Earnings Call Transcript - GIL Q3 2025

Jessy Hayem, Senior Vice President, Head of Investor Relations and Global Communications

Thank you, Jeannie. Good morning, everyone, and thank you for joining us. Earlier today, we issued a press release announcing our results for the third quarter while updating our full year guidance for 2025. We also issued our interim shareholder report containing management's discussion and analysis and consolidated financial statements. These documents are expected to be filed with the Canadian Securities and Regulatory Authorities and the U.S. Securities Commission today, and they'll also be available on our corporate website. Now joining me on the call today are Glenn Chamandy, our President and CEO; Luca Barile, Executive Vice President, CFO; and Chuck Ward, Executive Vice President, Chief Operating Officer. This morning, we'll take you through the results for the quarter, and then a question-and-answer session will follow. Before we 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 differ materially from future results expressed or implied by such forward-looking statements. We refer you to the company's filings with the U.S. Securities and Exchange Commission, and Canadian securities regulatory authorities. 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 Glenn.

Glenn Chamandy, President and CEO

Thank you, Jessy, and good morning, everyone. We're pleased with our third quarter results as we continue to drive profitable growth, especially in a macroeconomic backdrop, which remains fluid. We saw strong net sales growth of 5.4% in Activewear and adjusted operating margins of 23.2%, which allowed us to deliver record adjusted diluted EPS of $1 this quarter, an increase of 17.6% versus the same period last year. These are record-setting third quarter results, which once again showcased the effectiveness of our Gildan sustainable growth strategy in driving strong financial performance. Our sales in the distributor channel remain healthy, and we're seeing sustained momentum in our national account customers, which is supported by strong overall competitive positioning. We continue to drive growth in key categories. We're very pleased that our innovation pipeline continues to create excitement, and we have now introduced new brand offerings such as ALLPRO and Champion. Furthermore, our Comfort Colors brand continues to perform very well. This year, the brand is actually celebrating its 50th anniversary. A great milestone for Comfort Colors whose pigment dyed shirts are redefining comfort and style. They're crafted from 100% rings spun cotton, grown and harvested in the U.S. using pigment pure technology, which helps to reduce water and energy and shortens processing time. So as we turn the page to another successful quarter of execution, we are narrowing our adjusted diluted EPS guidance to a range of $3.45 to $3.51, and also updating our full-year adjusted operating margins, CapEx, free cash flow guidance. Luca will detail this in a moment. We believe that this is an exciting pivotal moment for Gildan, and we're enthusiastic about the next phase of our growth journey. We're delivering constant execution of our strategic priorities. We're capitalizing on the largest innovation pipeline in the company's history. And now we're focused on planning the integration of the proposed acquisition of HanesBrands, which will broaden our portfolio of retail presence as we look to drive meaningful run rate synergies of at least $200 million by leveraging our best-in-class large-scale, low-cost vertically integrated manufacturing network. We continue to expect the transaction to close late this year or early 2026. As you can expect, we have put in place an integration team that has begun planning for this combination. At this point, there is no further commentary that we'll be positioned to provide for the proposed transaction. In conclusion, we continue to execute from a position of strength. We have a solid foundation. We're focusing on our GSG strategy with our strong competitive positioning, all of which is putting us in a great position to execute on the eventual combination with HanesBrands and ultimately drive long-term shareholder value. I look forward to answering your questions after our formal remarks, and now I'll turn it over to Luca for a financial review.

Luca Barile, Executive Vice President, CFO

Thank you, Glenn. Good morning, everyone, and thank you for joining us today to discuss our third quarter results. Let me start with the specifics of the quarter, then turn to our 2025 outlook and guidance. First, the quarterly results. We reported third quarter sales of $911 million, up 2.2% year-over-year, in line with previously provided guidance of low single-digit growth. The 5.4% increase in Activewear sales was driven by favorable product mix and higher net prices. As Glenn mentioned, we continue to drive growth in key categories and are experiencing robust demand for Comfort Colors while supplementing our portfolio with the addition of ALLPRO and Champion. Sales to North American distributors were solid, complemented by sustained momentum at our national account customers, driven by our strong overall competitive positioning. Sales in the hosiery and underwear category were down 22% versus last year, which reflects, as expected, a timing shift of shipments into the fourth quarter and, to a lesser extent, unfavorable mix as the category experienced continued broader market weakness during the quarter. Turning to international markets. Sales were down by $4 million or down 6.1% year-over-year, primarily reflecting ongoing demand softness across markets. We don't typically spend time on our year-to-date results, but just a brief comment that on a year-to-date basis, our consolidated revenue growth is at mid-single digits, excluding the impact of the exit of the Under Armour business in 2024, setting us up well for the full year. Shifting to margins for the quarter. Our gross margin was 33.7%, a 250 basis point improvement over the prior year, primarily due to lower manufacturing costs and favorable pricing, which reflect price increases implemented to offset the initial impact from tariffs. To a lesser extent, we also benefited from lower raw material costs. SG&A expenses were $95 million versus $84 million last year. Excluding charges related to the proxy contest and leadership changes and related matters, which were almost entirely incurred in the prior year, adjusted SG&A were still $95 million or 10.4% of sales compared to $78 million or 8.8% of sales in the same quarter last year, reflecting higher variable compensation and IT-related general and administrative expenses. As we bring these elements together and adjusting for restructuring and acquisition-related costs primarily related to the proposed HanesBrands acquisition as well as the costs related to the proxy contest and leadership changes and related matters, which were almost all entirely incurred in the prior year, we generated adjusted operating income of $212 million, up $12 million, representing a record 23.2% of net sales. This reflects an 80 basis point improvement year-over-year, which came in ahead of guidance we provided. Net financial expenses of $44 million were up $13 million over the prior year due primarily to fees related to the committed financing that we obtained for the proposed HanesBrands acquisition and due to generally higher borrowing levels. Furthermore, in connection with the proposed acquisition, as you may have seen, we announced on September 23, a private placement offering of USD 1.2 billion aggregate principal amount of senior unsecured notes across 2 series. The proceeds from this offering will be used to fund the proposed acquisition of HanesBrands, refinance its debt, and cover related transaction costs. Taking into account all these factors and adjusting for restructuring and other costs and the financing fees in connection with the proposed HanesBrands acquisition, we generated record adjusted diluted EPS of $1, up 17.6% compared to $0.85 in the comparable period. Now turning to cash flow and balance sheet items for the first 9 months of 2025. Operating cash flow was $270 million compared to $291 million last year, primarily reflecting higher working capital investments. After accounting for CapEx of $82 million, we generated approximately $189 million in free cash flow in the first 9 months of 2025, of which $200 million was generated in the third quarter. During the first 9 months of the year, we returned $286 million in capital to shareholders, including $102 million in dividends and repurchased about 3.8 million shares under our NCIB program. Finally, we ended this quarter with net debt of about $1.7 billion and at a leveraged ratio of 2x net debt to trailing 12 months adjusted EBITDA, at the midpoint of our targeted range of 1.5x to 2.5x. Now turning to our strategy and outlook. As Glenn highlighted earlier, we are pleased with the team's continued execution as we approach the end of a very solid year. We continue to tap into the largest innovation pipeline in the company's history with more product launches to come in 2025 and into 2026. Now turning to the outlook. We remain focused on operational agility and committed to executing on our GSG strategy in order to drive strong financial performance as we navigate a fluid macroeconomic environment. We are updating our 2025 guidance as follows and expect revenue growth for the full year to be up mid-single digits, in line with previous guidance. Full year adjusted operating margin to increase approximately 70 basis points compared to previous guidance of up approximately 50 basis points. Our CapEx to come in at approximately 4% of sales compared to previous guidance of 5% of sales. Adjusted diluted EPS to be in the range of $3.45 to $3.51, which is up approximately 15% and 17% year-over-year compared to our previous guidance of $3.40 to $3.56; and free cash flow to now approximately $400 million compared to our previous guidance of above $450 million. The assumptions underpinning this outlook are the following: Firstly, we continue to reflect the impact of tariffs currently in place in conjunction with mitigation initiatives available to us, including pricing, and our ability to leverage our flexible business model as a low-cost, vertically integrated manufacturer. The higher tariffs are also embedded in our inventory costs. Furthermore, the outlook continues to reflect growth in key product categories, driven by recently introduced innovation, the favorable impact from new program launches and market share gains and the various incentives from jurisdictions where we operate. We've assumed no share repurchases for the remainder of 2025, as indicated at the time of the announcement of the proposed HanesBrands acquisition. We've taken into account acquisition-related costs incurred thus far, and we anticipate that our adjusted effective tax rate for 2025 will remain at a similar level to what we saw for the full year in 2024. Finally, we've assumed no meaningful deterioration from the current market conditions, including the pricing and inflationary environment, and the absence of a significant shift in labor conditions or the competitive environment. So in summary, we are pleased with the quarter, and we remain confident in our ability to deliver continued strong financial performance as we look ahead and get ready to welcome HanesBrands. Thank you. And now I'll turn it over to Jessy.

Jessy Hayem, Senior Vice President, Head of Investor Relations and Global Communications

Thank you, Luca. This concludes our prepared remarks, and now we'll start taking your questions. Jeannie, can you please begin the Q&A session?

Paul Lejuez, Analyst

A couple of questions. One, can you just talk a little bit more about the weakness in the underwear business, where you think that market share might be going? Maybe you can quantify how much was the shift versus overall market weakness? And what's your view on when that business stabilizes? And then second, just curious what you're seeing at point of sale overall. Maybe if you could talk to pockets of strength and weakness at point of sale.

Chuck Ward, Executive Vice President, Chief Operating Officer

Thank you for the questions, Paul. Regarding the underwear and innerwear business, we experienced several challenges this quarter. There were delays in some floor sets from a major retailer, which continue to affect us. Additionally, retailers are adjusting their inventory investments and balances due to tariff impacts, and there is some overall caution. During Q3, we observed retailers managing their inventory more tightly. We also mentioned earlier that there are ongoing product and program resets with some customers that have influenced our results this quarter. Looking ahead, we anticipate a return to growth in the innerwear segment in Q4. Overall, the market for point of sale has stabilized, and we expect that to continue into Q4. In terms of category performance, our Comfort Colors brand is doing very well, and there's significant growth in net fleece. Glenn highlighted some new Activewear programs and national account growth that we are also benefiting from as we move forward.

Paul Lejuez, Analyst

When you say a stable market, are you saying stable to last year, like POS is flat to last year or stable at a low single-digit or mid-single-digit rate?

Chuck Ward, Executive Vice President, Chief Operating Officer

Yes. More in line with Q2, what we were talking about in Q2, the market has kind of been stable at that same rate going forward.

Christopher Li, Analyst

Just maybe a first question on your guidance update. On your free cash flow guidance, you are guiding a little bit lower despite lower CapEx. It looks like it's mostly coming from higher working capital investment. Can you please elaborate a little bit on what's driving the change in the guidance for this year?

Luca Barile, Executive Vice President, CFO

Thank you, Chris, for your question. From a free cash flow perspective, we had a very good performance this quarter, generating $200 million, which aligns with our internal expectations. The revision to our free cash flow guidance is influenced by a few factors. Firstly, we have incurred transaction costs related to the proposed HanesBrands acquisition. Secondly, there is some timing related to working capital. We expect our working capital as a percentage of sales to stabilize around 37% to 38% as we approach 2026. Additionally, we are currently facing some tariff costs in our inventory. Despite these factors, we are still generating healthy free cash flow largely due to strong margin performance, which we anticipate will continue into next year.

Christopher Li, Analyst

Great. Okay. That's very helpful. And then maybe just another one on the guidance update. The operating margin expected to increase by 70 basis points this year. As you look out into next year, what are some of the key puts and takes? And maybe directionally speaking, do you think a 70 basis point improvement again next year is achievable?

Luca Barile, Executive Vice President, CFO

Starting with the guidance for this year, we are very pleased with the strong margin performance we have seen, particularly in the third quarter. This strong margin performance is due to two main factors: robust gross margins and effective cost control around SG&A. The decision to raise our guidance from a previous estimate of 50 basis points improvement year-over-year to up to 70 basis points is based on the elements we control that are driving this margin expansion. These foundational aspects of our operations are deeply integrated into our growth in Bangladesh, where our investment and the resulting cost benefits are significantly contributing to our margins. This positive trend is expected to continue. Additionally, our investments in optimizing our yarn operations and Central American capacity are paying off. While there are some effects from favorable pricing influencing our third-quarter gross margin, the overall picture of our margins remains strong and sustainable, supported by controllable factors inherent in our business model as we move into next year.

Jay Sole, Analyst

Two-part question for me. First is just on the fleece business. Glenn, if you can just talk about how the fleece business trended maybe in September, if the weather is a little bit warmer and maybe what you've seen in October as the weather has gotten a little cooler and just how inventory in that business is looking overall and how demand is looking? And then secondly, with all the tariffs now, it's been a couple of quarters since April 2. What kind of conversations are you having with companies? What kind of opportunity do you see maybe to capture some new business from companies maybe looking to move some of their production out of Asia, maybe to your factories with your company, whether it's in Bangladesh or Central America?

Glenn Chamandy, President and CEO

Fleece is still performing well for us, and we are in a good position with it this year. It's early in the season; we typically ship a lot of our fleece at the end of Q2 and into Q3, and the main sell-through period starts now and goes into the fall and winter. Therefore, while it's early in terms of weather, sales are meeting our expectations for fleece this year. Regarding tariffs, there is a lot of uncertainty in the market. Many companies are looking to reorient their supply chains, but there's also hesitation due to not fully understanding the status of tariffs and potential deals. Shifting the supply chain is not something to do impulsively. We are also looking at ways to optimize our own supply chain as we wait to see how things develop. Overall, there will likely be a reconsideration of how companies approach their supply chains, and we see specific areas where we can explore new product categories. For example, the 100% polyester category has the highest tariffs and duties, and our Rio Nance 6 facility has significant capabilities in polyester production. Trade legislation changes in this area present opportunities for us, particularly since we have low market penetration there. We are working quickly on product innovation in this category, including through our ALLPRO brand, which focuses on polyester products. Major brands are also considering nearshoring, making this category crucial for them. We believe there will be opportunities ahead, although they need to materialize as we move forward. We feel well positioned with our manufacturing capabilities to take advantage of any opportunities.

Vishal Shreedhar, Analyst

Luca, when you mentioned that the market was stable, my understanding was that the wholesale market has been under pressure for at least the last several quarters. Were you referring to volume or sales? And does your reference to stability include national accounts as well?

Glenn Chamandy, President and CEO

When we look at the market, we look at the whole market in styrene, and I would say to you that the Q3 was similar to Q2. And what we said in Q2, it was down low single digits basically. So we're seeing the same type of comps as we move into Q3. So it hasn't really improved and hasn't gotten any worse. So it's more stable relative to Q2, but still negative year-over-year. Obviously, we're doing well in the market because of our soft cotton technology, our Comfort Colors, our AA basically is continuing to grow, our launch of our ALLPRO and Champion, and remember that 3/4 of our sales growth this year in 2025 was projected coming from new programs. Our fleece is in retail, a big major program we had is doing very well. So all those things are driving the sales growth for us to have our mid-single-digit growth for the full year, which we're on track for. But I would say that the market, it was down probably low to mid in Q1. We said low in Q2, and it's probably in the same level Q3, and we're expecting that type of scenario in Q4 in our assumption.

Vishal Shreedhar, Analyst

Okay. And that's on a sales basis, right, not on a unit basis?

Glenn Chamandy, President and CEO

Yes. Yes.

Luca Barile, Executive Vice President, CFO

Yes, Vishal. So again, the gross margin was strong in the quarter. It's a combination of things. But really what's driving the foundation of the margin at the end of the day is the contribution of the lower manufacturing costs. There is some impact from pricing, but really the lower manufacturing cost is what's foundational. And that is what's going to carry forward not only into the fourth quarter, but that's foundational to the business as we move into next year.

Glenn Chamandy, President and CEO

Yes. And then, maybe just add one thing to that, I would say is that, look at the fundamentals of our strategy of optimizing our manufacturing and scaling and generating scale in our operations is going to continue as we move into 2026 because we've expanded in Central America, like we said this year, which we've added another 10% capacity in our facilities in our 4 walls at a limited CapEx, and the CapEx is coming even below our expectations. So as we leverage that CapEx as we move into 2026, obviously, that's going to continue to help us with additional cost reductions and margin expansion as we continue to optimize our facilities. And we're actually in the process now of looking to expand within our Bangladesh facility within the 4 walls of that as well. And we believe that we actually can expand that facility by probably another 50% as we look at the 4 walls of that building by utilizing some space that we have within our park and allowing us to drive additional capacity. So these are all the things that's built into Gildan DNA is looking at ways really to optimize our manufacturing, particularly as we look at our overall planning as we move into 2026 and bringing on Hanes and as far as we continue to plan our integration strategy. So scale is going to be a key driver of continued margin expansion, and we think we're well positioned to continue to grow our margins as we move forward and lower our costs.

Brian Morrison, Analyst

Glenn, I wanted to follow up with that what you just talked about. So how much capacity you talked about the increase in Bangladesh and in Honduras throughput. How much available capacity in dollars is within your existing infrastructure? It sounds like there's another $200 million to $250 million in Bangladesh 1, and what is your view for a go-ahead for a second facility at Bangladesh? I know you already have some of the pieces already in place there.

Glenn Chamandy, President and CEO

I believe there are two key points to discuss. First, we plan to share more details about our strategies as we transition into Q1 and provide updates on our overall integration plan with HBI, which will give you better insight. While we can increase capacity in Bangladesh, this does not prevent us from considering a second facility. We have options available, including adding more knitting equipment in Bangladesh and investing in additional dyeing and finishing equipment at the current site, which will support our initial expansion. As we move forward, we will also assess Phase 2, which would be a larger, longer-term project taking 12 to 18 months to complete. Our primary goal is to enhance our capacity while optimizing our cost structure and minimizing capital expenditures as we integrate HBI. We believe that by aligning with their ecosystem and product mix, we will create a robust integration plan that will lower costs and help us achieve scale. More significantly, we see significant potential for improving margins and operating performance. Our aim is for Hanes to operate at margins similar to those of Gildan today, which represents our long-term objective as we move forward. Overall, I feel we are in a solid position, and we will continue to utilize our top-tier vertically integrated large-scale manufacturing as we evolve our plans through 2026, 2027, and 2028. Even with tariffs, Bangladesh remains highly competitive. Previously, we mentioned that it holds a 25% cost advantage compared to our operations in Central America. The impact of tariffs with U.S. cotton is significantly lower than that. As we scale up and reduce costs, we're able to further offset some of those tariff costs. This strategy is key to enhancing efficiencies in our system. We believe we are in a favorable position and feel confident, as reflected in the expansion of our operating margin this year. We have room to broaden our manufacturing footprint, decrease costs, increase our competitiveness, and continue innovating our products. It's important to consider that despite margin expansion, we have reinvested substantially in product and innovation. For instance, our advancements in soft cotton technology add more value to garments, which may increase costs on a like-for-like basis. However, we're optimizing and offsetting those costs with lower manufacturing expenses, which enhances our operating margin. This creates a win-win situation within our ecosystem. Moving into 2026, as we capitalize on the significant volume from Hanes, we anticipate further scaling opportunities, and we are genuinely excited about this potential.

Stephen MacLeod, Analyst

Just a couple of questions. Just looking at the imprintables channel in Q3, and you sort of called it out as being similar to Q2. Can you talk a little bit about sort of what you're seeing within each segment of that market, fashion basics, basics and fleece?

Glenn Chamandy, President and CEO

I would say that our soft cotton technology remains central to our overall strategy. Comfort Colors is performing strongly again, much like last year. AA is also showing positive growth. We have introduced new brands such as ALLPRO and Champion, along with several new programs. Despite the challenging market conditions, which are down in low single digits, we are doing well. I believe we are well positioned, and I hope to see a significant improvement in market conditions by 2026. Given our current momentum, I anticipate a strong performance in 2026.

Luca Barile, Executive Vice President, CFO

No, I would say that, look, it's sort of going sideways right now. So there'll be no impact one way or the other on margins.

Glenn Chamandy, President and CEO

No, I would say that, look, it's sort of going sideways right now. So there'll be no impact one way or the other on margins.

Martin Landry, Analyst

Glenn, I want to come back on the market dynamic. You're saying that the market has been weak in Q1, Q2 and Q3, and you also expect the market to be down in Q4. I'm just trying to understand why is the imprintable market down? The economy is doing well. GDP is growing nicely. So what explains the fact that the industry is in decline?

Glenn Chamandy, President and CEO

There are various factors to consider when we analyze the market. Our GLB customers are not performing as well as they did in previous years. Additionally, large retailers are managing their inventory, particularly on the national account side. Companies that offer corporate promotional products are concerned about tariffs, which is impacting spending in the printwear market. Although the travel and tourism sectors are still doing well, with people continuing to move around and spend, there are multiple factors influencing the market. It's challenging to have a clear understanding since there are so many different growth and consumption avenues. While we are seeing results, they are scattered and add up to a complex picture. Maybe, Chuck, you would like to add to this.

Chuck Ward, Executive Vice President, Chief Operating Officer

Yes, Martin. To clarify, we're discussing the overall market as Glenn pointed out, not just imprintables. This situation spans the entire market, including inventory and retailers. In terms of the imprintables sector, we are confident in our positioning. Our brand portfolio has the ability to effectively address market needs. Glenn mentioned our soft cotton technology, which is boosting our basics category. Plasma print, which we’ve tested with DTG printers, is performing well and will launch in Q4. We're also expanding the Gildan line with the new Hammer Max heavyweight, targeting workwear and streetwear markets. Comfort Colors, our fastest-growing brand, has seen our manufacturing capacity double, and we've gained significant organic marketing visibility from outlets like CNBC, The New York Times, and GQ. We're leveraging this brand strength and plan to expand into premium bags and hats, alongside launching a women's fleece collection. Regarding AA, if you review our investor presentations, you'll see we've previously focused on the core of the imprintables market, which constitutes about 60% of it, while the remaining 40% was not our area of focus. However, we are now looking to enter that 40%, for instance, by expanding Comfort Colors into hats and bags. Historically, we haven't engaged in hats, outerwear, teamwear, bags, or accessories, but we are now working to tap into those markets. We're investing in innovation for our polyester fibers and enhancing the imprintability of poly and poly yarns, which should benefit future endeavors. This leads me to ALLPRO, targeting new white space categories such as performance and corporate ID uniforming markets and outerwear. Champion is building on its heritage with authentic sports team colors, fanwear, and teamwear styles like coaches' jackets and shorts. Overall, we feel optimistic about addressing the imprintables market and exploring new areas that we haven't previously entered.

Glenn Chamandy, President and CEO

So just to summarize that despite there could be some negativity in the market, we're well positioned for growth regardless. And despite the market being down, we're still seeing mid-single-digit growth from all these factors that Chuck just mentioned. And hopefully, as we move into 2026, we'll see some positive momentum in the market, which will even accelerate our growth further.

Luke Hannan, Analyst

Thanks for the commentary thus far. I wanted to follow up on the topic of there being delays in floor sets by large retailers. I know it was mentioned in the past that you have a large fleece program that's either already in place with your large retailer customers or set to. Has the timing of that been impacted at all by the fact that retailers are being a little bit more diligent in managing inventory?

Chuck Ward, Executive Vice President, Chief Operating Officer

No, Luke, that has set and on the floor, it is doing well. It's performing well. Early reads on it are very good. They definitely wouldn't want to miss that fleece season. So, no, it's been placed in on the floor. It was more in the innerwear categories.

Luca Barile, Executive Vice President, CFO

I would just add that, from a growth perspective this year, 75% of our growth is coming from new programs. That includes the T-shirt and fleece, which are significant programs within our national accounts.

John Zamparo, Analyst

I wanted to come back to the free cash flow guide, but related to the CapEx. Apologies if I missed it, what is the nature of that update? Are you deferring projects? Or are some areas of spending no longer as compelling as they were prior? And if it's the former, is that based on the supply chain uncertainty from some customers that you referenced?

Luca Barile, Executive Vice President, CFO

No. So 2 things. Starting with the CapEx guide, right? So going from 5% to 4% of net sales, I mean, still that's a healthy number, number one. One thing that we do not move off of, I think it's important to understand is how we reinvest in the maintenance of our assets. So always think about almost around 2/3 of what we spend in CapEx goes through maintenance and reinvesting into our assets to make sure that we maintain our competitive advantage. That doesn't move. And there is a little bit of shift in terms of timing of projects, which is effectively the difference between the 5% and the 4%. So that's the way I would think of the CapEx. And again, you touched upon free cash flow. I think, again, free cash flow is very important to us, and we're comfortable in terms of our free cash flow generation. The difference in the guide, again, comes down to we've reflected the transaction costs incurred to date. There's a bit of timing of working capital where we have a little bit of tariff cost that's in our inventories, but we're comfortable where we are, and we're comfortable that where we're going. There's nothing really major. It's timing.

Operator, Operator

Thank you. And your first question comes from Paul Lejuez with Citigroup.

Jessy Hayem, Senior Vice President, Head of Investor Relations and Global Communications

Thank you, everyone, for joining us today and attending our call, and we look forward to speaking with you soon. Have a great day.

Operator, Operator

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.