Earnings Call Transcript
Gildan Activewear Inc. (GIL)
Earnings Call Transcript - GIL Q1 2022
Operator, Operator
Good day and thank you for joining us. Welcome to the Gildan Activewear Earnings Conference Call for the first quarter of 2022. All participants are currently in a listen-only mode. After the presentations, we will have a Q&A session. To ask a question during that time, please follow the provided instructions. Now, I would like to turn the call over to our first speaker, Ms. Sophie Argiriou, Vice President of Investor Relations. Please proceed.
Sophie Argiriou, Vice President, Investor Relations
Thank you for your kind introduction. Good afternoon, everyone, and thank you for joining us. Earlier, we issued our press release announcing our earnings results for the first quarter of 2022. We also issued our interim shareholder reports containing management's discussion and analysis and consolidated financial statements. These documents will be filed with the Canadian Securities and Regulatory Authorities and the U.S. Securities Commission and are available on the company's corporate website. I'm joined here today by Glenn Chamandy, our President and Chief Executive Officer, and Rod Harries, our Executive Vice President and Chief Financial and Administrative Officer. In a moment, Rod will take you through the results for the quarter and a Q&A session will follow. Before we begin, please take note that certain statements included in this conference call may constitute forward-looking statements. Such forward-looking statements involve unknown and known risks, uncertainties, and other factors which could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. We refer you to the company's filings with the U.S. Securities and Exchange Commission and the Canadian Securities and Regulatory Authorities. During this call, we will also discuss certain non-GAAP financial measures. Reconciliations to the most directly comparable IFRS financial measures are provided in today's earnings release and in our MD&A. And with that, I will turn the call over to Rod.
Rhodri Harries, Executive Vice President and Chief Financial and Administrative Officer
Thank you, Sophie. Good afternoon all and thank you for joining us today. I would like to begin by saying we're off to a strong start to 2022 as we delivered record net sales up 31% and record adjusted EPS up 58% over last year for the first quarter. Great results as we shift to our Gildan sustainable growth strategy, which is focused on driving growth and margin performance as we invest in and fully leverage our world-class large-scale, vertically integrated manufacturing platform. This platform, together with an efficient product portfolio and go-to-market approach, is providing us with a strong capability to service our customers in an environment where many apparel companies are facing supply challenges. Further, because of our industry-leading ability to produce at low cost, we have been in a strong position to price to offset inflationary pressures and to deliver margin performance. Beyond our strong operating results, we are also pleased about our ability to execute on our capital allocation priorities during the quarter, including repurchasing 5.1 million shares or 3% of our float, and returning more than $200 million of capital to shareholders while maintaining a strong balance sheet. Turning to the details of our results for the quarter, total net sales of $775 million, reflecting an increase of $185 million or 31% over the first quarter last year, largely driven by volume growth and net selling price increases with some favorable impact from product mix. Activewear sales of $667 million were up 38% and hosiery and underwear sales of $108 million were up 3%. Volume growth in Activewear was driven by strong demand in North America, particularly in the distributor channel, with strong sell-through driven by the continued recovery of large events, travel, and other end-use markets. Volume growth with distributors was also driven by our ability to better service seasonal inventory requirements and to support growth, given our improved production levels this year versus last year. Also contributing to the Activewear sales growth was higher net selling prices, which reflected the impact of base price increases that were implemented starting in the fourth quarter last year, as well as the impact of lower year-over-year promotional discounting. We were also pleased to see that ring-spun and fleece products were key contributors to our strong sales performance in the quarter, driving favorable product mix. Finally, the 3% increase in the hosiery and underwear category was primarily driven by higher selling prices, which drove strong results when compared to industry sales for these categories according to NPD data. So overall, strong top-line delivery for the quarter. Moving on to our strong margin performance, adjusted gross margin of 30.9% was down slightly year-over-year by 20 basis points. You may recall last year we received a one-time cotton subsidy, which benefited gross margins in the quarter by 300 basis points. Excluding this benefit, adjusted gross margin expanded by 280 basis points in the quarter. The improvement was largely due to higher net selling prices and favorable product mix, which more than offset the impact of higher cotton costs and inflation across our manufacturing expenses. Turning to SG&A, first quarter of $81 million were up approximately $8 million compared to last year. The year-over-year increase was primarily due to higher volume-driven distribution expenses and the impact of inflation on overall costs. SG&A expenses, as a percentage of net sales, improved two percentage points to 10.4% compared to 12.4% last year. As the benefit of volume leverage and our continued focus on cost management more than offset inflationary cost pressures bringing in altogether our strong sales and gross margin performance combined with SG&A leverage translated to adjusted operating margin of 20.4% for the quarter, which compared to 18.7% last year, was up 170 basis points, and which led to record adjusted EPS for the quarter of $0.76, 58% above the prior year quarter. Moving on to cash flow and balance sheet items, we consumed $86 million of free cash flow during the first quarter, which included working capital investments to support growth and seasonal requirements, as well as $34 million of capital expenditures related to capacity expansion. As mentioned earlier, from a capital allocation perspective, we were also active on our share repurchase program during the quarter and combined with the share repurchases we have done in April, we have now completed more than 60% of our current NCIB program. Our net debt position at the end of the quarter increased to $829 million and our net debt leverage ratio of one times was at the low end of our one to two times target range. On the debt side, I would also highlight that as we focus on ESG as a key pillar of our strategy and reinforcing our commitment towards our ESG targets. During the first quarter, we amended the terms of our existing $1 billion revolving credit facility to incorporate sustainability-linked terms. In this regard, we're proud that Gildan is the first Canadian apparel manufacturing company to tie financing costs to the achievement of important ESG targets. Let me now give you a quick update on our Gildan sustainable growth for GHG strategy. As part of our capacity-driven growth initiative, we are pleased with the progress we're making on our overall expansion plans in Central America and Bangladesh, which all remain on track. Further, as part of our efforts to strengthen our vertical model, we are also making good progress with the integration of Frontier Yarns as we increasingly internalize and optimize production. Finally, on the ESG side, beyond the sustainability-linked loan, which I mentioned, we were also pleased to launch the Gildan respects marketing campaign during the quarter. Now, before concluding with my remarks, let me share some commentary on what we're seeing in the current environment. As I mentioned earlier, throughout the first quarter, we saw strong demand for our Activewear products in North America. More recently, while we have seen some deceleration in POS over the last few weeks, overall demand for Activewear remains healthy. Similarly, we have also started to see some slowing in sell-through for certain hosiery and underwear category products that could be related to broader economic factors, including the impact of the non-recurrence of stimulus and other support payments which consumers received last year. However, although it's difficult to predict how macro concerns will play out, we believe the favorable industry dynamics, which we discussed at our Investor Day, will remain a tailwind to demand. This combined with the continued recovery in areas impacted by the pandemic including tourism, travel, and the progressive comeback of large events, together with inventory levels in the distributor channel, which remain below pre-pandemic levels, is expected to provide support for demand going forward. Further on the cost side, our vertically integrated models and the disciplined pricing strategy we have followed so far put us in a strong competitive position and provide us with good flexibility to navigate inflationary headwinds and deliver against our profitability goals. Consequently, we are pleased with the start of the year and the progress that can be made in 2022 towards our three-year objectives as we execute on our GHG strategy, driving strong organic growth and margin performance by focusing on capacity expansion, innovation, and ESG to create long-term value for our shareholders. This concludes my formal remarks, and with that, I will turn it back over to Sophie.
Sophie Argiriou, Vice President, Investor Relations
Thank you, Rhodri. Before moving to the Q&A session, I ask that you limit the number of questions to two and will circle back for a second round of questions if time permits. I'll now turn the call back to the Operator for the question-and-answer session. Go ahead.
Operator, Operator
Your first question comes from the line of Mark Petrie of CIBC. Your line is open.
Mark Petrie, Analyst
Good afternoon. With regards to the outlook and the slowdown in POS trends that you were calling out in recent weeks, can you just give us some more color on the products? Where you're observing this and in your discussions with your customers, given their low inventory levels, are these slower POS trends translating to slower order flow or is there some replenishment underway?
Glenn Chamandy, President and Chief Executive Officer
I would say that the POS is somewhat pretty much consistently across the board; there's no one area that's slowed more than another, but let's put it in context: slow. We still have pretty good growth. Although it slowed some, it's still very positive for us, and we're still pretty optimistic about as we move forward. Just to taper that comment a bit: it's hard for us a little to understand too, because over the last four or five weeks we've had a huge spike in COVID across the United States, and we've had pretty bad weather. We think we're still well-positioned as things open up in travel and events continue to evolve as we transition out of the pandemic, so we are cautiously optimistic, I would say. We were guns blazing; record sales have slowed down a bit, but it's still pretty good. Inventory channels are still low; they've gone up slightly in Q1, but probably in the same level as our sales, where whatever growth we had in terms of unit volume sales are somewhat the inventory that increase in the channel. So channels are relatively low, specifically in relation to pre-pandemic levels. And we haven't seen any cancellation of orders. I mean, order flow is strong. We've got a very good order book, and I think we're just poised to continue having a good year. We're a little cautiously optimistic. We just don't have a crystal ball, so we're just making sure that we're managing ourselves through whatever the environment throws at us.
Mark Petrie, Analyst
I know that's very helpful context. I definitely appreciate all of that. And I guess just the second question, just with regards to the continued escalation in cotton prices, I know you are generally leaning towards supporting top-line growth, but can you just talk specifically if there's any change in how you're thinking about pricing or if you've observed any changes in the competitive landscape in the last couple of months?
Glenn Chamandy, President and Chief Executive Officer
Well, obviously, price was a big part of our sales in Q1. I mean, we've had to take price to offset inflation, but we're pricing off a very low cost of manufacturing and very low pricing, which we've set in the market. So our pricing gap between us and our competition has allowed us to increase prices and maintain equivalent operating margins, I think. So that's the good news. As we move forward into the future, we have pretty good visibility on our cost structure as we move through this year and as we move into next year. If we need to continue to take more prices, we'll look at that point in time. Nobody knows what the problem is going to be, but we have good visibility on this year as we proceed so far, and we'll take price accordingly.
Mark Petrie, Analyst
I appreciate all the comments. All the best.
Glenn Chamandy, President and Chief Executive Officer
Thank you.
Operator, Operator
Your next question comes from the line of Luke Hannan of Canaccord Genuity. Your line is open.
Luke Hannan, Analyst
Thanks. Good afternoon. Just following up on that line of questioning on the cost of cotton. Glenn, I think you've mentioned in the past that should the cost of cotton eventually fall back to more normalized levels, that there won't be the same level of price incentives or price decreases that won't be necessary should happen in the future like it was in the past to be able to spur demand. And I'm just curious to know what exactly underlies your conviction that that's the case this time around.
Glenn Chamandy, President and Chief Executive Officer
Well, because a large part of the price that we have attained in Q1 was just a reversal of promotional discounts that we provided to our customers historically. So what we've done is we did take some price increases in Q4 and a little bit in Q3, I think in certain areas. But the biggest part of the price associated with the price increases in Q1 was the reversal of discounting that we normally do in the market. So with cotton comes back down, we will just increase our discounting again, and therefore, we won't have to adjust pricing in the market.
Luke Hannan, Analyst
Okay. And I wanted to get a better understanding of moving towards the balance sheet. The accounts receivable had jumped up pretty materially quarter-to-quarter, and there has been mention of some impact relating to the timing of the payout for annual rebate programs. I just didn't quite understand that. I want to know what exactly that relates to even different than what you guys would have experienced in the past?
Rhodri Harries, Executive Vice President and Chief Financial and Administrative Officer
Yeah. I think that was probably a small question, Luke. If you look at the receivables, they were up, but obviously, the sales were up. And if you look at what our gross days outstanding are, they're well in line with where they have been, so I would say we're very comfortable with what's going on with our receivables. And again, mostly what you're seeing is effectively just an increase related to the increased level of sales that we've been seeing.
Luke Hannan, Analyst
Okay. I appreciate that. Thank you very much.
Glenn Chamandy, President and Chief Executive Officer
Thank you.
Operator, Operator
Your next question comes from the line of Stephen MacLeod of BMO Capital Markets. Your line is open.
Stephen Macleod, Analyst
Thank you. Good evening, guys.
Glenn Chamandy, President and Chief Executive Officer
Hi.
Stephen Macleod, Analyst
Just wanted to follow up on a couple of things here. When you think about the quarter and notwithstanding some of the relative slowdown that you've seen over the last couple of weeks, can you talk a little bit about how some of those categories that are continuing to make up ground to pre-pandemic levels, like travel, tourism, corporate, how those end markets fared in the quarter?
Glenn Chamandy, President and Chief Executive Officer
We don't have specific data on any area. I think in terms of what's growing market, but look, at the overall market, obviously, you can follow what's happening in the recovery, especially from COVID. I mean, travel is back, and tourism is coming back. Events are happening. I personally believe, over the last month, we saw a little bit of our slowdown was due to the big wave in COVID. But nevertheless, it's hard for us to tell. I would say that what's driving our business, I think, are really our fashion basics and our fleece sales, which are really the pillar of the growth for the company, and also are benefiting our overall mix of products. That's been pretty consistent for the last 24 months. Our fleece business continues to grow; it's a growth category. Lifestyle changes are also affecting people's fashion choices today. So we're pretty bullish on those. Through the acquisition of Frontier, we've been able to substantially increase our capacity in fleece. So that's also been a big positive for us. So we're optimistic about our positioning in the market, and we'll see where the market goes. We're cautiously optimistic as we go forward.
Stephen Macleod, Analyst
Okay. That's great. Thank you. And then just secondly, if I look through the outlook section, is it fair to assume that you would still expect at this point in time to generate sales growth in that 7% to 10% range for the full year?
Rhodri Harries, Executive Vice President and Chief Financial and Administrative Officer
Yeah, I think, Stephen, if you look at the full year, I mean, I think as Glenn said, we are cautiously optimistic as far as what we see from a volume perspective. We have seen some slowing down in POS, but I would say again more broadly, we are fairly optimistic. If you look at the volume that we would expect it would be effectively reflective of that. And then if you look at the price that we would expect for the full year, last quarter, I called out price being mid-to-high single-digit. I think you probably when it's all said and done now, as we see how things are playing out and what's going on with promotions, it's at the higher end, I would say then the lower end. So the combination of the higher end of the pricing and the volume would give you full-year sales. I would say that would be on the higher end of the range we've given. So we're not giving guidance, but I would say that 7% to 10% is a three-year CAGR. That's why we feel we're off to a good start against that target in 2022.
Stephen Macleod, Analyst
Okay. That's great. Thank you.
Operator, Operator
Your next question comes from the line of Jay Sole of UPS. Your line is open.
Jay Sole, Analyst
Thank you. I would like to discuss the gross margin since it's nearly 31%, significantly exceeding the consensus forecast and also the levels seen before the pandemic. Could you share the main factors contributing to this? Was it primarily due to pricing? Additionally, what efficiencies have emerged from the Back to Basics strategy that have contributed to the increased gross margin? A breakdown of the components would be helpful. Thank you.
Glenn Chamandy, President and Chief Executive Officer
Well, thanks, Jay. If you look at our gross margin, we were very pleased with the performance. We were down, but again, that's versus a tough comp due to the cotton subsidy last year. I think if you look at the ultimate, at a base level, our performance is being driven by our manufacturing. If you look at the business, it's our vertical integration, it's our scale, it's the way that we are leveraging our platform, which allows us to be very competitive and manage effectively. Our very low cost base is the starting point. For the quarter, effectively, we did see price coming through, we did see mix coming through, and of course we did have inflationary costs and higher cotton costs as I called out, but the combination of all of this is driving that strong margin. As we go through the year, we'll see how that progresses, and we will have more inflation coming through, but again, I think we are very pleased with the way that we are running the manufacturing, ramping up, and doing the vertical integration of Frontier. That will allow us to offset some of these inflationary costs and maintain our low cost position. There will be some gross margin pressure as we move through the year; you would expect that. But all in all, we're very pleased, and it really starts with our manufacturing, which sets us apart from others in delivering gross margin and ultimately against the operating margin targets.
Jay Sole, Analyst
Got it. Maybe if I can ask one more. You mentioned your group events are coming back. Maybe just give us a sense of where that business is right now relative to before the pandemic. Are the volumes there back to maybe fully 100% where it was, or maybe it's only 50%? Can you give us a sense of where that rebound in that business stands?
Glenn Chamandy, President and Chief Executive Officer
Well, it's hard to totally get a grasp on it today, but you can probably look at travel, and airlines, and data points. Contracts are pretty much in full swing. There are a lot of trade shows happening again, and back in Las Vegas is starting to pick up. The big things are... There's a lot of different elements: summer camps, little league baseball, and seasonal events. Corporate and promotional is probably the only area that we would see that could still be a little bit weak due to pressure on corporations because of higher costs. It's hard to say where all the puts and takes are because we don't have all those data points. Overall, the market has been very robust. One other key element for us, which is also growing our revenues, is that people are still looking to onshore their products. Screen printers, large national accounts, and retailers are looking to buy more product closer to their market, which is also a big positive for us. We're seeing lots of opportunities to continue growing sales. So all these things together make us feel we're in a very good position. We don't know if the world is going to fall apart, but so far, we've had a good run in Q1, and we're cautiously optimistic as we move through the balance of the year.
Jay Sole, Analyst
Got it. Okay, thank you so much.
Operator, Operator
Your next question comes from the line of Paul Lejuez of Citi. Your line is open.
Brandon Cheatham, Analyst
Hey, everyone. It's Brandon Cheatham, for Paul. I just want to get a sense of the past you've talked about the restocking opportunity. Was that any part of 1Q restocking? Do you think that you'll be able to catch up on some of that in the second quarter?
Glenn Chamandy, President and Chief Executive Officer
We believe that the second quarter will remain relatively strong, and as we mentioned earlier this year, we do not expect any restocking until 2023. We still hold that perspective. We will see how things unfold. Our inventories are managing to stay lean, and it appears that our customers' inventories are also quite lean at this time.
Brandon Cheatham, Analyst
Okay. So you wouldn't say you have any spare capacity currently or expect to have excess capacity this year based on what you're seeing so far?
Glenn Chamandy, President and Chief Executive Officer
No, we're running full. Our sales are pretty robust, a 31% increase year-over-year basis. So we're running pretty hard, and our inventories are low and our customer inventories are low. Those are two positives. We're still optimistic about the marketplace, so we'll see how those trends go as we move forward.
Brandon Cheatham, Analyst
Okay. And if I could just follow up on pricing. How much was that fully flowed through in the first quarter, or do you get an incremental benefit in the second quarter as well?
Rhodri Harries, Executive Vice President and Chief Financial and Administrative Officer
No. If you look at what we've done from our pricing perspective, it did fully flow through in the first quarter. The way we've been adjusting prices in the back part of last year and the price increases that we took at the beginning of this year were reflected in the first quarter. And then we'll see where we go from here. I think what's going to happen is that the comps are going to get tougher obviously as we go into Q2 and Q3, Q4, because we did start to adjust pricing in the back part of last year. So you will see it; the uplift from pricing that we saw in the first quarter together with very strong volume will start to abate. Right now we're going to just watch the environment, see where it is, and we'll go from there.
Brandon Cheatham, Analyst
I'll turn it back. Thank you. Good luck.
Operator, Operator
Your next question comes from the line of Brian Morrison of TD Securities. Your line is open.
Brian Morrison, Analyst
Yes. Thank you. Follow-up questions, please. Rhodri, you talked about your outlook, gave a little bit of guidance with respect to revenues at the high-end range. I'm wondering if you can just go back and talk about the parameters of your slowing growth comment with perspective sell-through. Q1, Glenn just mentioned you were in the 30% neighborhood. Maybe just some parameters where you were and in recent weeks.
Rhodri Harries, Executive Vice President and Chief Financial and Administrative Officer
In the first quarter, I noted that the results were influenced by a slight mix, but excluding that, it was about evenly split between volume and price. From a volume standpoint, we experienced double-digit point of sale in North America. As we analyze April, that has adjusted but remains healthy, settling into the mid-single-digit range. It might increase slightly from there, but it's challenging to interpret at this moment due to factors like weather and COVID. While there has been a decline, I believe we're still at good and healthy levels.
Brian Morrison, Analyst
Okay. Thank you for that. And then maybe Glenn, you did mention nearshoring. I'd like to follow up on that and if I could. You've had some lockdowns in China recently, which has got to be affecting the supply chain even further. I just wonder if you're seeing materially increased demand from national accounts and GLB and whether this is increasingly looking like it will be a permanent benefit to you?
Glenn Chamandy, President and Chief Executive Officer
Well, I think it's going to be a permanent benefit to us, but I think it's not this company's plan well in advance, so we have been working together with our customers as a plan to increase their volumes at this hemisphere. So I think that's a general trend that's transpiring. Some quicker and for example, the large national accounts like customers, they're looking to buy quicker and this is a bit more responsive. The larger brands are a little more systematic about how they approach their supply chain as global manufacturers, but at the end of the day, this hemisphere will continue to grow, and I think we're going to be a big beneficiary of that opportunity.
Brian Morrison, Analyst
Relative to your current benefit, could you just double over your three-year horizon?
Glenn Chamandy, President and Chief Executive Officer
Well, yeah. I would say that that's realistic. There's a lot of volumes we have.
Operator, Operator
Your next question comes from the line of Jim Duffy of Stifel. Your line is open.
James Duffy, Analyst
Thank you, good afternoon, everyone. I appreciate you taking the question. Given the trends in cotton prices and historical patterns, I anticipate that I will receive calls from clients tomorrow who will argue that the strength is due to distributors advancing purchases to build inventories in light of expected price increases. How would you respond to that, and what measures, if any, can you take to prevent this situation from happening again in the current environment?
Glenn Chamandy, President and Chief Executive Officer
You can conduct channel checks, which will reveal that the inventories in the channel are quite low. This indicates that inventories are in good shape overall. There isn't an excess of inventory, and we are effectively managing our sales and inventory levels in the channel. While I mentioned that inventory was slightly up based on Q1 performance, we are positioned to continue serving our customers as we move forward. My point is that we will not flood the channel with excess inventory just because cotton prices have increased. We are satisfied with our current pricing. There may be potential for price increases in 2023, but it’s uncertain what the landscape will look like. That poses a risk, and we believe no one will absorb all of it. Currently, our business remains strong, and we are focused on customer relations and fulfilling product demands. We are tight on product due to strong sales, and we will maintain control as we advance and our capacity grows.
James Duffy, Analyst
Thanks for indulging in that. So Glenn, with distributor inventories still lean, it sounds like you're suggesting Q1 as a normalized baseline. There's not much to work with without guidance here should historic seasonality apply that Activewear business for balancing the quarters of the year is that sounds like an ambitious assumption.
Rhodri Harries, Executive Vice President and Chief Financial and Administrative Officer
Well, I think you would see some normalization in seasonality. We've talked about what we're doing; obviously, I would say I was providing an inventory for seasonality, Jim. I wouldn't say it is a normal type of cadence that we see going forward. If you look at the first quarter and think about how that translates into the second quarter, third quarter, and fourth quarter. We've talked about price and what unfolded there. We've talked about what we've seen from the POS perspective, and Glenn also highlighted how we plan to be disciplined. The first quarter was very, very strong, and POS was very strong; the demand was there, and as we go forward we would expect to see that moderate as we move into the year. But still, the seasons are the same, right? A lot of travel, lots of events, and everything happening in the summertime will drive demand.
James Duffy, Analyst
Very good. Thank you, guys. Good luck.
Rhodri Harries, Executive Vice President and Chief Financial and Administrative Officer
Thank you.
Glenn Chamandy, President and Chief Executive Officer
Thank you.
Sophie Argiriou, Vice President, Investor Relations
Thank you, everyone. Before we leave you all, just a quick reminder that we will be holding our virtual Annual Shareholder's Meeting tomorrow morning at 10:00 AM Eastern Time. With that, I would like to thank you again for joining us today, and we look forward to speaking to you very soon. Have a good evening.
Operator, Operator
This concludes today's conference call. Thank you for participating. You may now disconnect.