Earnings Call Transcript - GIL Q3 2024

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

Thank you, Angela. Good morning, everyone. Earlier we issued a press release announcing our results for the third quarter of 2024, along with our interim shareholder report containing management's discussion and analysis, as well as 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. Joining me on the call today are Glenn Chamandy, President and CEO of Gildan; Rhodri Harries, Executive Vice President and Chief Financial and Administrative Officer; and Chuck Ward, President, Sales, Marketing and Distribution. 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 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, everybody. As highlighted in this morning's release, our Gildan sustainable growth strategy, or GSG, is clearly driving growth. We delivered record third quarter sales of $891 million, which were up 2.4% versus last year. Excluding the phase out of Under Armour, our third quarter consolidated sales would have been up high single digits. We are not only strengthening our competitive position and driving growth, but we are also continuing to enhance our profitability as reflected in our Q3 results with adjusted operating margins of 22.4%, up 430 basis points year-over-year and record third quarter adjusted diluted EPS of $0.85, up 15% versus last year, all while continuing to return significant capital to shareholders with a record of $404 million returned in Q3 and $643 million year-to-date. Rhod will provide more details shortly. But let me tell you that we are very excited about the opportunities ahead, as we continue to leverage the benefits of our ongoing yarn operation modernization in the United States, scale up further, capitalizing on our new Bangladesh operation, which is ramping up as planned and which will support the long-term growth of our ring spun products. As we continue to optimize our operations in Central America to support the growth of our fleece, and as we leverage the largest pipeline of innovation in the company's history. With the development of our new soft pump technology, our new MVS technology for fleece, our new color blast for comfort colors, our plasma technology to improve and reduce the cost of screen printers digital printing, just to name a few with more to come in 2025. The successful execution of the three strategic pillars, capacity expansion, innovation, and ESG, all of which are pretty much in place today and definitely moving the company in the right direction. Our complete focus on executing our GSG strategy gives us the confidence in our ability to deliver on our three-year growth targets that we had laid out earlier this year. For the 2025 to 2027 period, including mid-single-digit sales growth, improved adjusted operating margins over the three-year period as compared to 2024, CapEx as a percentage of sales above 5% per year on average, continued share repurchase in line with leverage framework of 1.5x to 2.5x net debt to adjusted EBITDA and adjusted diluted EPS growth in the mid-teen range. As we approach 2025, we are well positioned with good visibility heading into the New Year, assuming that the current macroeconomic outlook holds. I'm looking forward to answering your questions after Rod's formal remarks. And I now will turn it over to Rod.

Rhodri Harries, Executive Vice President and Chief Financial and Administrative Officer

Thank you, Glenn, and good morning, everyone. And thank you for joining us today to discuss our third quarter results. I'll start by going over the specifics of the quarter and then I will comment on our outlook and guidance for 2024. So let's begin with the quarter's results. As Glenn mentioned in his remarks, we reported third quarter sales of $891 million, up $21 million or 2.4%, at the high end of our guidance range for the quarter of flat to low single-digit growth. If we exclude the impact of the phase out of Under Armour, net sales for the quarter were up high single digits on a year-over-year basis. This was driven by a strong performance in Activewear, up $44 million or 6%, driven by higher sales volumes reflecting positive Point-of-Sale across channels in North America. We observed continued momentum with national account customers in several of our retail end markets, namely craft, online retailers, and in certain other mass markets. Moreover, our strong competitive positioning has enabled us to capitalize on recent changes in the industry landscape. The overall growth in Activewear sales would have been higher, but was partially offset by unfavorable product mix in the quarter. This was partly because of lower fleece sales compared to last year's strong performance, which was largely due to timing differences and which we had anticipated. Overall though, we were pleased with our mid-single-digit sales growth in Activewear, as we continue to see market share gains in key growth categories, as well as a positive market response to our newly-introduced products featuring our new soft cotton technology. Looking at international markets, sales increased by 20%. Growth stemmed from positive Point-of-Sale in Europe, our largest market, as well as inventory replenishment by distributors from sub-optimal levels. We are now clearly increasingly better positioned to service this market as we ramp up our Bangladesh facility. Turning to Hosiery and Underwear. As expected, this category was down 18% versus the prior year, mainly due to the phase out of the Under Armour business, and to a lesser extent due to unfavorable mix. Excluding this phase out, our Hosiery and Underwear sales would have been up low double digits year-over-year, highlighting strong underlying growth as we gain further traction with other national account customers and despite the prevailing broader market weakness in underwear. Finally, a quick note regarding our year-to-date net sales. If we exclude the impact of the Under Armour phase out, sales for the Hosiery and Underwear category as well as consolidated sales would have increased by mid-single digits year-over-year. Turning our focus to margins for the quarter. Our gross margin was 31.2% versus 27.5% in the prior year, a 370 basis point improvement, primarily due to lower raw material and manufacturing input costs, in line with our expectations. As for SG&A, expenses were $84 million in the quarter, including $6 million in carryover charges related to the proxy contest and related matters. Excluding these charges, adjusted SG&A expenses were $78 million or 8.8% of net sales, a 70 basis point improvement versus last year. The year-over-year reduction in SG&A mainly reflected the ongoing positive benefit of the jobs credit introduced by Barbados during the second quarter as part of their economic policies. As we bring all these elements together and adjusting for proxy contest and related matters, we generated adjusted operating income of $200 million or 22.4% of net sales in line with our guidance, and up 430 basis points compared to the prior year. As expected, the company's adjusted effective income tax rate for the quarter was 18.7% compared to 5.1% last year, reflecting the enactment of global minimum tax in Canada and Barbados earlier this year. After reflecting higher net financial and income tax expenses and our lower outstanding share base, we reported GAAP EPS of $0.82. Adjusting for the charges related to the proxy contest and related matters, our adjusted diluted earnings per share were at a record level for the third quarter at $0.85 versus $0.74 in the prior year, which represents a 15% increase. Now let's shift to cash flow and balance sheet items. With cash flow from operating activities of $178 million and CapEx of $30 million, the company generated free cash flow of $149 million in the third quarter. This together with our strong balance sheet allowed us to continue to execute on our capital allocation priorities and reflecting our strong commitment to returning capital to shareholders, we repurchased close to 9 million shares under our NCIB and returned a quarterly record of $404 million in capital, including dividends to shareholders in the third quarter. We ended the quarter with net debt of $1.5 billion and a net debt to EBITDA leverage ratio of 1.9 times, well within our targeted debt levels. Let's now focus on our strategy and outlook. As Glenn mentioned earlier, we continue to progress in the three pillars of our GSG strategy: capacity driven growth, innovation, and ESG. The ramp up of our new manufacturing complex in Bangladesh is on track and set to be at an exit capacity rate of 75% by year-end. On the innovation front, our new products are receiving positive feedback. And lastly, with regards to ESG, we're proud to have received yet another recognition, this time as one of Canada's most responsible companies by Newsweek, ranking 14th overall and securing the top spot in the retail and consumer goods industry, a testament to our fundamental commitment to ESG. So overall, we're very pleased with our performance despite a somewhat mixed macroeconomic backdrop. More specifically, considering where we are today in our final quarter, we feel we are on track to deliver our full year 2024 guidance and as such we have further narrowed our 2024 outlook range as follows. We're moving our revenue growth guidance to the upper end of our previous range. So we now anticipate growth of low single digits compared to our previous guidance of flat to up low single digits, noting that if we were to exclude the impact of the Under Armour license agreement, 2024 full year revenue growth would be in the mid-single-digit range. And remember this phase out has had minimal impact on our profitability. We now also expect adjusted operating margin to slightly exceed 21%, compared to our previous guidance of slightly above the high end of our 18% to 20% target range for 2024. This factors in the benefit of the refundable jobs credit introduced by Barbados as described earlier. We now expect adjusted diluted EPS to be in the range of $2.97 to $3.02, up significantly between 15.5% and 17.5% year-over-year, which compares to our previous guidance range of $2.92 to $3.07 for 2024. This takes into account an expected adjusted effective income tax rate of approximately 18% for the full year compared to 4.4% last year. We also continue to expect CapEx to come in at approximately 5% of net sales and free cash flow is still expected to be above 2023 levels, driven by increased profitability, lower working capital investments and lower CapEx than in 2023. Finally, we plan to continue share repurchases in the final quarter, given the strength of our balance sheet, our expected strong free cash flow, and our leverage framework target of 1.5x to 2.5x net debt to adjusted EBITDA. So this wraps up our financial overview for the quarter. Before we take your questions, I would just like to reemphasize that the strength of our vertical integration model, our steadfast focus on our cost structure, the successful execution of our GSG strategy combined with the strength of our balance sheet and free cash flow generation ability, all position the company favorably for the coming years, especially considering the current competitive landscape. So bottom line, and as Glenn mentioned earlier, we feel like we are fully on track to deliver on the targets we have provided for the next three years of mid-single-digit revenue growth, improved annual adjusted operating margin as compared to 2024 and mid-teen adjusted EPS growth. Thank you all for joining us today. I will now turn it back over to Jessy.

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

Thank you, Rod. This concludes our prepared remarks, and we'll now begin taking your questions. Before moving to the Q&A session, as usual, I'd like to remind you to limit your questions to two and circle back for a second round if time permits. Angela, you may begin the Q&A session.

Paul Lejuez, Analyst

Hi, thanks, guys. Two questions. One, just during the quarter, curious if you could talk about POS trends that you saw throughout, how it trended and if you could comment on anything that you might be seeing fourth quarter to date. And then looking out to next year, curious if you have any high-level thoughts about '25 market growth, but also market share opportunities just given the change in competitive landscape that you're seeing out there? Thanks.

Chuck Ward, President, Sales, Marketing and Distribution

Good morning, Paul. It's Chuck. And I guess we'll start with your question on the POS trends. Overall, we think the market has continued to be down low single digits to mid-single digits. But we've been gaining share in all the categories. Our basics POS was positive for the second quarter in a row, and I think it's showing really, as Rod and Glenn both mentioned that our innovation, our soft cotton technology is really coming through and well-received by the market. But then our growth continues to be really in the ring spun and fleece categories, where we're continuing to take share and drive growth with those categories. As for the trends through the quarter and then also what Q4 looks like, we continue the same trend we've been seeing, which the quarter started out with a little slower POS and then it picks up throughout the quarter. We saw that in Q3 and we continue to see that, as we go into Q4. So that's the sort of trends and where the POS had been, and I'll let Glenn talk about 2025.

Glenn Chamandy, President and CEO

Yes. Look, as far as we go forward into 2025, I think, look, we've got very good visibility, first of all, on our cost structure, and we have very good visibility on new programs that are basically going to support our growth for 2025. And I would say that we've taken a conservative assumption to flat to low single-digit growth. Basically, we're taking still a view that the market is still going to be weak as we move into next year. But those things considered, we feel comfortable that we'll be able to hit our mid-single-digit growth target.

Paul Lejuez, Analyst

Just to be clear, that was a flat to low single-digit growth in the market overall?

Glenn Chamandy, President and CEO

Yes. That's correct, Paul. Flat to low on the market and then overall we're effectively going to be mid-single in line with our three-year algorithm for growth. And obviously, we do feel very good about the market share opportunities highlighted when we opened up the call on all the things that we're working on.

Mark Petrie, Analyst

Yes, thanks. Good morning. I wanted to just sort of follow that same theme and maybe specifically hone in on national accounts. If you could just sort of talk about the dynamics that you saw in Q3, how you expect that to play out in Q4 and then into 2025? And how sticky do you think the gains that you've been able to secure are?

Chuck Ward, President, Sales, Marketing and Distribution

Okay. Thank you, Mark. And we feel like our national account business has been going well. Rhod called it out in his comments. We've seen gains across the categories there and across channels within our national accounts. And we think we've continued to gain share because as I mentioned earlier, where the market is down low to mid-single digits, but yet we are continuing to grow. So we continue to gain share in those categories. And we feel good about kind of that moving forward as well. As Glenn mentioned, as we think about going forward into 2025 between the market growth and then plus our new programs, we feel like we're going to be able to hit our targets of growing mid-single digits. So, I think we feel good about the national count business.

Glenn Chamandy, President and CEO

And also, some of it is not just market share, but don't forget we're getting new programs, which just add on to so it's a combination of new programs and share that's growing the overall growth. I think that's an important point.

Mark Petrie, Analyst

Understood. Thank you. And also could you just expand on specifically how the U.S. yarn operations sort of layer into the GSG plan and the opportunities that's affording you with regard to market shares momentum?

Glenn Chamandy, President and CEO

What they are supporting is providing us a competitive advantage, as our soft cotton technology has been developed through our yarn operations. We have modernized the way we produce our MVS for fleece and significantly increased capacity in our factories. The optimization involves transitioning to our new soft technology while also adding capacity and adjusting our yarn production for fleece, which will now be softer and have improved printing capabilities for the garments. These are the kinds of initiatives we are pursuing. Being a vertically integrated company gives us an edge, and we are focused on spending, innovating, and driving sales. Our sales in basics are positive for the second quarter, largely due to the technology we have been able to bring to the market.

Jay Sole, Analyst

Great. Thank you so much. Glenn, I want to ask you a question. I think Rhod alluded to this in his prepared remarks, but just changing industry dynamics, two of your largest customers essentially have now gotten together because of an acquisition. Can you just talk about how that might impact the business? I guess there's some concern out there that they're bigger, maybe they have a little bit more leverage now, they can maybe extract better price and put some pressure on your margins. I mean, do you think that's possible? And really what do you think the impact to Gildan is from that acquisition?

Glenn Chamandy, President and CEO

I think that we're going to be the beneficiary of consolidation and consolidation has been happening for the last 20 years. So this is not new. We understand what's happening in the market and we've been the beneficiaries. So when you look at what is going to continue to happen, as the distributor market consolidates, but there's also going to be consolidation in brands. Delta has gone away. I don't know if you just heard recently that Fruit is pulling out of the printwear market. So as brands leave the industry, Gildan has a competitive advantage. They are a large customer to us, but we're also a large customer to them as well. So I think it's usually a good opportunity for everybody, and the market will be more stable with fewer distributors, and I think overall, it's a win-win for everybody.

Stephen MacLeod, Analyst

Thank you. Good morning, guys. I just wanted to see if you could give a little bit of sort of more specific color around what you saw for POS trends within ring spun, fashion basics, fleece, and basics?

Chuck Ward, President, Sales, Marketing and Distribution

Hi, Stephen. As I was mentioning, we did see again positive Point-of-Sale and basics as Glenn mentioned as well. And again, we think our soft cotton technology is hitting the market and is well received. As I mentioned, we're still driving growth with our ring spun as we continue to take share across ring spun and fleece categories. We see those will have driven growth and they're going to continue to drive growth in the future years. We've seen ring spun up high single digits. And fleece is maybe a little softer as it started out in the season due to weather, but we still feel really good about the category and really good about our strong position that we have in the fleece category as well. So positive momentum in both of those areas.

Stephen MacLeod, Analyst

Okay. That's great. And then just on fleece, with respect to the timing impact that you saw in Q3, how do you expect that to evolve in Q4? Can you just remind us, sort of the timing impact on the fleece?

Rhodri Harries, Executive Vice President and Chief Financial and Administrative Officer

Yes, we expect strong fleece sales in Q4. In Q3, our sales were affected by timing as we adjusted our production to optimize costs, which led to lower than anticipated fleece sales during that quarter. However, we anticipate that fleece sales will improve significantly in Q4. We feel confident about the quarter overall despite facing headwinds from the Under Armour phase-out, which will have a noticeable impact in Q4, especially since it’s a crucial period for hosiery. Nonetheless, we are optimistic about how the quarter is progressing. It’s encouraging to see our Activewear business growing, with a 6% increase in sales during Q3, contributing to mid-single-digit growth across the category. This trend is expected to continue into Q4 as we close out the year. We'll have to monitor the macro environment, but our expectations remain positive. Moving into 2025, we see this growth as a significant factor in our overall performance. Regarding the Innerwear business, the Under Armour phase-out has caused some areas to be weaker than we would prefer, particularly with underwear, although we are performing well in that segment. We expect our underwear performance to positively impact Q4 as well. Overall, we are well positioned to finish the year strongly and make a successful transition into 2025.

Stephen MacLeod, Analyst

Okay. That's great color. Thanks, Rhod. And then maybe just one more if I could. Just you talked a little bit about unfolding 2025 in terms of the top line. You've had strong gross margin and strong SG&A leverage year-to-date. Can you just give a little bit of color on how you would expect that to evolve as you look into 2025?

Rhodri Harries, Executive Vice President and Chief Financial and Administrative Officer

Yes. Look, I think we feel that we have gross margin well under control. If you look at the performance in the quarter effectively, we ended up at 31.2% and now we've moved above that 30% level as we've been talking about. And Glenn highlighted it in the early part of the comments. If you look at what's going on in the cost side, we feel we have that well under control with the ramp up of Bangladesh, the effectively the optimization of Central America with the yarn optimization. And so that's going well. I think from a pricing perspective, we see a very stable environment. And so I would say we feel well positioned on the gross margin side for ‘25 and actually really as we go forward right over the whole three-year period. I would say everything's coming together and we really are benefiting from all of these elements of the strategy that we put in place. And then we continue to grow the top line and then we leverage SG&A as well as that in order to drive operating margin performance. So we're in good shape overall and very much in line with what we planned for finish the year for '25 and over the three years.

Martin Landry, Analyst

Hi, good morning guys. I wanted to touch on the upcoming U.S. Election. There's a lot of discussions about implementing tariffs. So I'm just trying to understand what would be the implication for your production in Bangladesh that's destined for the U.S. market?

Glenn Chamandy, President and CEO

Well, Martin, first of all, we're diagnostic because if tariffs come in, they come in for everybody, right? So we'll be in the same position that we're in today. Today in Bangladesh, we do have tariffs coming back into the United States at the rate of 16.5%, and that's factored into our cost savings and everything else we have planned for that facility. So I would say we're diagnostic. I mean, the only thing I would think tariffs could do is create inflation and the question is, will there be elasticity in how many garments people can buy because costs will go up for consumers? But don't forget, even within Gildan, I mean, we're still very attractively priced in the marketplace. So I don't think it will be hugely effective to us personally. When our shirts are selling for $2.50 wholesale, I mean, even if they do go up, I mean, it still will be very attractively priced overall. So it's hard to say what will happen, but I don't think we're going to be at a disadvantage. In fact, it may even be an advantage for us.

Martin Landry, Analyst

Okay. And then would your production in Central America be impacted by the tariffs that are contemplated?

Glenn Chamandy, President and CEO

We don't know. Honestly, we have free trade agreements in place that we are using to bring our products back into the United States. It depends on whether tariffs are applied to those agreements, and we are uncertain about that. We'll have to wait and see.

Brian Morrison, Analyst

Question for Rhod or Glenn. How should we think about cotton prices in your pricing strategy going forward next year? I assume your competitors with all their difficulties may be hesitant to lower prices, but could that be a market share opportunity for you? I'm just wondering how we should think about this as the hedging rolls off next year?

Glenn Chamandy, President and CEO

Cotton prices have decreased slightly since last year, and while we have a clear understanding of our cost structure, there is still inflation present in various areas such as labor, transportation, and energy. Any slight benefits from lower cotton costs have been countered by these inflationary pressures. Consequently, we anticipate that pricing will remain relatively stable. However, we are well positioned with several cost initiatives in place. In Bangladesh, we are ramping up operations, which has not yet resulted in cost savings but is expected to lead to a 25% reduction in costs compared to our Central American operations once fully operational. Our yarn optimization project savings have not yet impacted our cost of goods sold, but we expect this to be resolved in the upcoming year. Currently, our capacity utilization in Central America is not fully maximized, but we are working on increasing it, especially with fleece production. Overall, we have a solid plan and good visibility for the future, with numerous new programs already set for 2024. The main uncertainty we face is the economic outlook, which has been weak across all categories. We hope to see improvement, as reaching a bottom could positively influence our sales plan.

Brian Morrison, Analyst

I appreciate that, Glenn. Perhaps I'm a bit ahead of myself here. With your success in gaining market share, I’d like to know where we stand with Phase 2 in Bangladesh and the cost to complete that facility. I understand there is infrastructure already in place. Should we anticipate this as a CapEx for 2025 or 2026? Any details on that would be helpful.

Glenn Chamandy, President and CEO

I would like to highlight two points. Firstly, we currently have all the necessary capacity installed to meet the demands of 2025, 2026, and 2027. Once we fully ramp up operations in Bangladesh and optimize our capacity in Central America, we will have sufficient capacity. Our capital expenditures of 5% during this period will include the development of Phase 2 in Bangladesh, which will primarily support sales towards the end of 2027 and likely into 2028. We are well positioned to meet our three-year targets, as we have the required capacity, innovation, and ESG initiatives in place. This is why we feel confident about our three-year outlook; we simply need to continue selling, delivering, and executing our plans.

Rhodri Harries, Executive Vice President and Chief Financial and Administrative Officer

And Brian, the only thing I would add to that also as Glenn said, we're well set up for the next three years, right? We know exactly where we're going and how to deliver it. But if things get better, we have the ability to also take advantage of that. And then if you think beyond that and you think about the next phase of Bangladesh, what's important is that we put all of the infrastructure in for the second phase. We built the first phase. So it's all there. And so the cost of the second phase will be very low as compared to what we've spent on Phase 1. So when we see that come through, you're not going to see, I would say, anything of a meaningful impact. It will be inside of our normal envelope of effectively the 5% per year that we have as an assumption for the next three years. And then even beyond that. Historically, we've been at those levels and we think we can run the business and grow the business running with that type of spending.

Chuck Ward, President, Sales, Marketing and Distribution

And just maybe to add one more thing that I would say is that in our planning process towards the end of '25 is when we plan to start to develop the second phase of the operation.

Vishal Shreedhar, Analyst

Hi. I just want to ask about Bangladesh and the civil unrest there and how you see that unfolding. Is it fully stabilized? And do you see that as an impediment looking forward?

Glenn Chamandy, President and CEO

No. Look, we've been in Bangladesh for over 10 years. We've seen some instability in the past during election years. But I would say, look, we're very comfortable with Bangladesh. We lost a couple of days as we let people stay home just for safety reasons. But overall, things are running as planned. The plants are fully functioning and running today and being ramped up. So we're very comfortable with where we are in Bangladesh. Obviously, it's something we've developed in being a vertically integrated low-cost manufacturer. Basically, we have the skill set to operate in some of these countries. We're still operating today every day in Haiti, which is probably in a lot of cases much more difficult environments in which to operate. So I would say that we're very comfortable with where we are in Bangladesh and things are going well and the plant will be on track and ramped up at 75% by the end of the year.

Vishal Shreedhar, Analyst

Thank you for that. With respect to fleece performance, you mentioned it earlier in the call, it's been strong for the last several years, tepid in the quarter due to timing. But fleece has also benefited from a fashion trend towards that type of product. So wondering, how you see that unfolding through the years? Do you expect the tailwind to persist, or is it more of a transient bump over the last few years associated with the trend?

Glenn Chamandy, President and CEO

There are two important points to consider. First, we sell fleece in different markets. Historically, we have a larger market share in the distributor channel, while our presence in the national account channel is minimal. This represents a significant growth opportunity for us. Currently, fleece accounts for about 17% of our total unit volume, and we believe there is considerable potential for further growth. It is still early in its development stage, but we are confident that the fleece category will continue to expand. We expect to maintain our market share in the distributor sector and have new products on the way to support this growth. Additionally, we have room to grow in the national account space. Overall, we anticipate fleece will continue to grow at a high single-digit rate over the next three years.

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

Thanks, Angela. Once again, we'd like to thank everyone for joining us and attending our call today, and we look forward to speaking with you soon. Have a great day.

Operator, Operator

That concludes today's conference call. Thank you all for joining. You may now disconnect.