with additional cost reductions as well as prudent investment management.
We reduced corporate head count in January we're.
We're expanding our savings actions across our procurement operations, including contract renegotiations, our strategically managing our investments to align with the current macro environment just to name a few.
We believe the combination of these actions position us to generate approximately $500 million in operating cash flow in 2023.
To exit the year with a meaningfully higher run rate for both gross and operating margins and to operate even more efficiently, which unlocks long term growth.
Lastly, I'd like to touch on our full potential plan.
Our long term strategy is fundamentally unchanged. The plan, we're executing is right and our long term financial targets remain however.
However, given the realities of the near term macroeconomic and consumer demand environment.
Timetable has shifted to the end of 2026.
So the timeline has shifted we are confident in our ability to deliver $8 billion of sales and a mid 14% operating margin our confidence is reinforced by the improvements we've made and the way our business operates.
We've added new capabilities across the organization and exited non strategic businesses, we've enhanced our inventory and demand planning processes as well as streamlined our innovation process and innerwear, which began to bear fruit with the launch of our Hanes original product.
We've improved the go forward efficiency and effectiveness of our supply chain.
We reduced global Skus by 45% since 2019 as well as exited unproductive facilities.
We're consolidating distribution centers, and we're generating high single digit savings rates and our sourcing and procurement operations plus we're continuing our technology investments to improve our data analytics drive global integration efficiency and ultimately lower costs.
We've also changed leadership and our global Activewear business, the new team is moving fast.
Streamlining the operating model, including global coordination of product design, and merchandising increased speed to market and portfolio simplification.
This in turn is expected to drive a more focused global product and channel segmentation strategy that provides greater clarity to retailers and consumers as well as improves the long term health of both the champion and Hanes Activewear brands.
It is also expected to build the right foundation to drive revenue and margin growth well beyond the timeline of our full potential plan.
We've accomplished a lot there is no doubt that we're a better more disciplined operating company today than we were just two years ago, but we're not done and will continue to make progress this year.
So in closing we will continue our proactive approach to remain agile and continue to adapt to serve our customers innovate and reduce costs, while continuing to execute our long term transformation strategy.
We're making progress and we see the path to improving cash flow and margins as the year unfolds.
Before I turn the call over I want to take a moment to thank Michael for his contributions to hanesbrands over the past few years. He has been instrumental in the progress we've made to unlock our full potential.
Michael has been a great partner and I respect his desire to spend more time with his family.
To that end I am pleased to have Scott Lewis step back into the interim CFO role as you all know Scott held this role before Michael joined the company and performed extremely well I'm confident and Scott and our entire finance team as we move forward.
So thank you both Michael and Scott.
And with that I'll turn the call over to Michael.
Thanks, Steve.
Really appreciate the opportunity and I'm proud of what we've accomplished over the past two years I am confident in our full potential plan and I know you and the company are in great hands with Scott and the entire finance team.
For today's call I'll break my comments into three sections.
First I'll highlight a couple of key items from our fourth quarter results.
I'll address our debt and our actions to strengthen the balance sheet.
And third I'll provide some thoughts on our 2023 outlook.
With respect.
To the fourth quarter I was encouraged by the team's ability to deliver results that were in line or above our outlook. Despite the challenging environment our.
I'll point, you to the news release for the detailed including our segment performance. However, I would like to provide additional context on inventory as well as the noncash adjustment to our deferred tax asset as they drive some of the assumptions in our 2023 outlook.
Starting with inventory as Steve mentioned, we accomplished our goal as we ended the year with inventory unit, 6% below prior year as expected time out actions, we took in our manufacturing operations to deliver on our goal resulted in a drag of approximately 220 basis points to fourth quarter gross margins.
However by quickly aligning inventory units with demand. We believe we are positioned to generate better efficiencies and more importantly to release working capital and drive operating cash flow back to more historical levels in 2023.
Looking at deferred taxes, we recorded a reserve in the quarter, which was not contemplated in our GAAP guidance based on recent results as well as our 2023 outlook, which reflects meaningfully higher interest expense, we were unlikely to utilize this asset in the short term therefore accounting.
Rules required we record a reserve against this asset. Additionally.
Additionally, and related to the deferred tax asset accounting treatment. This will increase accounting tax expense and the effective tax rate in 2023.
However, I'll note. This reserve is noncash and therefore does not impact our cash taxes.
Next I'd like to take a moment to address our balance sheet and leverage.
We've taken a number of proactive steps to further increase our financial flexibility as well as derisked the balance sheet long term, we've made a commitment to meaningfully reduce our debt to accelerate this process, we've shifted our capital allocation strategy.
We have eliminated the quarterly cash dividend to focus all of our free cash flow, which we define as cash flow from operations less capital expenditures to pay down debt and bring our leverage back to a range thats no greater than two to three times on a net debt to adjusted EBITDA basis.
We also work with our bank group to adjust our credit facility amendment to provide additional near term flexibility given the continued uncertainty in the macroeconomic environment, specifically, we increased the leverage ratio by one to one five turns for Q1 through Q3, this year and we extended the relief period by one quarter, which now.
Now runs through the end of the first quarter 2024 summary details of the amendment can be found on our IR website.
We are also working to derisk the balance sheet in the near term.
We've already begun the process and we are working with the necessary parties and subject to market conditions, we expect to refinance our 2024 maturities in the first quarter of this year.
And now turning to 2023 guidance I'll point, you to our news release and <unk> document for additional details.
I'd like to share a few thoughts to frame our outlook.
At a high level given the continued macroeconomic uncertainty we have taken a muted view of consumer demand in 2023.
This is expected most pronounced in the first quarter as we overlap last year's strong results for.
For Q1 at the midpoint, we expect net sales to decline, 11% compared to prior year in constant currency or 13% on a reported basis.
Looking at the full year, we expect net sales to decline, 1% in constant currency or approximately 2% on a reported basis as comparisons ease beginning in the second quarter.
With respect to gross and operating margins as we communicated last quarter, we expect margin pressure to continue through the first half as we sell through the remainder of our high cost inventory.
As we move through the second half, particularly the fourth quarter, we expect year over year margin improvement as we begin selling lower cost inventory and we anniversary last year's manufacturing time out cost.
Looking at adjusted gross margin for the first quarter, we expect a decline of approximately 300 basis points as compared to prior year.
This reflects a headwind of more than 300 basis points from commodity and freight inflation as we continue to sell through our higher cost inventory.
For the full year, we expect adjusted gross margin to be flat to slightly down as compared to prior year.
In terms of adjusted SG&A at the midpoint, we expect first quarter SG&A to be relatively consistent with prior year on a dollar basis.
However, given the sales outlook, we expect SG&A, which carries a higher fixed cost component to delever, approximately 370 basis points as compared to last year for.
For the full year, we expect a slight increase in SG&A dollars on a percentage of sales basis, we expect SG&A leverage to improve over the course of the year as sales comparisons ease.
Sure.
For adjusted operating profit our outlook is for a range of $500 million to $550 million for the full year in a range of $50 million to $70 million for the first quarter, we expect adjusted interest and other expense to be nearly $300 million for the full year, an increase of approximately $130 million over prior year.
Our outlook assumes that we refinance approximately $1 $4 billion of our 2024 maturities at current market rates in the first quarter as well as higher average rate on our variable rate debt for.
For the first quarter, we expect adjusted interest and other expense to be approximately $65 million.
With respect to taxes, our outlook reflects an adjusted tax expense of approximately $90 million to $100 million for the full year and approximately 17 million to $20 million for the first quarter.
With respect to earnings per share for the full year, we expect adjusted earnings per share from continuing operations to range from 31% to <unk> 42.
For the first quarter, we expect adjusted EPS from continuing operations to range from a loss of <unk> to a loss of <unk>.
And lastly, we are well positioned to release working capital and drive operating cash flow back to more historical levels in 2023 for.
For the full year, we expect to generate approximately $500 million in cash from operations.
So in closing, although the macro related challenges are masking the progress we've made I'm encouraged by the improvements we've made and the actions we're taking to transform the business, we're taking steps to meaningfully reduce our debt we see the path to improving margins by the end of the year as inflation eases and we benefit from our savings initiatives we're driving.
Higher operating cash flow and we're continuing to progress on implementing our full potential plan. We believe this will drive higher sales profits and shareholder returns over time and with that I'll turn the call over to T. C.
Thanks, Michael that concludes our prepared remarks, we'll now begin taking your questions and we'll continue as time allows I'll turn the call back over to the operator to begin the question and answer session operator.
As a reminder to ask a question you will need to press star one one on your telephone.
Our first question comes from the line of Omar Saad with Evercore ISI Evercore Omar Your line is now open.
Thanks, Good morning, Thanks for all the information the update today.
I guess I wanted to ask you about <unk>.
All the news new information today, maybe looking at both the business and the capital structure.
<unk>.
Leverage position at year end.
Is your confidence that things are going to improve from here.
Are you finding on the leverage side are you finding that the debt markets are open to refi and maybe a little bit of like.
Going back in time and.
In evaluating some of the decisions that were made along the lines what can be done differently in the future as you guys think about leverage.
The underlying nature of the business.
Sure. Good morning, Martin Thanks for the question, let me start with confidence in the business and then we'll get into cash.
Capital allocation.
I have a lot of confidence in this business and we continue to improve upon the foundational capabilities that business I'll.
I'll go back and I look at a little short term history, we came out of 'twenty, one really strong.
First quarter 'twenty, two was really strong and we felt good about the business and obviously thinks pivoted.
In the macro environment in Q2, and we've had a lot of headwinds since that point, but the foundational capabilities of the company that we've been putting into place through full potential plan continue to improve.
I really believe we're a stronger company today than we were process improvement to better we have a lot new and expanded supply chain capabilities, new leadership team, particularly across activewear, our innovation pipeline.
Is stronger and we continue to make the investments that need to be made.
The long term the company, particularly in things like technology, and so as you go into 'twenty. Three I think we have foundational capabilities that are going to continue to get stronger, but we're facing continued headwinds certainly on the top line. We think the consumer challenge is going to stick around for a while so we have a bit of a muted.
We look forward in 23 of the top line.
I am encouraged to see that our margins are going to improve as we come into the back half of the year as that more expensive cost of goods start to roll.
Through the P&L and we get the better stuff that we're making right now and when I returned to cash flow.
Positive so the foundational fundamental operating of the company.
It is better today than it was and I think theres a lot of upside as we go forward as we continue to invest to continue to make good decisions both for the short term and for the long term.
Now capital allocation.
As I said, we're going to return to positive cash flow this year and I believe and we're confident in the long term cash flow generation of the company.
But as we look at kind of where we are when we look at the capital structure of the company and we look at being able to build as much flexibility into the balance sheet going forward. We thought it was prudent to make shifts in how we're thinking about allocating that capital number one priority remains investing in the business.
We believe in the plan that we have to invest to build the capabilities that we need but we are making a shift for our free cash flow.
To focus on debt reduction, which means the elimination of the dividend as we announced.
We think between investing in the business and paying down debt is what's going to position us in the long run for the best shareholder returns.
We're going to be thoughtful about.
<unk> as we go forward as things change, we'll obviously always continue to look at it both in the short term and the long term, but we think thats the right <unk>.
<unk> for us to be in today.
Got it thanks good luck.
Omar.
Our next question comes from the line of Tom <unk> with Wedbush. Your line is now open.
Hey, good morning, Thanks for taking my question.
So I wanted to ask about I guess, the top line progression for the year. So I think obviously.
Retailers are still planning inventories pretty.
<unk> to start 2023, and I think you've guided to a big decline in Q1.
The guidance implies to get better.
Later on in the year do you think that the retailer inventory actions are pretty much.
Done in Q1 and at that point to inventories will be.
Rebased to where they need to be and then that kind of positions you.
For a more favorable top line environment.
I guess I'm, just trying to think like how the shape of the year looks like.
Are you expecting Q2 to be down as well.
Just trying to figure out like how we should think about the recovery on the top line.
Yes, I think the way you should think about it first stop start kind of at the top is we're seeing a muted view of the consumer this year in terms of their draw from the category, which is going to be.
Challenge as we go forward.
Underneath that when you look at retail inventory it really varies by the business that when you look at the Innerwear business.
Certainly we're in a replenishment business so when retailers take significant inventory action to reduce inventory across the board in apparel. The replenishment businesses can get impacted first we saw that happen and you will continue to work through that even though we look at our inventory levels and.
We're still below where we were in innerwear versus Q1 of last year. So we see opportunity to keep <unk> built that inventory back.
I would expect you would see that in the innerwear business start to rebuild and inventory start to rebuild faster than you would necessarily in activewear inactive where there is still pockets that have a lot of inventory out there. It does vary by channel. It does vary by <unk>.
Customer.
And some have been more promotional driven inventory faster than others. Some have managed inventory a little bit.
It's a bit of a hit and miss.
So I think fleece will take a little bit of time to continue to work itself through the system, but we're going into the year with a conservative view of the consumer and the topline.
Understood Thanks very much.
Our next question comes from the line of Michael Binetti with Credit Suisse. Your line is now open.
Hey, guys Hope you can hear me okay.
So I guess with that in mind.
Jump off of that question can you give us an indication of you give his thoughts on the replenishment and working through inventory, but maybe your thoughts on how champion fall order books look I want to see what maybe the response to some of the new product is.
Obviously theres a lot of.
Factors at play here, but.
I guess what factors are you looking forward to help you anticipate when restocking can begin in the mass channel in the U S. And then my final one as I think you said inventory units down 6% with dollars up 25, I just want make sure I heard that correctly does that that seems to imply something like price per unit up in the <unk>.
30% range, maybe just walk me through that if I'm missing anything obvious.
Yeah. So.
In terms of restocking in the mass channel.
We talk to our customers and our partners.
Closely all the time.
And kind of understand where they are we're also working very closely to find specific opportunities. There's always different pockets by <unk> by different customer by different product to be able to use data and analytics that we're building to find those opportunities. So.
I would expect those channels to probably come back faster than others, but again it ties back to the consumer and obviously, we all want to match shipments.
They want to Matt shipments to pass we want to match shipments to Pos. So we don't end up with with big pockets of inventory to the positive or to the negative so.
As we see relatively conservative view of consumer demand.
Trying to match inventory to that point, so that should come back.
Late first quarter early second quarter, we get back to a more normalized matching of Pos to shipments as we go forward.
In terms of inventory dollars are up about 25%.
When you think about that difference versus unit, it's about half inflation and the other half would be roughly mix. So when you think about unit cost you are probably up in the low to mid teens.
<unk> average all of that out.
Good morning, Michael This is Scott just to add a couple of things to the inventory.
We're in a really good shape from that the health of the inventory I think we're in good shape. There the vast majority of the inventory replenishment in nature. So the quality of inventory is really good and.
If you think about inventory itself, we've been very proactive in managing our inventory levels like we've talked about.
Early in the prepared remarks, we took time out of their manufacturing facilities.
I will say to exited a couple of our manufacturing facilities as we are optimizing our manufacturing network, so that really positions us.
I believe well going into 'twenty, three and it should drive working capital benefits as we move over the course of 'twenty three so we feel good about it.
Again units for now we met our goal of our units being down 6% compared to last year and we're not stopping there and we're looking to reduce unit that can really drive working capital benefit as we move forward.
Thanks, guys.
Our next question comes from the line of Ike <unk> with Wells Fargo.
Yes.
Hey, good morning, guys.
<unk>.
Couple of quick housekeeping question.
On the model.
On the elevated interest the $1 30 is there any way you could break out how much of that is from the variable debt versus how much is the expectation on the refi.
On the tax rate.
I think if my math is right I think it implied 40% rate.
I understand the dynamic this year I'm, just kind of curious like when we go past this year and the deferred tax dynamic does that tax rate revert back to I believe your high teens run rate once we get through there and the last one is just on the inventory is there a way I think youre, saying that the inventory is going to be a cash benefit. This year is there like an inventory dollar amount you can kind of.
Sure.
Let us know or something you can let us know by year end on your expectation on the balance sheet.
Sure.
Yes.
Hey, Eric This is Michael with regard to the interest.
Because it factors in financing.
There's a number of different scenarios that could play out between the mix between fixed and floating.
So I think we'll just stick with the $300 million at this point.
As we work through the financing then we would probably be a lot more.
Granularity or certainty you could we could provide you about what's the ultimate fixed floating mix there.
The seat with regard to the.
Your question on the tax rate.
Yes.
Effective tax rate as you look at 2023 is in the area of 40% to 45%.
<unk>.
And what will happen.
I'm not sure I caught the tail end of the comments you were making but as you think about this deferred tax accounting what will happen over time is that.
It will return to normalized levels, but it could take several number of years.
And.
Once again it does not have an impact on the cash tax payments. So for perspective, the cash tax payments in 2023 are expected to be in the neighborhood of $90 million to $100 million, which is essentially where they were in 2022 and 2021.
So.
The last question was on.
Inventory.
Yes, I'll take that one Michael so on inventory, we don't guide to specific.
Target up of inventory by the end of the year, but again, they kind of talking about expectations and working capital is going to drive a lot of the benefit from a cash flow perspective, and I know you've been with us a while so you know that the cadence of our inventory as we look in the first half we typically use cash in the first half as we are supporting tobacco.
So, we'll see that and looking to drive that inventory down over the course of the rest of the year and as you think about our cash flow again.
Adding to $500 million.
Good mixed again heavy working capital benefit and the net income that drives from a profitability standpoint, but we get felt really good about the cadence.
Being able to drop that working capital benefit to really revert back into a good position the cash standpoint.
Got it Super helpful. Thank you.
Sure.
Our next question comes from the line of Paul Cooney with Barclays.
Hey, good morning. So quick question can you talk a little bit more about what's embedded behind.
Maybe your segments and the full year guidance for sales for Innerwear versus Activewear, and then where are you seeing pricing and promotional shaking out through the year to offset any of the costs during the first half.
Lastly, when do you expect to achieve the target leverage range.
Sure.
So in terms of the mix of the guide if you will by segment. The way I think you should think about it is we'll be roughly consistent across the segments for the total company guide so no meaningful outliers.
Across the three segments.
In terms of pricing and promotion in the market I think two different businesses. We're.
We're looking at the start of Q1 for Innerwear particular kind of less promo then than we have seen a lower promotional environment.
<unk> I think are working to recover some of the gross margin and in the in the innerwear.
Innerwear space. If there was any distressed inventory I think most of that's been worked through so I think you'll start to see a normal cadence of promo where Q1 is always less than Q4 kind of on a natural basis on the activewear side.
Really varies by by channel and by customer there is I'm seeing there is low in some areas high and others.
So it just depends on where that individual customer is there is still lots of fleets out there in the market and some of that is aged so I think youre going to continue to see some promotion around that space, but we would expect that promotional environment would begin to drop as CEO as the quarter progresses.
And then yes, I think with regard to below we would be below three by 2025.
So essentially a couple of years from now.
Okay. Thank you.
Our next question comes from the line of Jay sole with UBS.
Great. Thank you. So much my question is on SG&A and our full potential plan, maybe Steve can you just walk us through how much of the expected SG&A savings have already been realized in 'twenty two maybe how much more you expect in 'twenty three and 'twenty four.
Can you just give us an update there that'd be super helpful. Thank you.
Yes, there is a lot.
Lot of activity going on in the SG&A space and it is a balance of savings and investment.
It will be clear that part of the full potential plan as we're leaning into the areas of the business that we need to continue to grow.
Technology spend is going to continue to build some of that expense some of that capital but.
But we're going to continue to invest in that space, but we are taking near term actions. We did do a head count reduction in January we are looking at other opportunities for us to continue.
To take costs out of our networks.
And be as efficient as we possibly can we're looking carefully at spending this year, we've been investing in our brands, who are going to be thoughtful and kind of spend at the rate of consumer demand out there as we go forward, but when you look at our model when you look at the P&L of this company.
Big savings that we need to continue to generate a revert back to where we were as in cost of goods, we need to regain the margins that we had before COVID-19 before all the inflation hit and Thats our focus.
And we're doing that through optimizing our network, we are looking at sourcing and our contracts and how we source for consolidating vendors.
We're looking at all the different parts of our network to continue to improve and we think we can do that.
You said, we kind of reconfirm the commitment of a <unk>.
Mid 14%.
Op margin and our full potential plan and we're going to continue to work costs across the board.
Got it okay, and if I can follow up with one more.
Jamie it's been touched on the call, but if you could just elaborate a little bit more about where the headwinds are in 'twenty three maybe in terms of channel or geography.
And then maybe talk about where some of the opportunities are for growth, perhaps beyond that'd be that'd be helpful as well.
Yes, and as I said, we expect it to be.
Relatively consistent across all the segments as I look at the market right now and look at how the consumers responding on a global basis.
Obviously, the U S market inflation, while softening, we still see as well above historical levels and continued impact of the U S consumer and their spending decisions, particularly in the lower income consumers.
As you look back we would expect the mass channel trend to start to improve we are seeing.
Decent pass early in January which we're seeing is encouraging.
Positive in most accounts, but as we've talked earlier shipments are still lagging. So there is some optimism there when I look at our European market.
The U S still challenging there consumer sentiment is still low so kind of cautious in the retail environment. There Asia mixed obviously there is a degree of opening up so we're seeing signs of improving traffic in our stores.
Stores in Japan, which are heavy travel dependent.
Opening up with its covered policies, so that'll help us get traffic back into our stores there although.
But because those stores have been closed for so long is sitting on inventory for the past. So we have to work through that and Australia I would say, it's lagging the U S a little bit in terms of its.
Evolution going through the inflation, but we've got a really strong DTC network, there and a really strong brand portfolios and they're working hard on innovation, so similar consumer headwinds, but the <unk> network there is relatively well positioned.
Got it thank you so much.
Our next question comes from the line of Paul <unk> with Citi.
Hey, Thanks, guys. Just a couple you had some big changes in your working capital this year.
Curious, which of those line items came in better or worse than you initially expected or I Shouldnt say initially Steven.
The last quarter, and maybe you could talk a little bit more about what your assumptions are for this year on some of those major items inventory accounts payable just the ones that you think can move the dial lowest in terms of generating that $500 million of cash from operations.
And then also separately just what percent of your items. This year were manufactured internally how does that look for 23 any change in your thinking about the right structure in terms of how much you do internally versus externally. Thanks.
When we take it in reverse order, let me start with manufacturing.
We manufacture internally.
70% of our units, which has been relatively consistent over the years fluctuates a little bit.
As Scott mentioned earlier, we did take two facilities offline.
Over the last couple of months that was primarily driven by efficiency not volume. So we're working hard to make all of our facilities more efficient over time and as we build those efficiencies and increased capacity allows us to streamline the network as we go forward, we're always looking to balance our.
Internal versus external.
And with the supply chain innovation that we've been doing as part of the full potential plan, we have new capabilities inside our supply chain to separate replenishment product versus made to order product versus.
SaaS Chase products. So the capabilities, we have there allow us to make certain things better and faster, but as we continue to innovate and as we continue to move into new materials and as we continue to be a faster moving company in certain parts of our business. We will look to continue to use strategic partners to use those products we may <unk>.
<unk> them over time, but we're going to find that right balance as we go forward and it's a product that we think we can make cheaper and more effectively internally and we've done a lot of benchmarking on that we will continue to do that and if it's smaller runs maybe new materials.
A more difficult design will look to outsource that overtime, but the mix is staying relatively same for now.
Good morning. Thanks for your question, so as far as the cash flow for 'twenty, two working capital everything was pretty much in line with what we expected as far as the contribution from working capital like we talked about earlier with the inventory we came in.
Our goal of lowering unit at the end of the year. So we came in very much in line with our expectations renovation.
As we move to 'twenty, three and like I mentioned earlier really looking to drive working capital benefit across the board I would say in particular inventory is going to drive that benefit and just the accounts payable accounts payable and the relationship is that as the timing of procurement and production throughout the year, we're expecting some benefits over the course.
A year from the payable standpoint.
Got it and does it in any change in terms on your on your payables.
That has occurred over the last year.
No no changes in terms.
Okay. Thank you good luck.
Yes, the one thing I would say about you got to remember with payables to inventory is.
That when the business is accelerating like it was late last year, you get incredible payable leverage in terms of when Youre sourcing and manufacturing and if you looked at the balance sheet at the end of 'twenty. One I think we were like 76% payables to inventory when.
When you think about what we did in the back half of 2022, we significantly put decelerated right. We took production out we it took time out.
And when you look at the balance sheet, where I think we're about 46% payables to inventory really.
Because we were pulling back, but youre still paying your vendors when you get to a more normalized environment in terms of 2023.
Instead of those two extremes I think youre going to be more in that 50, 60% area.
In terms of payables to inventory and so when you are trying to do the math I think that's something to keep in mind.
As you get into a more normalized situation the payables goes back to a normal relationship with inventory.
Our next question comes from the line of David Swartz with Morningstar.
David Your line is now open.
David Your line is now open.
I apologize for that sorry.
Okay.
Good morning, David.
Paul can you give.
You give us some more information on champion what gives you some confidence that it's going to recover and what categories are champions seem to be.
Stronger and weaker right now and also secondly on the dividend can.
Can you give us some.
Indication on when you might revisit decision to suspend the dividend.
It seems to be.
<unk>.
The dividend was eliminated due to the lower EBITDA and so maybe.
When EBITDA returns to more normal levels, perhaps you.
Revisit the decision to suspend it.
Thanks.
Sure David Let me talk about champion first.
I'm really confident in champion and see a big opportunity in the brand obviously, there's some work to do right now, but we have a new team in place. They are building the foundation for both revenue and margin growth and I think thats growth beyond the timeline of our full potential plan.
They're moving fast.
We focus on brand purpose brand desire.
Operational effectiveness and to drive sustainable profitable growth around product design and merchandising increased speed to market they've already taken three months out of our global design calendar.
Really working on global product and channel segmentation really provide clarity for consumers and retailers, what's the portfolio is and what the brand stands for.
DTC is a.
Early opportunity we've made progress I think if you look at our site, it's much better than it was say a year ago, but it's not where it needs to be.
Footwear is still a big opportunity and then theres opportunities just across the portfolio in general so.
Near term there are some challenges in the brand as we continue to work through inventory, but the team is being very aggressive.
We're going to see good growth in Asia led by Japan.
The collegiate channel.
Has rebounded we've talked about that over a number of calls in the past two years and we expect it to continue to grow as we go forward.
We are reaching new campuses and have much deeper relationships with those campuses.
We've got good merchandising capabilities in that space are seeing good student response were seeing positive price mix in that area. So lots of good things there and we're going to continue to focus on.
Channel strategy and being really specific about where we need to go in early on we're getting good response from our retailers they like where we're going.
What this brand to win but that plays a really important role for them and they like to work that we're doing.
Going forward so.
Work to be done on the brand, but confident in where it can go and what it stands for and the work that the team is doing and we're starting to see some interesting innovation and.
In reverse we've in some new product for our pinnacle accounts.
Our TSP product from anywhere is going to crossover now going to the champion business. This year.
Working on the Absorbency category for champion as well as our innerwear business. So <unk>.
Innovation is coming we're going to continue to lean into innovation continued to build the brand continue to be a more disciplined operating company around the ban and how we go to market and I'm confident that it's going to it's going to continue to improve but we have work to do this year for sure.
And then on the dividend.
I think what's clear to know is our focus right now is around.
Paying down debt.
And Thats, what we announced today and that's we're going to put our free cash flow.
The board is always evaluating capital allocation, both the short term and the long term, but right now our focus is on reducing debt and we think if we reduce debt and we continue to deliver against the full potential plan, that's what will drive that higher shareholder returns in the long run.
Did the market require you to.
Eliminate your dividend for the refinancing.
The amendment.
The basket does allow us to pay a dividend.
Of up to $75 million annually. So.
Steve's point, we thought it was prudent to utilize all of the cash after we've made the investments in the business to retire debt.
Okay. Thanks for all the information today. Thanks.
Our next question comes from the line of William Reuter with Bank of America.
Good morning.
Have two the first is there was good commentary when you broke out the difference between.
Inventory units.
Amount of that was due to higher average unit cost when you look at this year, what youre seeing in terms of lower cotton, Paul as well as lower rate how should we think about where your average unit cost might be.
I don't know six months from now or towards the end of the year.
Yes, yes, I would I don't know that were going to give you a specific guidance, but I think I would tell you that the cost that we are seeing today in terms of either what we manufacture the input costs for cotton for free.
Those those costs are coming down.
And so you will see the margins.
In Q3, and especially in Q4 start to improve because our cost.
Our coming down currently relative to where we were six to 12 months ago.
And we're seeing lower commodity costs lower freight costs all of that again units that we are producing today.
Well again as we talked about in the earlier remarks from a margin standpoint, as you look over the course of the year I am very encouraged with the trends youre going to see a sequential improvement in margins throughout the year as we are getting selling off the higher cost inventory in the first half and as we get into the second half, especially in the fourth quarter Youre going to see some really.
Positive margin trends as we go into late in the year as we move into into next year also we have foreign currency.
Transactional standpoint from headwinds into the in the first half that will subside in the back half, but again a lot of positive trends that were going to say in March and as you move into the latter part of the year.
One thing I would just add to that Scott also is.
There are a couple of hundred basis points of headwind from time out that we took in Q3 and Q4 of last year. So you don't have that headwind as well. So when you take that headwind going away when you take that.
Change that we're seeing right now.
We would expect to see as you said the sequential margin improvement going forward.
Cost savings initiatives all of those things are adding up to really a positive trend as you look late in the year and as we move forward.
Okay, and I guess related to that.
Timing lag between when cash costs are incurred versus when those hit the P&L with that lag typically like.
Around two to three quarters, depending on the product.
Okay, and then just lastly for me.
You mentioned addressing the 20 fours in the first quarter is there a <unk>.
Uhm or set of circumstances, where you would consider addressing the 26 at the same time.
I would say right now we're focused on the 2024 maturities.
Got it okay. Thank you very much thank.
Thank you.
Yes.
Our next question comes from the line of Carla Casella with JP Morgan.
Great.
With Bill's question around that refinancing your thoughts and whether you are looking in the bank market versus <unk>.
You have capacity to do either bank or bond.
Hassan.
Yes, Carla this is Michael as you can appreciate we can't really discuss that at this point, but.
But we do think that we have flexibility to access a number of the market.
Okay, Great and then a couple of.
Cost question. The facility time out is that all behind you now or could that also affect <unk>.
That's all behind US we recorded all of the.
The charges cost associated with that in 2002, so nothing going forward they will impact 'twenty three.
Okay.
And then on SG&A I think I heard it correctly that you expect the dollar amount of SG&A to be up.
Year over year and I'm just.
There's a little surprise given all the work youre doing around full potential. So could you just give us any more clarity there.
Okay.
Good morning, Karl Thanks for the question there on the SG&A I think you are exactly right. The $1 are up and Theres, some puts and takes for SG&A.
A couple of things to consider from a higher cost standpoint, we will have higher incentive variable compensation cost in 'twenty. Two we didn't have a payout in line with our performance as we move into 'twenty. Three we expect to have a pay out there. So you have a higher cost associated with that and also have a higher technology investment so we're going to <unk>.
To invest moving forward with our technology transformation initiatives that will have those.
All setting that is what Steve mentioned earlier, we are and laser focused on controlling cost.
Action in January corporate head count actions, there to reduce costs. There. So we are again laser focus on cost control of discretionary spending.
The leverage standpoint, again over the course of the year that should improve as the sales comparison.
Okay, and then just one on the amendment.
Just I guess I don't I can't find the document yet.
Thank you thank you to increase that.
The flexibility by one to one and a half are one to one half turn.
Over the next three quarters should we assume that goes up by one in the first quarter and then buy one and half to kind of peak quarters is that the way to think about it.
Yes, so as an example.
Q1 of 'twenty three goes to 675 Q2 goes to seven to five Q3 goes to $6 75, Q4 goes to 525.
Q1 of 2024 goes to five.
And then the amendment period is over.
Okay.
That concludes today's question and answer session I would like to turn the call back to T. C Robillard for closing remarks.
We'd like to thank everyone for attending the call today, we look forward to speaking with you soon have a great day.
This concludes today's conference call. Thank you for participating you may now disconnect.
The conference will begin shortly to raise and lower Johan during Q&A you can dial one one.
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Okay.