Q1 2023 Gildan Activewear Inc Earnings Call
Speaker 1: The.
Speaker 2: Ladies and gentlemen.
Speaker 2: Thank you for standing by and welcome to the Q1 2023 Guilden ActiveWare earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star one on your telephone keypad.
Speaker 2: If you would like to withdraw your question, again, press the star 1. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Elizabeth Hamoui. Please go ahead.
Speaker 3: Good afternoon everyone. Earlier we issued a press release announcing our result for the first quarter of 2023. We also issued our interim shareholder report with the Canadian Securities and Regulatory Authorities and the U.S. Securities Commission which are available on the company's corporate website. As a reminder, please note that we will be holding our virtual AGM tomorrow morning at 10 1st on Chairman Ron Dutchman. He also further needs to get tenga had had in his auto while conducting physical 35-til Syndrome medication as objective MRI.
Speaker 3: I see HEM, Vice President, head of investor relations, which Rod will introduce in a moment.
Speaker 3: Before I begin, please take note that certain statements included in this conference call may constitute forward-looking statements which involve unknown and known risks, uncertainties and other factors which could cause actual results to defer materially from future results expressed or implied by such forward-looking statements.
Speaker 3: We refer you to the company's filings with the U.S. Securities and Exchange Commission and Canadian Securities Regulatory Authorities. During this call, we will also discuss certain non-GAB financial measures, reconciliations to the most directly comparable IFRS measures are provided in today's earnings release, as well as our MDNA. And now, I'll turn it over to Rod. Thank you, Elizabeth, and thank you all for joining us today to discuss our first quarter results.
Speaker 4: Further and more importantly, I'd like to highlight that we are continuing to make progress with our GST strategy. And after one year of execution, we are pleased with the initiatives we are driving under each of our strategic pillars related to capacity, innovation and ESG, which all are reinforcing our strong competitive position. We also remain committed to our capital allocation priorities, including return of capital to the shareholders, supported by our healthy balance sheet and strong annual free cash flow generation.
Speaker 4: With that, let's now turn to the details of our Q1 results. Net sales for the first quarter came in at 703 million, reflecting a decline in active or sales of 12%, partly offset by 7% growth in the Hozary Un underwear category.
Speaker 4: Europe , Europe , U.S. trends that North American distributors remain down, they showed notable sequential quarterly improvement. Further, while international sales in the quarter were down 17 percent, continuing to maintain a positive outlook regarding recovery in international markets for the full year.
Speaker 4: both in the Mass channel and with global lifestyle brand customers.
Speaker 4: of 82 million were largely in line with prior year levels and as a percentage of net sales were 11.6 percent, which was up from the prior year due to sales deleverage. We generated operating income of 18.2 percent of sales, which included the benefit of a $25 million gain from the sale and leaseback of one of our U.S. distribution facilities. Excluding this gain, adjusted operating income was 14.6 percent of sales, slightly below our expectations largely due to the unfavorable mix impact of the lower fleece sales during the quarter.
Speaker 4: After reflecting increased net financial expenses of 17 million and higher gap income taxes tied to the sale lease sale and lease back gain and factoring in continued share we purchases. We reported gap and adjusted deluded EPS for the quarter of 54 cents and 45 cents respectively.
Speaker 4: Moving on to cash flow, higher working capital investments and lower net earnings light to 179 million of cash flows used in operating activities in the first quarter. After capital expenditures of 74 million and that proceeds of 51 million from the sale and leaseback transaction, we consumed approximately 202 million of free cash flow in the first quarter.
Speaker 4: Higher capital expenditures during the quarter mostly reflected investments in our new manufacturing complex in Bangladesh. In fact, construction of the first facility is in its final stages and progressive ramp up of operations is now underway, which will continue through 2023 into 24.
Speaker 4: We also bought back 1 million shares in the quarter, reflecting our strong commitment to return capital to shareholders under our capital allocation priorities. The company ended the first quarter of 2023 with net debt of 1.15 billion and a net debt to EBITDA leverage ratio of 1.6 times in line with our
Speaker 4: while the economic environment remains uncertain and we are dealing with cautiousness on inventory levels with our customers.
Speaker 4: Our POS trends were in line with our expectations for the first quarter. Further, we continue to expect incremental sales from the rollout of new program servicing retail and markets to provide growth.
Speaker 4: We also expect continuing recovery in international markets driven by increased availability and depth of product at distributors.
Speaker 4: So, even though the first half of the year will be challenging due to difficult comparative periods related to post-pandemic inventory replenishment in 2022 and the impact of peak raw material and higher input costs in our inventories flowing through our cost of sales in the first half of 2023, we see growth and margin improvement once these headwinds are available
Speaker 4: Summing this all up, we continue to expect sales for the full year to be up low single digits compared to 2022.
Speaker 4: Further, with margin pressures from raw materials easing in the second half, we continue to expect our adjusted operating margin to fall within our 18-20% annual target range for the full year.
Speaker 4: We expect capex to come in at the lower end of our previously stated 6-8% range, and we expect strong free cash flow generation for the full year. And on the bottom line, we expect adjusted deluded EPS in line with 2022, which assumes the continuation of share repurchases aligned with our capital allocation targets.
Speaker 4: of purchasing approximately 5% of our outstanding public float in 2023.
Speaker 4: So in conclusion, while we are mindful of the economic uncertainty and we are seeing cautiousness and a mixed consumer environment, we continue to be cautiously optimistic on 2023 and continue to work hard towards delivering on our goals and creating shareholder value. Thank you and I will now turn the call back to Elizabeth.
Speaker 4: So in conclusion, while we are mindful of the economic uncertainty and we are seeing cautiousness and a mixed consumer environment, we continue to be cautiously optimistic on 2023 and continue to work hard towards delivering on our goals and creating shareholder value. Thank you and I will now turn the call back to Elizabeth. Thank you, Rod.
Speaker 3: Before we move to the Q&A session, I ask that you limit the number of questions to two, and we will circle back if time permits. Operator, you may begin the Q&A session. Again, as a reminder, if you have a question, please press star one on your telephone keypad.
Speaker 2: Your first question comes from the line of Paul La Hués from City Group. Please go ahead.
Speaker 5: Everyone this brings Cheatamon for Paul. Thanks for taking our question. So I just wanted to kind of dig in on the international segment. No, POS trends seem like they were positive. They're saying around 17%, which would suggest a pretty meaningful bestocking. I guess like if current trends continue, at what point do you think that they've kind of run?
Speaker 5: So again, I think as you said, we saw an international, we saw POS up mid single digits, and we think the de-stocking is finished, and now we will see replenishment along with POS.
Speaker 5: And where did POS trending currently?
Speaker 5: You know versus what you experienced in the quarter and trans and through them all
Speaker 6: Well, you were asking before about international, so I'll address that first. The international POS continues to be positive, so it's trending as it did in the first quarter. From a US perspective, it is...
Speaker 6: Before about international, so I'll address that first. The international POS continues to be positive. So it's trending as it did in the first quarter. From a US perspective, it is, you know, was.
Speaker 6: flat to slightly down but has started to be positive now. And one thing just to remember maybe is that in Q4.
Speaker 7: It was sort of like the bottom of our POS and then you know, it started to improve in Q1 And Q1 was slightly down From last year and now we're planning to be you know flat to slightly down in Q2 I would say more like the flage level, but what's more important in Q1 is that you know That's before the market really started to turn so we're almost
Speaker 7: We're slightly below where the market started to retract basically, you know, sometime toward the end of March. So I think that we did relatively good and then, you know, that's where we're pretty optimistic that we're seeing good trends. One thing that I think is still affecting POS is the weather. I mean, the weather in April has been terrible.
Speaker 7: We're starting to see some good days right now, but it's much raw here. It's still winter, but you're reading in the paper. It's just not good anywhere. So I think weather has a little bit to do with it, but we're very, I think, cautiously optimistic as we move into Q2.
Speaker 7: some good days right now but it's you know, it's Montreal here it's still winter but you know you're reading in the paper it's just not good anywhere so I think weather has a little bit to do with it but we're very I think cautiously optimistic as we move into Q2. Gotcha.
Speaker 2: Your next question comes from the line of Martin Landry of Stifle GMP. Please go ahead.
Speaker 2: Your next question comes from the line of Martin Landry of Stifle GMP. Please go ahead. Hi, good evening.
Speaker 8: I was wondering if you could discuss the inventory levels at your distributor, how many days you have currently and how does that compare to your historical levels.
Speaker 7: Well historically the inventory level is I would say normal except for we think we're on the low end of the fleece as Bud called out we had a little bit more de-stocking than we anticipated in fleece but the levels are pretty well in line with historic levels moving into the season.
Speaker 8: In your outlook, you mentioned the contribution that you expect from new retail programs.
Speaker 7: Wondering if you can discuss the size of these programs and timing? Well, what we said earlier in our last call, if you look at the guidance we set out for the year, we said that the US overall market was going to be down around three or more single digits.
Speaker 7: and we said that our overall sales volume was going to be up low single digits and the delta between those two is the new programs and also some growth in Europe .
Speaker 2: Your next question comes from the line of George Dumet, socha bank.
Speaker 9: Hi guys. Yeah, thank you. You mentioned improving inventory levels at retail. The retailers, can you maybe give us some color there, perhaps a magnitude and maybe how long you think it will take to get to normalized levels. Rod, on the last call you mentioned that the impact of managing inventory is highly, was around $75 million for Q1. So just wondering if you have a similar estimate for Q2.
Speaker 4: Yeah, look at retail inventories and where we are. I mean, obviously through the back half of last year, effectively there was a lot of deep docking going on. And then as we moved into the first quarter, I would say we saw that stabilize somewhat. So it was a little bit variable across the different channels, but I would say it was stabilizing.
Speaker 4: And as we're moving into Q2 on the retail side, I would say we mostly believe the destock is behind us. If you look at Q2 sales overall and the way we think about it, and maybe this is a good opportunity just for me to run through kind of where we are on that.
Speaker 4: Effectively, and I've called this out in prior calls, we do expect that we still will get some price in Q2. Effectively, we get the wraparound from price from last year. We saw that in Q1, and we're going to see it in Q2, probably around low single digits. And then volumes will be down from that. If you look at the distributor PUS as Chuck and Glenn called out.
Speaker 4: We are seeing an improving environment as we moved into Q2. If you look at Q1, we were down low single digits, what we expected on the distributor side, but then as we move into Q2, it's improving as we said, and we're looking at more like a flattish type of environment. If you look in the retail side,
Speaker 4: The POS effectively is improving also versus what we saw in Q1. Q1 it was more like down, I would say, double digits. Now we're probably down high single digits. And so we have all of these factors together plus we have the fact that we will not be able to comp the restocking that we saw in Q2.
Speaker 4: last year and you know last year very definitely in Q1 and Q2 we saw a lot of restocking this year in the first half we won't be able to comp that so if you think about where we're going to be on net sales for Q2, I would say it's going to look a lot like Q1 probably from a percentage perspective as to you know what we're going to see for the quarter.
Speaker 9: have that $4470 base point decline in it and adjust the gross margin. And you maybe break that down for us. I'm just curious how much of that impact was fleas, the negative mix from fleas. And I guess what gives you confidence that we could maybe recover some of that margin, I guess, as your progress is.
Speaker 4: Yeah, look, our confidence is driven by the POS on the police, right? So the police has been a very strong category for us. It continues to be a very strong category in Q1. We saw a very strong POS, so we know that effectively the demand will come through. We were expecting a stronger demand in the first quarter than we saw.
Speaker 4: and the impact of that was probably about 100 basis points. So our margins came in about 100 basis points lower than we were expecting as a result of that. But then of course that will turn into a positive tailwind as we move through Q2 and more into Q3 and Q4 because ultimately that fleece will come through because of the strong POS and ultimately the demand will drive the sales.
Speaker 2: Your next question comes from the line of Jsoul UBS. Please go ahead.
Speaker 5: Great, thank you so much. Would it be possible to maybe talk about the t-shirt business, how the ringspun tees performed versus open-end and any trends that you're seeing in that business? Thank you. Good evening, Jay, and thank you for the question. I guess to your question around kind of the difference between the ringspun and the open-end, we did see the open-end was down during the quarter.
Speaker 6: high single digits whereas we saw the ring spun up high single digits.
Speaker 6: So we're continuing to see a mix shift there as to the ringspond t-shirts And and that trend has kind of continued through first quarter continuous from last year as well Got it, and then maybe Just add one more thing on that because a lot of the you know promotional products basically you know that you know the corporate promotional side
Speaker 5: both Bangladesh and in Central America? Like, is that connected to your ability to deliver these new programs that are servicing retail that Rod talked about in the prepared remarks?
Speaker 7: Well, no, look, we have, obviously the ramp up is going to help us to continue to develop our RINXBUN portfolio, including underwear and active wear type products. But we're in a relatively good position from a capacity perspective. We have all of our capacity installed in Central America in the DR like we said we were going to do. We're currently running around 85 to 90% of our capacity in Central America. So we've got ample capacity there to support these programs and other programs.
Speaker 7: We're building up Bangladesh to start, you know, it started and it's going to wrap up slowly during the year and really build up during 2024 for continued growth. And so we're pretty optimistic and look, the key thing for us is look, we got the capacity in place.
really to support the growth as we move into 23 and into 24. And that will well position both from a product perspective and a capacity perspective.
Your next question comes from the line of Stephen McLeod, BMO Capital Markets. Please go ahead. Thank you, good evening. Just wanted to circle around on the SG&A. I know it came in a bit higher as a percent of sales but I just want to confirm is there anything in there on higher costs or is it just a matter of deleveraging from the top line?
It's just the leveraging we've got our SGA I would say well under control and I think as you go through the year you know from a full year and we've called it a south we're basically running to a target of around 10% of sales and we have it we have it well dialed in Steven so
If you look at what went on in the quarter, it was basically just de-leveraging. Okay, that makes sense, thank you. And then just as you think about the gross margin for the rest of the year.
You know, you talked about some of that fleece headwind turning into a tailwind, but it sounds like that's mostly Q3 and Q4 weighted if I understood that correctly So if you could just confirm that that'd be great. And then I guess secondly to that How does cotton price? Deflation that we've seen we've seen some conferences come off. How does that impact your
margin on your cost base going forward.
So if you look at effectively the cotton prices, I mean, I would say that.
Yeah, we have high cotton prices coming through, our cost of sales flowing through as I called out in Q1 and to a certain extent in Q2. But then once we get past that, it will effectively be behind us. And we know that effectively that in the back half, I mean, we have a lot of our inventory already in place now, right? So as we move into the back half, we're going to see how it goes down.
cost of goods is going to, not where it currently is because right now we're seeing the pressure on our margins but where it's going to I think I would say we're very well placed. So if you look at Q1 there was a fair amount of pressure on our overall margins as a result of cotton and then if you and also was related to manufacturing costs as well higher inflationary costs that were flowing through.
And then if you move to Q2, that is still going to be in our cost of goods, but it's going to start to abate. And so if you look at on a sequential basis effectively what the change in our margins are going to be, probably in Q2 versus Q1 we're going to see 100-150 basis point.
uplift as a result of effectively the, I would say, improved cost position flowing through, and then it really improves as we move into Q3 and Q4. And again, we have a lot of that in inventory already so we can see it coming. So that effectively is how it's all rolling through. Your next question comes from the line of Luke Hennen, Kennacord Genuity. Please go ahead.
Thanks. Good afternoon. Glenn, if we think back to last quarter, one thing that you had brought up was that your balance sheet being better equipped to handle financing more inventory than peers would be something that would help you capture share from those competitors. How has that played out through Q1 and then thus...
We're giving you our POS. I think the market is below our results significantly. So we're actually outperforming the market right now and I think we're well positioned. The inventory is in good shape. And our inventories are high right now, mainly because we have a lot of fleece that we're gearing up for to ship in the...
our capacities in line, our inventories in line, our products are in line, our POS is performing and we're out working hard to build new programs and are very optimistic as you know as we continue to move into 24.
Okay, and then for my follow-up, Rod, correct me if I'm wrong, but I think I heard you correctly in that there will be a low single-digit benefit from price in Q2, from the carryover effect, the price that was taken last year. What do you see playing out for the balance of this year as well, that carryover effect? How should that plan to result?
in the back half effectively and we'll have worked our way through the wrap around by the end of the second quarter and then that'll be the full year effect. So I think we're trying to be very balanced in the way that we think about price. Again, I think it's going to hold up well as we move into the back half because of the reasons that we outlined.
but effectively it's a low single digit for the full year. Your next question comes from the line of Chris Lee of Digiardin. Please go ahead. Oh, I could have done everyone. I just wanted to dive a bit deeper into the POS. I mentioned that it's a upside-down positive in Q2 so far. Just curious, you know.
When you look at your end user demand, which segments are driving that growth? It sounds like also from your earlier comments that you are gaining share because the market overall is down below where you are trending.
Well, I would say that in the distributor market, there's different categories, travel, entertainment, rock concerts, the experience. I mean, those are the things that are continuing to drive. I think the momentum in the distributor channel. And then, you know, when it goes, the t-shirts going into the retail channel.
pretty comfortable with the POS. And it's really more of the same. There's nothing that's changed. It's just a question of in our distributor business, taking share, and I think in our business it services teachers to retailers, making sure that the retailers are starting to place orders and work through the rickshawers.
Okay, that's helpful. And my other follow-up question just on sales again, just looking at your hostry and underwear segment. Is there much seasonality with that business? And if not, is the 150 million of revenue that you did in Q1? Is that a good run rate for the rest of the year with perhaps some upside in the second half as the new retail programs start to kick in? Well, the only thing that's exactly that's the point. So I think that on our...
You know, on a constant basis is one thing, but as we go into the back half, we're going to have all the new programs, so we should get a big lift in sales.
Again, if you'd like to ask a question, press star, then the number one in your telephone keypad. Your next question comes from the line of Brian Morrison, TD Securities. Please go ahead.
Good evening. Rod, I just want to circle back to the colour on the Q2 margin. Last quarter you said that we should be back in our historical range. I appreciate the headwinds that you talked about with the sales outlook and fleece mix and input prices, but can you just maybe speak??
provide some color on.
the decline since the call, the Q1, pardon me, the Q4 call on your outlook. Is it the fleeced mix that's taking the margin down a little bit?
Yeah it is. I mean we're being a little bit cautious. As I called out, you know what we're seeing is people are effectively taking the product, they want to take the product a little bit closer to the season this year. So as based on what we saw in Q1, we want to be a little bit cautious as we as we look at Q2. Again it's going to come through. We know absolutely will.
So I would say effectively that's what was driving, I would say, a little bit more cautious view on Q2 and versus where we were when we reported Q4.
Okay, so the input prices that will still be a headwind but that had been anticipated previously correct? That had been anticipated correct. Okay and then just following up on the fleece because it's a big part of the story in terms of margin profile. POS for the industry is that up or is it up for Gildan because you're taking so much market share.
We don't have all the information industry market share data but I would say that as far as we're concerned we're seeing good signs, good POS and it's high single, low double digit growth so far. Your next question comes from...
Sub-a-hat con of RBC capital markets, please go ahead. Thanks very much. There's a lot of commentary earlier, Mr. Shared on the inventory position of the distributors. I guess a big picture of what kind of demand environment are the distributors generally preparing for? Are they expecting a moderation in POS through the back half of the year or are they kind of expecting pledges?
What's your perspective on the demand uptake and what are they preparing for?
Well, look, I think that everybody is cautiously optimistic, I think is the way to position it. Inventories are in good shape now. I mean, obviously we've called out the year-over-year impact, but as we go through, I think that people are optimistic, but cautious about...
moving forward in this environment and you know it's just it's the macro environment that is uncertain a little bit but I say that when we were early on in the year I think people were more pessimistic than I think the tone is today so I think that things are improving just to vibe of the way people are thinking about the market and the opportunity so you know at least with Optimist we're optimistic but cautious about
you know what we're doing as we go forward. I think that's a general consensus amongst our customers and then users. Great and then now I want to think about the EBIT margin range that you're providing for the year. Given that you've got pricing sort of in place already, whatever you're going to see flow through. Is it really volume or POS or just demand? And I guess.
and determine whether you get the more under high end of that range from here on board.
Well, look, we do have our cost structure, I would say, well under control. So as we as we go through the year, yeah, I mean, we are it's going to be driven by what we've said on from a sales perspective, what we've highlighted with respect to the low single digit growth and what's going on in the various areas including the.
the 18 and the 20%. So I would say we've got good line of sight in a lot of it and of course we don't control the macro environment but there are a lot of positive things happening across the business and so we as Glenn said are cautiously optimistic.
Thanks very much. Again, if you would like to ask a question, press the star and the number one on your telephone keypad. Your next question comes from the line of Mark Petrie of CIBC. Please go ahead.
Good afternoon. Thanks for all the comments so far. I just had one question actually just on the corporate inventory levels. Obviously there's some normalization there and you've already called out the impact of FLEES but I'm just trying to understand where
do you think the inventory levels will normalize as we progress through the course of the year or by the end of the year?
So if you look at the inventory levels, Mark, yes, if you look at where we were in the first quarter, we were up a bit versus the end of the year. I mean, you expect that to a certain extent from a seasonal perspective, but also because of what went on with FLEES, the rollout of the new programs. All of these things were playing in, but I think we see it in peak inventory levels.
And as we move into Q2, we will see some progress on that. And as we get to the end of the year, I think Glenn called it out, we expect our inventory levels to be below where we started the year. So I would say overall from an inventory perspective, I mean the good news is we've got great, I would say depth and ability to service, and that's very important in the business. What we are seeing is that we are seeing a lot of growth in the industry.
you know, the bill that we had in working capital last year. If you look at CapEx where it was last year and this year, we are expecting it to be down a bit from 2022. We do expect to see strong free cash flow for the full year. So, you know, if you run through the numbers and you compare to last year.
And you take inventory that's going to be slightly down. You know, you can really see that our free cash flow could be well You know north of 450 million for the year a very good and strong delivery As a result of effectively we've made that investment in inventory and now we're going to benefit from as we move through the year Okay, thanks and actually just one more just to clarify the
No, it's a combination of what's going on overall and it's being driven by cotton, it's being driven by some manufacturing costs as well. And then you get some movements as well in price and mix. But I think it's a good estimate of effectively what's going on. But cotton is improving for us and manufacturing costs is improving for us.
as we go through Q2 and then very, you know, very defileys without a Q3 and Q4. There are no further questions at this time. This concludes today's conference call. You may now disconnect. Thank you.