Ladies and gentlemen, thank you for standing by and welcome to the Q2 2021 Gildan Activewear Earnings Conference Call. Please be advised that today’s conference is being recorded. Now I would like to hand over the conference over to Ms. Sophie Argiriou, VP, Investor Communications. Please go ahead.

Thank you, Roel. Good morning, everyone, and thank you for joining us. Earlier this morning, we issued a press release announcing our results for the second quarter of 2021. We also issued our interim shareholder report containing management’s discussion and analysis and consolidated financial statements. These documents will be filed with the Canadian securities and regulatory authorities and the U.S. Securities Commission and are available on the company’s corporate website. I’m joined here today by Glenn Chamandy, President and Chief Executive Officer of Gildan; and Rhod Harries, our Executive Vice President and Chief Financial and Administrative Officer. Momentarily, Rhod will take you through the results for the quarter and a Q&A session will follow. Before we begin, I’d 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 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 the Canadian securities regulatory authorities that may affect the company’s future results. And with that, I’ll turn the call over to Rhod.

Thank you, Sophie. Good morning to all, and thank you for joining us on the call today. This morning, we reported strong second quarter results, which, as anticipated, reflected a significant recovery from the height of the COVID shutdowns in the second quarter last year. We also delivered improved sequential performance, building from the solid start that we saw in the first quarter this year. Further, when compared to pre-pandemic levels in the second quarter of 2019, our results are showing that even though we have not seen a full top line recovery, our Back to Basics strategy is unfolding better than planned. Benefits from eliminating redundancy and complexity in our business are driving solid sales performance, efficiencies in our operations, cost savings and stronger profitability. Of course, this strong performance is supported by strong execution. And once again, our team demonstrated exceptional operating capability during the quarter by delivering on our targets while navigating through the challenges of a tight supply chain environment. In the end, we were able to deliver higher-than-anticipated sales of $747 million, adjusted operating margin of 19.9%, adjusted EPS of $0.68, up 21% over the second quarter of 2019 and record second quarter free cash flow of $208 million. Given the strong recovery so far, the better-than-expected progress of our Back to Basics strategy, the company’s prospects for continued free cash flow generation and with our net debt leverage ratio now at 0.6x, our Board approved yesterday the reinstatement of our share repurchase program to buy back over the next 12 months, up to 5% of the company’s outstanding shares. So overall, another strong quarter. Now turning to more specific details on our results. As I just mentioned, for the second quarter, we generated sales of $747 million, up 225% over the prior year, driven by volume increases across all product categories and favorable product mix. Activewear sales came in at $597 million, up 354% and sales in the hosiery and underwear category were $150 million, up 53% versus last year. Volumes were up in all markets and geographies, particularly in imprintables, driven by the strong recovery in POS and the impact of the nonrecurrence of significant distributor inventory destocking, which we saw last year as distributors drew down their inventories during the COVID shutdown period. On the underwear and hosiery front, we saw a double-digit POS growth drive higher underwear unit sales during the quarter as well as in hosiery products, which were particularly impacted by last year’s store closures. Comparing to the second quarter of 2019, which was a strong quarter, sales were down 7%, which we nonetheless think is encouraging when considering the impact of both lower imprintables net selling prices this year and product mix slightly unfavorable compared to 2019. Overall, imprintables POS was down approximately 8% compared to the same period in 2019, showing some further improvement from the 10% decline we saw going into the quarter, mainly due to improving trends in North America. Specifically, imprintables POS in North America was down in the single-digit range compared to the second quarter of 2019, while POS in international imprintables markets remained weak, down close to 30%. In retail channels, overall POS in the quarter was up compared to the same quarter in 2019. So overall, we were pleased with the top line performance we delivered in this quarter especially given the context of a tight supply chain environment where labor shortages in the U.S. are continuing to affect yarn supply and constraining our ability to completely rebuild inventory levels following the hurricane from last year. Moving to gross profit. We reported a strong recovery over last year, generating adjusted gross margin of 30.5% in the quarter. While last year, we had significant COVID-related costs and Back to Basics related charges in the second quarter of 2020 flowing through our numbers, we are now also seeing the favorable impact of product mix, lower raw material costs and benefits stemming from our Back to Basics initiatives in our gross margin. This was evident on a sequential basis. With adjusted gross margin in the quarter up 240 basis points from 28.1%. After excluding the onetime USDA pandemic assistance benefit we received in the first quarter of this year, which impacted margins by 300 basis points. Likewise, our margin performance compared to 2019 pre-pandemic levels also improved meaningfully, even though sales have not yet fully returned to 2019 levels. Adjusted gross margin of 30.5% in the second quarter was up 270 basis points compared to 27.8% in the second quarter of 2019. The increase was driven primarily by lower raw material costs and Back to Basics cost savings, which more than offset lower imprintables net selling prices and slightly unfavorable product mix compared to 2019. Turning to SG&A. Our SG&A expenses in the quarter were $80 million, up approximately $15 million over last year, driven primarily by increases in variable compensation expenses and volume-driven distribution costs, offset in part by Back to Basics cost savings. As a percentage of sales, SG&A expenses of 10.7% were down significantly from last year, as you would expect, and 80 basis points better than 11.5% in the second quarter of 2019. Adding up these elements, we generated adjusted operating income of $149 million, translating to an operating margin of 19.9% in the quarter. The significant recovery from the loss we posted last year was driven by the higher sales, strong gross margin performance and SG&A leverage. Lower financial expenses driven by reduced average debt levels and the nonrecurrence of fees related to debt facility amendments we made last year also offset the impact of higher income taxes. Consequently, we generated net earnings of $146 million or $0.74 per diluted share and adjusted net earnings just over $135 million or $0.68 per share compared to a net loss of $250 million or $1.26 per share and an adjusted net loss of $197 million or $0.99 per diluted share in the second quarter last year. Compared to 2019, stronger adjusted gross margin and SG&A performance drove a 360 basis point adjusted operating margin improvement in the quarter compared to 16.3% in 2019 which led to a 21% increase in adjusted EPS. Finally, from a cash flow perspective, we generated $208 million in the quarter, which was a record for a second quarter, up from $177 million last year and $26 million in 2019. The increase over last year was primarily due to higher operating earnings and included a net cash benefit of $18 million from insurance proceeds we received in connection to damages sustained from the hurricanes last year. These positive elements were partly offset by higher trade receivable balances driven by the sales increase, a lower drawdown in inventory compared to last year when our facilities were idled and higher capital expenditures related to our manufacturing capacity. Our net debt position at the end of the second quarter was $363 million, down from $542 million at the end of March, and our debt leverage ratio fell to 0.6x net debt to trailing 12 months adjusted EBITDA, which is now below our historical target leverage range and down from 2.1x at the end of the first quarter of 2021. Consequently, as highlighted at the beginning of the call, given the strength of the results we are achieving and the free cash flow we are generating, we were pleased to announce this morning that in addition to the reinstatement of our dividend last quarter, we are now reinstating our share repurchase program. An important step given the emphasis we placed on return of capital to shareholders under our overall capital allocation program. This sums up the key highlights of our results for the second quarter. In short, strong results driven by a number of considerations, which on balance, give us reason to feel good about our outlook. On the positive side, we are encouraged by the recovery we have seen in North America so far, including the sell-through trends for our products as well as the benefits we are seeing from our Back to Basics strategy. On the other side of the ledger, we remain cautious about certain factors, including the pace of recovery outside of North America, which currently is weak. Further, on the supply chain side, U.S. labor shortages continue to be a factor affecting yarn supply, although we have seen some improvement more recently. We're also seeing tightness in raw material inputs and broader transportation-related issues, which are creating inflationary pressure. Consequently, we can sum it up by saying we remain cautiously optimistic as the recovery progresses. Confident that our people and our strategy are positioning us well to continue to move through this environment and capitalize on market share opportunities as we fully utilize and grow our manufacturing capacity, deliver on our profitability targets, and create shareholder value for the long term. This concludes my formal remarks. And with that, I will turn it back to Sophie.

Thank you, Rhod. And with that, I will now turn it over back to our operator, Roel, to begin the question-and-answer session. Roel, go ahead.

Your first question comes from Paul Lejuez at Citigroup.

Could you provide more details about the supply chain, specifically which areas are improving or declining? What is your level of visibility? Additionally, how are you approaching pricing as you manage higher costs, and where do you feel you have pricing power? What is the timeline for any potential price adjustments?

I’ll address the question about our supply chain first. Currently, our main challenges lie in our U.S. yarn operations. We resumed production at the end of last year after the hurricane, but labor shortages have slowed our efforts to bring back staff and get our facilities fully operational. However, we are now running at improved rates and are optimistic about continuing this positive momentum. We plan to incrementally increase capacity as we progress through the year. Despite the supply chain challenges, our current production levels in the latter half of the year remain similar to what we saw in 2019 as we finished Q2. We have also repurposed much of our equipment from our Mexican operations, which will significantly enhance our capacity moving forward. Our goal is to keep increasing our volumes throughout the year and heading into 2022. Regarding pricing, we will implement our Back to Basics strategy. While we are facing price inflation and have streamlined operations to improve manufacturing efficiencies, these measures have not completely offset the significant increases in raw materials and transportation costs. Therefore, we will need to adjust our pricing in 2022 while striving to maximize our operating efficiencies. Our primary objective is to maintain an operating margin of 18%, so we will carefully balance these factors to align with our goals as we move into the next year.

Your next question is from the line of Vishal Shreedhar from National Bank.

Sorry, can you hear me now?

Yes, we hear you. Thank you.

Okay. Great. With respect to the 18% operating margin target, obviously, Gildan is doing better than most would have thought at this juncture in H1 tracking above those targets. I understand inflation is coming, and I understand you intend to take price. But given that you’re still tracking to that 18%, should we think that H2 falls below that 18% operating margin level as inflation comes in, and you kick in price towards the back end of the year?

Yes. The 18% target that Glenn mentioned is very important to us. This is essentially where we're aiming, considering our gross margin and SG&A. We've successfully reached that target, even sooner than we expected, as we've returned to 2019 revenue levels. However, as we move into the second half of the year, we will experience some pressure, particularly inflationary pressure in the third and fourth quarters across all areas of the business. Specifically, we are seeing rising cotton prices and increased transportation costs. Therefore, these factors will impact our margins as we progress through the second half of the year. Despite this, we have achieved the 18% margin and our objective is to maintain it moving forward. I believe we can meet that target for the full year in 2021.

What are you currently observing in the market considering the widespread inflation? Are some of your competitors in the wholesale market raising their prices at this time?

There has been no price increase in the market this year. Our strategy is to continue using our low-cost manufacturing and adhere to our Back to Basics approach. We will adjust our pricing regardless of our competition because we are gaining market share. The market has not recovered, but we are performing well and are pleased with our position. We have significant capacity that will be coming online as we move into 2022 with the installation of our machines in Central America from our Mexican operations. We aim to balance volume growth and operating margins effectively. We are not planning any impulsive price changes. We could potentially increase prices if we chose to, but we believe that maintaining a disciplined target for operating margins while focusing on revenue growth will ultimately create long-term value for our shareholders.

Given the current inflation, transportation issues, and labor challenges, how would you assess the financial health of the wholesalers and their capacity to manage these pressures?

I believe that inflation can be beneficial for wholesalers since higher prices allow them to ship units and increase their profits. However, the challenges go beyond just inflation; it's also about the ability to conduct business. Many restaurants are closing due to a lack of employees, which presents more of a structural issue than a financial one. In the U.S., we need to ensure that we can maintain employment levels. We've made good progress in raising salaries and offering incentives to encourage employees to return to work, and currently, we have positive momentum. In Central America, we don't face similar employment issues; labor is plentiful. Although there is some inflation, it's mainly related to input costs for manufacturing, electricity, and transportation. Our primary focus now is to ensure that our yarn facilities are operational to support our capacity growth.

Your next question is from the line of Stephen MacLeod from BMO Capital Markets.

I wanted to ask about the labor situation, especially concerning the yarn spinning business. You mentioned it affecting your ability to restock inventories. Are there specific areas where demand is not being met due to labor shortages?

We started the channel in the second quarter, which should serve as a good benchmark. We are currently leaving potential sales untapped due to relatively low inventories. Demand remains robust, and I believe this strong demand is not solely attributed to the market recovery but also to an increased focus on onshore factors, which will benefit us moving forward. Additionally, we noted a few quarters back that we think the overall market has expanded, contributing to increased demand in our channel. Overall, the outlook for demand is positive, and we are well positioned to take advantage of potential volume growth as we transition from this year to next.

Okay. That’s helpful. And then I’m just wondering if you’re able to give any more sort of discrete color around how things are shaping up in the back half of the year in terms of your outlook section. In the past, you’ve given some directional indicators around POS and demand trends. Are you able to do that for Q3 and into Q4?

Yes. I believe, Stephen, you can see the improvement in the point of sale during the second quarter. We mentioned how we started and ended the quarter, and clearly, conditions are getting better as the year progresses. Looking at the second half of the year, our overall sales seem to be aligning well with 2019 levels. As Glenn mentioned, we're currently operating at 2019 capacity. For the latter half of the year, that's our main focus. I also want to highlight the anticipated 18% margin for the full year. Overall, it’s a better environment, but there are still risks involved, as we noted at the start of the call. If we compare it to 2019, Q3 might be slightly lower and Q4 slightly higher, reflecting how the supply chain is developing. That’s about all we can share at this moment.

Your next question is from the line of Luke Hannan from Canaccord Genuity.

First question for me is on capital allocation. You guys finished the quarter with a very clean balance sheet here, which obviously inspired you guys to bring back the share buyback program. I’m just curious, though, if I just do a quick math, and I assume that you invest a little bit in inventory going forward, plus you fulfill the NCIB. That still leaves you in a very clean position balance sheet-wise. So do you see any changes to your near-term capital allocation priorities?

We are very happy with our balance sheet. Over the past 12 to 18 months, we have significantly strengthened it as we navigated the COVID environment. We generated a lot of cash last year and continue to do so this year. We are pleased with the balance sheet. Looking ahead, we have a target leverage range of 1x to 2x that we are aiming for. We will focus on capital allocation and returning capital to stay within that range. Like everyone else, we cannot predict the future and must be cautious as we move into the latter half of this year and next year due to the broader situation. We are satisfied with the current state of our balance sheet and plan to generate cash as we progress. We also intend to buy back stock as mentioned. Moving forward, I would expect to operate at the lower end of that leverage range as we approach the end of this year and into 2022.

Understood. In the press release, you mentioned that retail overall POS was up during the quarter compared to 2019. Can you provide any specific figures for that?

On the retail side, we saw strong performance in our point of sale overall. Our underwear sales have been particularly robust, and we are very pleased with its performance compared to 2020 and 2019. Underwear has been very good. Activewear is slightly down compared to 2019, but it is doing well overall. Regarding hosiery, we have definitely seen an increase compared to 2020, and it's fairly stable when looking at 2019.

Your next question is from the line of Chris Li from Desjardins.

I’m wondering, Glenn, if you can share with us a little bit more of what’s driving the international weakness.

I believe that Europe differs from the North American market in that it is not primarily a lifestyle market but more of a tourism market. The decline in tourism has likely impacted our business, particularly since many T-shirts in Europe are sold in tourism shops. That's one possibility. Overall, the market just isn't as large as in the U.S., and it may also be affected by the lack of stimulus. It’s difficult for us to determine the exact reasons. Currently, we are seeing a decline of approximately 30%, but there is still some activity, and we remain hopeful that conditions will improve; it just seems to be taking longer than expected.

Okay. That’s helpful. And then just shifting over to the U.S. I remember last quarter, I think you mentioned that the distributor inventory levels were about 40% below the 2019 level. I’m just wondering if you have an updated number for us on that side?

Well, we destocked again in the quarter so probably more 45%, I would say.

Your next question is from the line of Brian Morrison from TD Securities.

I would like to revisit your inventory situation and the yarn shortage. Could you share your perspective on the sourced inputs in comparison to some of your competitors? I assume your vertical integration gives you an advantage. Additionally, are you gaining market share as a result of this situation? Also, regarding your comment about 45%, could you provide a specific numerical value for that?

45%, what on inventory?

Regarding inventory, last quarter we noted it was over $100 million, considering the destocking that took place compared to 2019. This quarter, we anticipate an additional destock of around $30 million. Therefore, we're likely down about $135 million in total compared to 2019.

Regarding the supply chain, we are a vertically integrated company, meaning we produce yarn and manufacture it into finished products. Unlike our competitors, who rely on sourcing yarn or fabric, we believe this gives us a strategic advantage in the long term. However, we did experience some setbacks when our factories were damaged by the hurricane, which coincided with an unforeseen labor shortage. This has delayed the return of staff to our plants, but we are making significant progress in this area. It has been challenging to hire new workers, especially since there are not many available in the yarn facilities, reflecting the tight labor market. Nonetheless, we are optimistic about our progress as we move forward and are committed to increasing our overall production volumes.

To address your point, Brian, regarding our vertical integration, we believe we are in a stronger position regarding our supply chain compared to our competitors. We do not feel any disadvantage. Everyone is facing a very tight supply chain, and we think our team is performing exceptionally well in this situation.

And also, there’s a lot more inflation on sourced yarn, particularly in Asia, then there is in this hemisphere. I mean pricing in Asia on yarns and fibers has gone up significantly relative to more of a stable class structure, I think in our hemisphere and across the U.S.

Yes. It has to be an advantage. I want to discuss the point of sale at retail for imprintables, which is making up for other verticals that have not yet recovered. Can you estimate the size of your national account business and the potential opportunity you see for further growth in onshoring?

We are supporting major brands like Nike and Adidas, both of which are looking to exit China. This shift presents significant benefits. Additionally, our large brands and retail partners aim to source products locally. Screen printers serving mass market retailers are expanding their businesses, which is contributing to our point of sale performance. While currently our performance is slightly below 2019 levels, we are seeing improvements as we get closer to those figures in July, with each month showing continued progress. Moreover, we're beginning to notice larger orders returning to the market as gatherings increase, which were previously nonexistent. However, we remain cautiously optimistic due to the emergence of the Delta virus. On the bright side, we are in a good position with low inventory levels both in our warehouses and our customers' warehouses. Global supply remains tight, largely because many factories and raw materials capacities were stalled during the pandemic as companies idled older equipment to streamline their cost structures. This has resulted in a significant reduction in overall capacity. Looking at the current equipment market, acquiring new equipment typically takes 12 to 18 months, indicating that supply constraints will likely persist as businesses work to restore their capacity. Overall, we feel confident about our operational structure and cost management.

Your next question is from the line of Jay Sole from UBS.

This is Mauricio Serna on behalf of Jay Sole. First of all, congratulations on the results. And I wanted to ask a couple of things. First on the pricing strategy. Is there like a pricing gap that you have in mind in the imprintables business just versus your competitors that you cannot target and on the other hand, you talked about inflationary pressure. Should we think that will mostly affect the cost of goods sold, or should we also see some of that hitting the SG&A dollars in the second half of the year, just thinking also because the SG&A dollars versus 2019, they were like down 14% in the second quarter. Just thinking that like a level that we should think about for the second half, or is there anything regarding inflation there?

Okay. Well, I’ll answer the pricing and Rhod will take the other part of your question. As far as the pricing is concerned, look, we have a significant advantage on price in the market today. These pricing inflation affects everybody. But the only caveat is that I think that we have positive manufacturing efficiencies coming through our Back to Basics strategy as we continue to streamline our operations. So our pricing strategy will be a function of maintaining our operating margins at probably the 18% level and focusing on top line growth. I mean, that’s how we’re going to balance it out. So we’re really focused on making sure the top line grows as we look forward into ‘22. At the same time as delivering good financial results and targets that we set to the market.

Inflation is indeed present on the SG&A line. It impacts labor, particularly on the distribution side, and we see upward pressure in other areas as well. We anticipate that labor will influence SG&A. However, we believe we have managed our SG&A effectively. Looking at our performance for the quarter and our overall SG&A targets, we are doing well. We are confident in our ability to maintain tight control over SG&A as we progress through the latter half of the year, which will help us achieve our goal of an 18% operating perspective for the full year. Nevertheless, inflation is pervasive and can be seen everywhere.

Congratulations.

Your next question is from the line of Patricia Baker from Scotiabank.

My questions on the quarter have been asked and answered. But perhaps you take this opportunity to provide us with an update of how things are going with the Bangladeshi facility build?

Well, we’re continuing to move forward in Bangladesh as planned. We’re still projected to start the plant at the end of Q4 in ‘22 and be wrapped up during the year of ‘23 is really where we stand today. Maybe 1 or 2 months, I think probably a little later than we anticipated, but it’s still moving forward, and we feel comfortable we’ll deliver the plant at the end of Q4 ‘22.

Well, with that, I guess, once again, I’d like to thank everyone for their participation today. And we look forward to speaking to you soon. So have a wonderful day, everyone, and thanks.

Thank you.

And with that, this concludes today’s conference call. Thank you for attending. You may now disconnect.