Gildan Activewear Inc. Q4 FY2022 Earnings Call

Ladies and gentlemen, thank you for standing by, and welcome to the Q4 2022 Gildan Activewear Earnings Conference Call. All participants are in a listen-only mode. After the speaker's presentation, we will conduct a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Élisabeth Hamaoui. Please go ahead.

Good morning, everyone. This morning, we issued a press release announcing our fourth quarter and full year 2022 results. Please take note, the company's MD&A and financial statements will be filed tomorrow and made available on our website. Joining me on the call this morning are Glenn Chamandy, President and CEO of Gildan; Rhod Harries, our Executive Vice President, and Chief Financial and Administrative Officer; and Chuck Ward, President, Sales, Marketing & Distribution. In a moment, Rhod will take you through our results, and a Q&A session will follow. Please 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 differ materially from future results expressed or implied by such forward-looking statements. We refer you to the company's filings with the US Securities and Exchange Commission and the Canadian securities regulatory authorities. During this call, we will also discuss certain non-GAAP financial measures. Reconciliations to the most directly comparable IFRS measures are provided in today's earnings release as well as our MD&A. And now, I'll turn it over to Rhod.

Thank you, Élisabeth, and good morning, everyone. I'd like to start the call by thanking the entire Gildan team for everyone's excellent work and dedication during 2022. This put us in a position to be able to deliver record full year results with sales up 11% and adjusted EPS of 14% and $573 million of capital returned to our shareholders during the year through a combination of share repurchases and dividends. We are now one year into the Gildan Sustainable Growth strategy or GSG strategy. And we are extremely pleased with our progress executing on all three of the key strategic pillars we laid out early last year, focused on manufacturing capacity, innovation, and ESG. And even though the environment has been challenging, with fourth quarter net sales coming in softer than we originally expected, we believe our strong fundamentals and competitive advantages are positioning us to be able to navigate through near-term macro headwinds and capitalize on future growth. I'll provide a detailed update on our GSG strategy and our financial outlook later in my remarks. But first, let me take you through our fourth quarter results. We reported total revenue of $720 million, down 8% versus the prior year quarter, due to a 5% decrease in Activewear, where we generated $595 million of sales, while sales in the hosiery and underwear category of $125 million were down 21% in the quarter. More specifically, the decrease in Activewear sales during the quarter reflected continued POS softness in retail end markets, as well as some slowing in printables combined with the impact of the non-recurrence of post-pandemic restocking, which occurred in the same quarter last year. Highlighting a few bright spots, the quarter included strong sell-through of ring spun and fleece products, where we believe our market share continues to grow. And we saw higher year-over-year shipments in international markets as distributors in Europe replenished inventory levels, showing some confidence in the outlook ahead. As in previous quarters during 2022, higher net selling prices were also a favorable factor for Activewear during the fourth quarter. In hosiery and underwear, we generated sales of $125 million in the quarter, reflecting weak category level demand for these products and the ongoing impact of tight inventory management by retailers. We also saw this reflected in the numbers reported by NPD with demand for men's underwear and hosiery in the total measured market down again for the quarter without any sequential improvement from Q3. Moving on to margins, excluding accrued insurance recoveries of $26 million recognized in the fourth quarter, adjusted gross margin came in at 29.1%, down 150 basis points compared to 30.6% last year. The decline was primarily due to higher raw material and manufacturing costs, which more than offset higher net selling prices and favorable product mix. Our SG&A expenses for the fourth quarter were $76 million, down 6% from last year, reflecting lower compensation expenses as well as ongoing cost containment efforts. As a percentage of sales, SG&A expenses were 10.5%, 20 basis points above the prior year, reflecting the impact of lower sales in the quarter. As part of annual impairment testing requirements, we recorded a non-cash impairment charge in the fourth quarter of $62 million, with the charge tied to current market conditions and related to intangible assets acquired in previous sock and hosiery business acquisitions. You should note, this charge follows a net reversal of impairment for these assets recorded in the same quarter last year in the amount of $32 million. Excluding this charge, and given our combined gross margin and SG&A performance, adjusted operating margin in the fourth quarter came in at 18.8%, down 160 basis points from 20.4% last year, but in line with our expectations for the quarter, despite lower than expected sales. Overall, adjusted net earnings for the December quarter totaled $117 million or $0.65 per share, down 14% from adjusted net earnings of $149 million or $0.76 per share last year. This brought adjusted net earnings per share for the full year to $3.11, a record for Gildan, and we think a testament to the strength of our overall business model. Turning to free cash flow, for the quarter we generated $131 million, up from $160 million in the prior year quarter, mainly driven by focus working capital management efforts, which combined with insurance recoveries, more than offset the impact from inventory built in the quarter and higher capital investments during 2022. Full year cash flow totaled $198 million, down from $594 million in 2021, mainly due to significant investments in inventories and the impact of higher capital investments. On inventories, you may recall, we were running below optimal levels last year due to the impact of hurricanes in Honduras in 2020 and a tight yarn supply environment in 2021. Our inventory levels now put us in a strong position to service our customers as we move through 2023. On capital spending, we spent approximately $80 million on CapEx in the quarter, bringing total capital investments for the year to approximately $245 million, with most of the spending related to optimization and expansion projects. Further, we repurchased approximately 1.2 million common shares in the fourth quarter for approximately $37 million, bringing our share repurchases for the full year under two buyback programs to 13.1 million shares or 7% of our float and an overall cost of $444 million. We did this while maintaining a strong balance sheet with our net debt on January 1, totaling $874 million, and our net debt to adjusted EBITDA leverage ratio at 1.1 times at the lower end of our target range of one to two times. This brings me to our update on our GSG strategy and our outlook for the year ahead. A year ago, we provided an overview of Gildan's sustainable growth strategy focused on capacity-driven growth, innovation, and ESG. We are pleased with the progress we've made with our strategy, which is reflected in our strong '22 results. With our 2022 revenue base of over $3.2 billion and our full year adjusted operating margin of 19.7% coming in at the higher end of our target range of 18% to 20%, we believe our business model is positioning us well to deliver on our long-term profitability and return targets. Specifically, by executing on our strategy, we have shifted gears from a year ago when we were capacity constrained. Today, our capital investments have translated into increased manufacturing capacity and flexibility throughout our supply chain. This has allowed us to invest in inventory and improved product availability, which together with leadership in pricing and ESG is enabling us to adapt to the current environment and take market share in key product categories. Turning to 2023. We feel cautiously optimistic despite ongoing uncertainty. In the first part of 2023, we expect continued headwinds tied to the demand environment and two strong comparative periods, particularly as we cycle post-pandemic inventory replenishment in the first quarter. In this regard, while we continue to see momentum in the principles market, driven by the return of large gatherings, and the shift of consumer spending to experiences, including travel, we're also seeing macro uncertainty weighing on buying patterns, as some of our customers are placing orders closer to their needs and managing their inventory levels more tightly. Nonetheless, we believe we are well positioned to gain share even in a softer demand environment. And we have recently seen this in the strength of our distributor POS, which is now running better than the fourth quarter. With regard to our national accounts business, where we service retailers, our business continues to be impacted by soft demand in retail end markets, and ongoing tight inventory management by retailers. However, despite this current tightness, we expect demand for replenishment type products to start to normalize, as we move through the year, given the nature of the products we sell. Finally, in international markets, we started to see improvement in Q4, with positive sell-through trends in certain regions, together with healthy demand for inventory to support a stronger outlook for '23. Moving to the margin front. In the first part of the year, we're expecting increased margin pressure due to higher raw material and input costs, which are currently in our inventories. As we move past the first quarter, we expect these headwinds to start to abate and to deliver strong margin performance during the remainder of the year. So summing it all up, and looking at our 2023 financial performance, and providing additional color given the current circumstances, we expect revenue growth for the full year to be in the low single digit range, following what will be a slow start to the year in the first quarter, given the demand environment and tough comps. On margins, we expect our full year adjusted operating margin to fall within our 18% to 20% target range, despite expected margin pressure in the first quarter, driving us 200 to 300 basis points below the low end of our target range. As we translate this into earnings, we expect to achieve adjusted diluted EPS in 2023, in line with 2022, assuming the continuation of share repurchases aligned with our capital allocation targets of purchasing approximately 5% of our public float annually. Finally, we plan to stay the course on our new capital projects, while managing our existing capacity carefully, demonstrating our confidence in the long-term outlook for our business. Capital expenditures are expected to come in at the lower end of our previously stated 6% to 8% range. And with significant working capital investments behind us, we expect to drive strong operating and free cash flow generation for the year. So overall, you can see we enter the second year of our GSG strategy excited and as we prepare to launch production at our new manufacturing facility in Bangladesh in late March, which will ramp up through the year providing us with new capabilities and opportunities ahead. Our in-stock levels are in great shape. We have significant flexibility in our manufacturing system and a healthy balance sheet. In closing, although the current environment presents its challenges, we remain excited and focused on our long-term strategy. Favorable industry trends remain intact, including the casualization of apparel, the interest in private label, the growing greater economy and ongoing developments in digital printing, as well as the appeal of nearshoring and sustainable practices, all of which are creating long-term growth opportunities for Gildan given our strong competitive advantages. With that, I will now turn the call back over to Elizabeth.

Thank you, Rhod. Before moving to the Q&A session, I ask that you limit the number of questions to two and we'll circle back if time permits. Operator, you may begin the Q&A session.

Hi. Thank you. I'm interested in hearing more about your first quarter top-line plan and how it divides between the two segments. You provided the EBIT margin, but I hope you can elaborate on the top-line performance. Additionally, could you discuss the pricing environment in the printwear channel and how your price gaps compare to typical expectations? I may have one follow-up question.

I will begin with the top-line performance for Q1 2023. It has been a challenging quarter in terms of comparisons, particularly since we had a strong Q2 2021. We're anticipating a decline in sales for this quarter. Looking back at 2022, we were successfully raising prices which had started in 2021, benefiting us throughout that year. However, as we enter 2023, this pricing advantage is diminishing, resulting in limited price increases impacting our overall sales. From the point of sale perspective, we are experiencing weak performance in the first quarter, with distributor sales declining, likely in the single digits, and retail sales dropping in the double digits. Any price increases we achieved in Q1 2023 are largely being offset by this lower sales activity. Additionally, our overall sales figures will be affected by the inability to compare to Q1 2022, the restocking we observed last year, and anticipated destocking this quarter. Given the current inventory situation and how customers are managing their stocks, we estimate the total impact will be around $75 million in Q1. Therefore, we are expecting a softer performance for this quarter as we navigate these challenges. However, we anticipate strength in various areas as we progress through the year, which we can elaborate on further during the call.

I'll address the pricing aspect. Firstly, market pricing is stable and has remained roughly the same over the past two quarters. The main reason for this stability is that inflation continues to be a factor. To remind you, when we raised prices to keep up with inflation, especially concerning raw materials, we didn't increase them enough to fully offset peak raw material costs. That was just over $1, and currently, we are not far from our initial pricing. Other contributors include ongoing inflation in labor, materials, and energy as we move forward. Therefore, inflation remains a presence, and we anticipate pricing will remain relatively stable throughout 2023.

And then, Glenn, what's the average unit cost increase? Do you expect as we move throughout the year when you take into account those cost pressures, labor, raw materials, as I look in first half or the second half?

So it's – if you look full year, it's actually pretty low, Paul, right? Again, we're not really calling out much from a price perspective, as we look at the full year. If you look at our low single digit increase in sales, that's very little of it really is coming from price, I would say, some of it is coming from mix. And volume is sort of staying in there. It's not, obviously, because if we look at the comp versus last year, from a volume perspective, we're not forecasting major volume. Actually, we're being quite conservative, really when you look at it, when you think about the year, because the way that we've set up the assumption is that we are assuming the US market is down effectively for the full year. And really, what we've assumed is that effectively, the sales bump that we get the low single digit increase. That's really coming from some recovery in the international markets, which have been very, very weak over the last number of years. But we started to see some strength as we moved out of the fourth quarter. And then, we're also assuming that we'll get the benefit of new retail programs, which we can also talk about. So effectively, if you look at the full year, not much from price, really, if you look at the real drivers, it's these two factors that we talked about. And we are assuming a down market in the US. So if the market is stronger than we ultimately expect currently, effectively, we will see the benefit on a go forward basis.

Got it. Thank you. Good luck, guys.

Thank you.

Our next question comes from Luke Hannan from Canaccord Genuity. Please go ahead. Your line is open.

Thanks. Good morning, everyone. I just want to focus on the inventory for a second, your own inventory. Curious to know how the composition shakes out across each of your product lines, how you feel about that? And then also how you feel about capacity moving into this early part of the year where presumably demand is going to be a little bit weaker? And if we look at some of the other peers in the industry, it looks like they've scaled back capacity? So I'm curious to know, your thoughts there on your positioning going forward?

We are beginning with our inventory, which we view as an investment in our business. Our inventory is well positioned and at historic levels. Currently, we are operating with about 34% working capital, consistent with our historical norms, and our balance sheet can support this inventory level. We believe that having this inventory will provide us with a strategic advantage, allowing us to capture market share, especially as competitors struggle to finance high inventory levels. We are also committed to investing in manufacturing for the future. We have completed our ramp-up in Central America, and while Coronado will start at the end of March, it will experience a gradual ramp-up throughout this year and into 2024. We are well-equipped to support our GSG strategy. Regarding our capacity, we have flexible utilization and are currently not operating at 100% capacity, which does not significantly impact our operating margins, which we are comfortable maintaining in the 18% to 20% range. Historically, Gildan has built capacity and successfully utilized it, and we are confident that as we move through this year into the next, our investments and strategy will allow us to fully utilize our capacity.

Okay, I appreciate that. And then for my follow-up here, the international markets Rhod, you touched on, you guys saw strength there during the quarter, curious to know which particular markets were you saw strength and growth and where which markets rather, are still lagging and what the trends have been so far, early in the year.

Good morning, Luke. Thanks for the question. I think as we look at the international markets, the Asian markets, parts of them continue to be more challenging, as there continue to be certain restrictions in those markets. And so they're lagging as we see the return. I think what you're seeing is a little more optimism in the European market, from our both UK and European distributors. So we're seeing potential upside from an international perspective in Europe and continued challenges in Asia.

Our next question comes from Stephen MacLeod from BMO Capital Markets. Please go ahead. Your line is open.

Thank you. Good morning. I'd like to begin by asking about your outlook for revenue as you move past the first quarter. Can you share what factors are influencing your improved expectations beyond Q1?

I want to emphasize that we are expecting low single-digit growth, particularly in the US market where we are seeing a decline, with all growth coming from new programs in our retail and GLB categories. Our opportunity lies in the potential for market recovery in the US, as we've taken a conservative approach to our forecasting, which could mean there is upside. I’ll let Chuck discuss the current point-of-sale situation and our standing in the market.

Thank you, Glenn. I believe Stephen has a point regarding the low single-digit growth. As Glenn mentioned, we are cautious about the North American market, which is expected to decline. However, we anticipate slight growth internationally as we progress through the year. The growth primarily hinges on new programs, which will drive our sales growth and contribute to the low single-digit increase. We have no new programs planned across the board, but we are expanding in our underwear category and introducing new initiatives with global lifestyle brand partners that are exploring nearshoring. Additionally, we have been launching more ring-spun products in the fleece and T-shirt segments within the North American imprintables market. We believe this will positively impact growth and help offset some of the challenges in the North American market.

In the Printwear market, especially in Q4, we experienced some negative sales. Looking back at last year, January and February were very strong, but as the year went on, our sales figures declined, and Q4 was a bit disappointing. We anticipated similar sales levels for Q4. The good news is that in January and February this year, we've seen our distributor business sales improve, coming in almost flat compared to last year, which is a positive sign. We're cautiously optimistic, but we are being conservative in our forecasts due to the current macroeconomic environment. Overall, at the start of this year, our sales performance has been better than we expected.

Yes. Okay. That's great color. Thanks guys. And then maybe secondly, on the gross margin, obviously, seeing some pressure in Q1, do you expect that once you get past Q1 into Q2 and beyond, on a quarterly basis, you'll be within that 18% to 20% target range?

Yes, that's how we have it projected. In the first quarter, as mentioned, we will be 200 to 300 basis points below the lower end of our range as we manage the factors highlighted earlier. As we move into the second, third, and fourth quarters, we anticipate our margins will improve. The second quarter is expected to be significantly stronger than the first quarter, aligning back with our target range. Looking ahead for the rest of the year, we predict to operate well within our range. We are optimistic about our margins as the year progresses. Considering our manufacturing system and supply chain, we are aware of our inventory levels and feel confident in our cost structure. Therefore, we can confidently discuss our margin performance for 2023, reflecting on what we achieved in 2022.

Hi. Thanks for taking my questions. I just want to get a bit more color on mix. Management suggested that mix would be a favorable factor again in 2023. And I understand fleece was a contributor in 2022. And fleece may have been a contributor due to work from home; as work from home unwinds, would you expect that fleece contribution to similarly unwind and put some pressure on gross margin? How should we think about that?

Fleece is still growing rapidly and is actually accelerating. What is driving our point of sale in Q1 is robust sales. It has been a contributor along with the carry-over fashion T-shirts segment, so both continue to positively influence our top line mix and performance.

Okay. And does management understand the drivers behind fleece? Is it still work from home demand, or is there some other driver that we should contemplate?

Well, I think it's a lifestyle thing. You know, people are wearing more smart casual wear, or it's creator economy. It's all the factors really, I mean, people are still casual, even though they're just getting out of the house.

Okay. And just switching gears here, with respect to labor across your various manufacturing platforms, how does management feel with regards to labor in your facilities?

We have observed inflation impacting labor across our global manufacturing, and this has been ongoing since last year. Inflation is indeed a factor affecting energy and materials as well. While there has been some slight normalization in certain areas, inflation remains a significant concern. Ultimately, this will continue to influence long-term pricing.

Okay. And with respect to getting the bodies you need in your yarn-spinning studies, are those issues under control?

Yeah. No, so Vishal you're asking about the labor in yarn. Yeah, it was an issue for us in 2021. And in 2022, we started to get our arms around that. The environment improved. And now as we move through 2023, availability of labor is not a concern for us. We have the labor that we need. And we don't see that as being a constraint. Actually, we see our yarn operations are in very good shape, really, with the after the acquisition of frontier. And we've been integrating and optimizing. And so we feel very good about the supply chain and our ability to run yarn, textiles sewing. And as we go forward that really puts us in a position of strength.

Thank you.

Thank you.

Our next question comes from Brian Morrison from TD Securities. Please go ahead. Your line is open.

Hi. Good morning. Thank you. So potentially for Chuck or for Glenn here, you talk about these new program opportunities. And it sounds like Private Label and GOB. Can you give us some more details like deep contracts and award? How should we think about magnitude? And then, you did talk about some update in Q1? Is it still in the same timeframe, or have they been pushed out at all?

I think from the perspective of the new programs, the ones I mentioned are all awarded, and we're progressing with them. The launch timing for these programs will take place throughout the year, but these are not speculative; we have definitive awards. Therefore, we have a good understanding of when they will be implemented. Regarding Q1, as Glenn mentioned, our point of sale has performed a bit better than we anticipated, especially considering the strong comparison from Q1, 2022. There are still challenges in printables and the distributor channel, but overall, it's better than we expected. January was slightly weaker, but February shows signs of improvement. Okay. And specifically, are these new programs, are they private label or are the GLB, the Nikes, Adidas of the world?

Yes, they encompass all categories. We have some that are private label, some that belong to global lifestyle brands, and some that are Gildan.

As you remember, in our last call, we talked about the numerous underwear programs we acquired, as well as the additional shelf space for underwear, which contributed significantly to our growth in new programs.

Okay. Thanks for that clarification, Glenn. And then, maybe for Rhod, I just wanted to circle back to the corporate inventory. I know you say you're comfortable with it. It's up about 17% from 2019, admitted that was a bit high. So is it really volumes are somewhat flat and its inflation and mix with much more fleece in there? And, I guess, maybe, how should we think about corporate inventory balance as we look out to year end? Is it going to be a source or use of working capital?

Glenn discussed the current status of our inventories. Over the past several years, we operated with low inventories, and we needed to return to more optimal levels, which we've been actively working on. We've successfully built out our supply chain among various factors. Currently, our inventory levels stand at $1.2 billion for the fourth quarter, reflecting a year-over-year increase driven by higher units and costs. We required these units to effectively serve our business and are now well-positioned to meet our customers' needs. It's important to note that we mainly deal with basic replenishment products. As Glenn mentioned, we've made significant efforts in managing our overall working capital to invest in this inventory. We concluded the year with a working capital of 34%, falling within our target range of 30% to 35%. Looking ahead, we anticipate stable inventory levels throughout the year, with no significant investment needed in our inventories for 2023. This stability supports the strength of our overall free cash flow. In 2022, we generated $200 million in free cash flow while experiencing a working capital build of approximately $300 million, which we do not foresee for 2023. Furthermore, our capital expenditures were higher in 2022 than we expect them to be this year. In 2022, we operated at the upper end of our target range of 6% to 8%, while this year, we expect to be at the lower end. Overall, we're very optimistic about our inventory position, our ability to serve customers, and our expectation to generate substantial cash throughout the year. This ultimately aligns with our announcement of a dividend increase and plans for share buybacks. We feel well-prepared for 2023.

All right. Very good color. Thanks very much, Rhod.

Our next question comes from Jim Duffy from Stifel. Please go ahead. Your line is open.

Hi. This is Peter McGoldrick on for Jim. Thanks for taking our questions. First, I wanted to get an idea of your expectations for private label into 2023. Can you add some perspective on growth in private label relative to branded products? How should we think of mix contribution into 2023 net of new programs, et cetera?

We don't expect a significant shift between private label and our brand products. The margin profiles are quite similar. As mentioned earlier, these programs have been secured and are integral to our 2023 forecast. We are actively exploring new opportunities. Last call, we noted that entering 2022, we were focused on our existing business and not pursuing new programs. However, following the downturn in Q2 and Q3 of last year, we proactively sought new business, which we have successfully gained. We're continuing to pursue further opportunities as we progress. Our aim is to maintain our GSG strategy, with the goal of capturing market share thanks to our strong inventory position in the printwear market, and to leverage near-shoring opportunities, private label, and international sales. All these elements are part of our growth initiatives, and we will remain focused on our core strengths to meet our targets.

Thanks. Could you provide an update on the size of the digital printing business and how it has progressed compared to the traditional print business?

I would say it's pretty difficult for us to give you a number on it. But I would say that one of the big drivers of growth during 2021 was partly the greater economy, digital printing, online selling, which is also the part that I think that has come down a little bit in 2022 as we saw e-commerce sort of leveling off. But replacing that was people getting out and all the events, raw-concert, sporting events, different things. So I don't think that's structural because I think that, that will continue to be a growth driver. I think it just peaked during the pandemic because people were home. But we forecasted. And as we went to our investor conference last year, and we sized the size of the market, we did a recap refresh on that. And basically, everything is still intact other than I think the economic market has sort of contained the growth rate a little bit as we move. But I think all of the pieces are still heading in the right direction on a longer-term basis.

Our next question comes from Jay Sole from UBS. Please go ahead. Your line is open.

Great. Thank you. Glenn, you made some comments earlier in the call just about the competitive landscape and how the current environment has made it difficult for some competitors. Can you elaborate on that a little bit? Maybe just talk to us how you're seeing the competitive landscape shift versus maybe a couple of years ago and what that means for your ability to take market share?

Well, I think that if you look at the landscape, not just here in North America, but I would say, globally, the running capacity rate of the apparel industry length and I prefer that to yarn and textiles, et cetera is relatively low throughout the globe right now. So that's, that's a big factor. You know, one of the things we see is that there's two elements, I think that are going to be big opportunities for us as we move forward is that, as the cost of capital continues to increase, the carrying cost and the capability for manufacturing expansion is going to be difficult for a lot of companies. And the strength of our balance sheet allows us to do both is to carry the inventory, as well as to continue making those capital investments because we can afford to do. And you can look at anybody who's basically has high debt, high leverage, and as his leverage comes due, either private equity or companies that have leveraged, their ability to support inventory, I think will be limited on a go forward basis and they'll manage those inventories down and will be difficult for them to service the market, particularly when the market rebounds, but I think even it takes time to restart your engines, right. So, you know, we look at us, we took us almost a 1.5 years from the hurricane and 2021 to the pandemic, and you know, just to get all that capacity coming online. And we think that this is a real opportunity for us right now. And that's why we're very confident and carrying the inventory levels that we are carrying and continue making the CapEx that we've committed to so for both those reasons, we're very optimistic about committing and achieving our GSG strategy targets as we go forward.

Our next question comes from Chris Li from Desjardins. Please go ahead. Your line is open.

Hi, good morning, everyone. Maybe just a first question for Rhod, just maybe follow-up to your answer to Brian's question. I was wondering, do you – would you expect your leverage to remain in the lower end of your one to two times target range by the end of this year? And then when can we expect you to resume buying back shares again? Thank you.

So the answer is that yes, we do expect the leverage to be at the lower end of our target range as we move through the year and definitely by the end of the year, again, given the strong cash flow generation. And as I said, we do plan to be able to buyback; we called out 5% of our shares. You'll see us do that on a consistent basis as we go through the year. I think if you look at 2022, we bought back 7%. And effectively, so we were above our 5%. And as we finished up the year, effectively, we lightened off a little bit. But as we move through 2023, you'll see us pretty well on a steady cadence, effectively delivering the buyback of the 5%. And again, what we're really excited about is that our balance sheet is in great shape, our leverage we are forecasting will be at the low end of the range. And we're well positioned to do all the things that Glenn just talked about. So I think we're in a strong position to drive the organic growth, and we're in a strong position to return capital to shareholders.

Thanks, Rhod. I have a question for Chuck or Glenn. You noted that your expectation of low-single-digit revenue growth for this year might be somewhat conservative due to a decline in the North American market. Could you provide more details on this? Specifically, what is the expected decline? Is it low-single-digit or mid-single-digit? Understanding the magnitude would help us gauge how conservative your forecast truly is.

Rhod?

Yes. For North America, we're anticipating a decline in the low-single-digit range. While we recognize that we won't be able to match the restocking levels we experienced in early 2022, this has already been factored into our forecast for 2023. Adjusting for that, North America remains in the low-single-digit decline. However, we expect this to be balanced by the addition of new programs and performance from international markets. Overall, our outlook is conservative, especially since the first quarter is expected to be softer. However, given the strong demand from consumers, we remain optimistic about the year ahead. We'll monitor inventory levels as we progress, and with the consumer strength we see, we hope for a better outcome than what we've projected.

Okay. Sorry. And maybe just a quick follow-up on, I think you also mentioned that, in February you've seen the Gildan and POS is starting to increase versus a year ago. Is that mainly driven by your ability to gain market shares or are you actually seeing some resilience on the demand side of things?

We believe we are well positioned to continue capturing market share. Although the overall market remains somewhat down, we are experiencing positive comparisons driven mainly by fleece. The fashion segment is also a significant contributor to our growth. Overall, we feel confident in our ability to navigate the market.

Our next question comes from Mark Petrie from CIBC. Please go ahead. Your line is open.

Hey. Good morning. Thanks for all the comments so far. Just a couple of follow-ups. Within retail in Q4, how much of the weakness was sort of at shelf with your programs versus national accounts order or demand?

So if you look at Q4, really, we saw the retail environment down. If you look at the POS, generally, it was down double-digit I would say on the retail side, but it was across all of the retail end markets, Mark. So if you look at national accounts, if you look at the sales to the big retailers, because a lot of sales of the national accounts end up in retail. So, we see sort of similarities on the national accounts, and the national accounts in Printwear I'm talking about, because we call everything, including retail national accounts as well. But it was pretty, I would say, similar across all of the different channels and retail customers. I mean, it was a soft quarter in retail and we saw pretty well everywhere.

Okay. And with regards to sort of end market demands within the distributor channel, I know you're saying industry volume down for 2023. But is that driven by one market more significantly than another in terms of the end markets, or is it pretty balanced as well?

It's pretty balanced.

Okay. And then do the account wins in retail impact the EBIT margin at all? Are they consistent with the overall profile?

It’s very consistent with the overall profile.

Okay. And then last one, I'm just curious about your views or any comments or you can provide about the competitive dynamic within the Printwear channel particularly as if volume does blow through the course of the year, how you expect and I know you were talking about sort of inventory positioning and the challenges for people there. But I'm specifically curious about views on price and how that might play out?

I believe our cost structure is in much better shape compared to the industry's, both regarding raw material and manufacturing costs. Inventory levels are high, and many companies have reduced production, which is driving up the cost of remaining inventories. This situation is likely to keep prices stable in the market. Unlike in the past, price isn't going to significantly influence the market now, as there aren't large purchasing events driving demand. Most manufacturers in our sector are cutting back on their inventories and operating capacity, likely running at only about 50%. In contrast, we came off very low inventory levels in 2021, which supports our current production rate. Our cost structure remains strong concerning both raw materials and input costs, putting us in a favorable position, and we feel confident about our forecasts.

And we have another question from Sabahat Khan from RBC Capital Markets. Please go ahead. Your line is open.

Great. Thanks. So just a clarification question. I think when you're talking about POS being somewhat better during the early months of 2023, especially, that will help you kind of get the distributors in better inventory position, so they can order later, or do you think there is sort of upside to a guidance they are already providing in terms of you might be able to ship more to them than you initially thought, or is that just that's what you're expected for them to be able to deplete their inventories over the next few quarters?

What we're saying is that we are comparing our performance to last year, particularly noting that we had negative point of sale in the fourth quarter, which was our weakest quarter of 2023. Consequently, we've adjusted our forecasts accordingly. January and February were strong months for point of sale in 2022, so we can use those figures as a benchmark moving forward. Throughout the year, we have seen a decline in point of sale, and we've projected negative point of sale for the entire year. Given this context, we believe we are in a good position for potential upside. Therefore, we are cautiously optimistic and will observe how the market evolves as we continue.

Okay. And then just quick clarification on Q2, I definitely call up some of the tough comps, et cetera for Q1. For Q2, I guess, do you expect sequentially improvement if look for some top-line growth in Q2 here as well year-over-year?

Yeah, if you look at Q2, effectively, yeah, I would say that we do see weakness in Q1, as you said, I think, as we go to Q2, I think, that'll be again, it was a tough quarter when we looked at Q2 2022. We did almost $900 million of revenue. So it is a big comp. So I think there I think it will be a little tougher but again, as we move through Q3, Q4 we see real strength. So I think that's probably about as much color as I want to give you on the way the quarters unfold.

Okay. Thanks very much.

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