Ladies and gentlemen, thank you for standing by, and welcome to the Third Quarter 2020 Gildan Activewear Earnings Conference Call. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to Sophie Argiriou, VP Investor Communications. Please go ahead.

Thank you, [Meski]. Good morning to all and thank you for joining us. Earlier, we issued a press release announcing our earnings results for the third quarter of 2020. We also issued our interim shareholder report containing management's discussion and analysis of consolidated financial statements. These documents will be filed with the Canadian securities and regulatory authorities and the U.S. Securities Commission, and will be available on the Company's corporate website. On the call today, we have Glenn Chamandy, our President and Chief Executive Officer; and Rhod Harries, our Executive Vice President and Chief Financial and Administrative Officer. In a moment, Rhod 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 within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve unknown and known risks, uncertainties and other factors, which could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. We refer you to the Company's filings with the U.S. Securities and Exchange Commission and Canadian Securities Regulatory Authorities that may affect the Company's future results. I will now turn the call over to Rhod. Rhod?

Thank you, Sophie. Good morning and thank you all for joining us on our third quarter call. We hope that you and your families are healthy and staying safe. This morning, we posted results reflecting a strong recovery for the third quarter. Sales came back nicely more than doubling from the second quarter. We saw good retail performance with sales up year-over-year driven by momentum in underwear. And although the pandemic continues to weigh on the demand for principles used for large events, other areas within this part of our business are growing and mitigating the impact. Further, we're making good progress with our Back to Basics strategy, as we continue to focus on servicing our customers with a more streamlined product portfolio, which in turn is allowing us to remove complexity from our business and fully leverage our manufacturing platform to drive market share growth. In this regard, during the third quarter, we saw manufacturing cost efficiencies from our Back to Basics strategy come through as we brought back more capacity online and together with a sequential improvement in product mix as sales improved, we generate gross margin of 22.5%, a strong recovery from the second quarter. This was achieved despite a continuing year-over-year impact from period costs related to below normal manufacturing capacity utilization rates. And albeit better but suboptimal product mix given the COVID related environment. Moreover, we kept a strong focus on managing our SG&A expenses which came in at 10% of sales. So adding all this up, we return to a profit in the quarter with GAAP EPS of $0.28, adjusted diluted EPS of $0.30. We were also very pleased with our strong free cash flow generation, a $137 million in the quarter or on a cumulative basis $300 million in the last few quarters…

Thank you, Rhod. Before moving to the Q&A session, I ask that you limit the number of questions to two and we will circle back for a second round of question if time permits. I'll turn the call over back to the operator for the question-and-answer session. Meski?

[Operator Instructions] Your first question is from the line of Paul Lejuez with Citibank. Mr. Paul, your line is open.

Hello.

Yes, Paul.

Can you hear me?

Yes, we hear you.

Just I'm curious if you've seen any improvement in the promotional levels within the imprintables channel this quarter versus last quarter, curious if there are any categories that stand out as being more or less promotional, just promotions across the board. And you mentioned, the sales trends are better this quarter, curious if anything has changed on the promotional front? And then totally separate, I'm just curious about your raw materials outlook for the first half of ‘21? Thanks.

Yes, maybe on the promotion, look we've commented that we are continuing to drive our Back to Basics strategy, which includes continuing to price and promote our products. And basically, this allowing us to continue to generate market share and prove our POS and where we're spending and promoting our products is in the fashion basics fund category. Open-end basic T-shirts and our fleece products and those are the main three areas that are -- we are promoting and those are the three big categories that are driving our POS and market share gains as we speak. So, it's not across the board promotion it’s specifically a three categories today.

Second part of yoru question, Paul was on raw materials. And I think if you look at raw materials, I mean, cotton prices are going up. But I think if you obviously, if you look at the lag time, I think in the in the first half, you won't necessarily see that. But obviously, there is some upward pressure as we go forward.

Okay. Thank you. Good luck.

Thank you.

And your next question is from Chris Li with Desjardins.

Hi, good morning, Hey Glenn I know we're still far away from the new normal, but just curious if you can give more colors on what drove the POS improvement from Q3 to October, because considering your end user demand, that's quite impressive improvements, so if you can provide some more colors on that will be much appreciated? Thank you.

Well, I mean, I think the Q3 was, we were pretty excited about the improvement in Q3 to be very honest, I mean, if you look at the -- our industry and we're a little bit like airle industry, which is travels, tourism, and sporting events and rock concerts. I mean, none of these things have really come back and social distancing factor. So the good news is that our products are stronger than our lifestyle but basic casual stay at home is driving sales. And what is happening is that there's alternative ways to product market. And that's the great news is that we're an efficient industry. We should have big insertions in product and screen printed T-shirts in retail customers, for example, that are now carrying more products online reselling, has been very strong. At the end of the day, really what your position is we position to have an effective supply chain to support the shifting in the market and the shifting of behavior of how people are consuming and buying the products. And I think that's really the most important shining star of this whole thing is that it allows people to continue to increase our market share in the market and there's issues of social gatherings and social distancing. So we're very excited about it now. We don't have all the answers because it's a great way to market. And our products are resold to distributors and get sold to screen printers. So it's hard for us to get a total handle on it. But it's very encouraging. And as we moved into October, we continue to see further upside in terms of more sales and market share gains.

Okay, that's helpful. Maybe a quick follow up. You mentioned I think, last quarter that your expectation is still that by next year, sales will recover to around 80% to 85% of the pre-COVID level by 2021. I know there's still a lot of moving parts. But is that still your view?

Well, I mean, from where we are today? I would say yes, that's a good view. I mean, we see that in Q3 we see slightly improving so far this quarter. But the pandemic is also worsening, I mean, what we see in Europe today. So that's really a function of the overall how it affects, but I think that where we are and how we position our business. Regardless I think we're well positioned, we have a good handle on our manufacturing capacity to be able to go up or down or support any demand in the market. Our inventory levels are in very good shape. Our debt has come down and we'll continue to drive -- we are driving for cash flow as we move into Q4 into Q1 as we continue to focus on our inventories. And when you look at our whole strategy of Back to Basics, what it means is improving our availability of selling and driving price, market share by price but ultimately continuing to reduce the amount of working capital required to support the business. And all those things together are going to continue to play a big part in recovery for us and drive share.

Okay, that's helpful. And best of luck for the rest of the year and continue to stay safe.

Thanks you.

And your next question comes from the line of the Vishal Shreedhar with National Bank.

Hi, thanks for taking my questions and congrats on these results in the tough period. Regarding your wholesaler customers, wondering if you can update us on the state of the inventory in the wholesale channel and now that we've seen restocking for some period of time, is it reasonable to destocking, sorry for some period of time is it reasonable to expect restocking in the coming quarters and also maybe just tag along to the financial health of the average, wholesale customer?

The health of our customers have are sort of in the same position that we are, they've seen a big recovery in the industry. So because most of these products are being sold through our distributors, so as we recover, they've recovered. They also have managed their working capital and their financial stability as well. So we're all in the same -- really the same direction there. And the inventory is yes, they probably hit the low at the end of Q3 will be a little bit of that -- I would say that they're stable, but they will probably grow a little bit Q4 as demand continues to grow to support the future sales. But they're in very good shape. Our customers are in good shape and we are pretty excited in our position right now.

Okay. I appreciate that color. And just a follow on to that, with respect to your own manufacturing capability and the restrictions imposed associate with COVID-19. Can you talk about Gildan’s ability to make sufficient inventory to reflect this seemingly unproven demand outlook? And do you foresee any problems related to COVID-19? And perhaps, social distancing and restrictions on your manufacturing footprint?

Well, I think one of the things in the -- our strength is being a vertically integrated manufacturer. And when we really see how we performed this quarter and how we brought back our production is a real function of our strength of our manufacturing team itself. Did a great job, we brought back capacity to the 75% level, which is lower than some of the sales level, because we were focusing on making sure that we continue to try free cash flow and bring down our inventories. And we're continuing to increase it as we speak into Q4 to support demand. So we have all the flexibility really to decide how fast we want to go up. And if we have to scale back down, we can do that relatively easy too, we are going to -- we're going to manage really what occurs in the market. We've got available capacity to continue growing to 100% to pre-COVID levels. And that's all installed ready to go. We've got capacity that is being installed as we speak from the closure of our Mexican facilities that we closed down in March that we are repurchasing in Central America. And we're continuing to expand and planning for Bangladesh expansion, which is planning to come on Q2, of 2022. So I think we're in a very good position on manufacturing perspective, to continue to support sales growth. And we're also in a position that if sales curtailed, we can support that relatively easy where we are today. So, we're excited that we have all the protocols in our factories and regions, I know our plants have social distancing the transportation, testing employees every single day when they come in for test temperature scans, sanitation, their footwear. I mean, we've put in all the protocol; it is a factor that COVID is quite relevant in Central America. But we've been able to operate and control our situation in our factories. I think pretty well, so far.

Thank you.

And your next question comes to the line of Sam Khan with RBC.

We're having trouble hearing you.

And your line is open. Okay, question was withdrawn. Your next question is from Stephen MacLeod with BMO.

Thank you. Good morning.

Good morning.

Good morning

I just had a couple of questions on the imprintables segment or actually sorry one question on the imprintables segment and then one other. In terms of the imprintables, can you just talk a little bit about categories, where you saw incremental strengths between Q2 and Q3 and then where you see an incremental strength between Q3 and into October?

, :

Great. Thank you. And then on the margin side you had some nice growth in Q3 sequentially. and you talked about sort of margins normalizing or certainly the mix impact normalizing. And can you talk a little bit about how you expect that to evolve? And then do you still view that 30% level as potentially attainable as you get into 2021, 2022?

Yes, if you look at the margin, Stephen how it's evolved, right, we have seen those the impacts that we called out as we move from Q2 to Q3, and you can see them continue evolve, as we move into Q4. So we had in Q2, we had a lot of period cost in Q3. We also had period cost, we call it out 250 basis points, right as we move [Indiscernible] our manufacturing, on average about 70% utilization 75% at the end of the quarter. And then as we move into Q4, that will improve as we continue to ramp up our production. So effectively, that'll diminish. On the mix side, we have seen the evolution of the mix is quite negative in Q2, Q3 also negative it’s 280 basis point in fact. And then as we move into Q4, effectively as the mix starts to normalize, that should diminish. We still have mixed impacts, like Glenn called out, bridge products, the pockets things like those, but they do have a negative impact. And if that's not in your mix, you don't get that. But effectively as we continue our sales continue to come back. We do see positive mix overall. Fleece is an area where effectively, we probably if you look at Q3, effectively, some of that has shifted into Q4 for a number of different reasons. And that's that drives positive margin. So overall, I would say our margin is evolving as effectively everything normalizes and as we drive to ‘21. If you look on our longer term targets, we very definitely are driving towards those targets. It's going to take some time. We call that out last quarter, effectively. Previously, we had said that we thought we would be able to pre-COVID hit those targets by the end of ‘21 on a run rate basis. I think we have to push that back now given what's going on from a COVID perspective, right, because you've got to get to a more normalized environment overall where a print where business is back to where it was in 2019. But we're still going after those targets.

Okay, that's, that's helpful. Thank you, and congrats on the great quarter.

And your next question is from the line of Mark Petrie with CIBC.

Good morning, Working capital obviously been very, very strong Rhod, you highlighted your optimism for Q4. So is this just representative of a permanently more efficient operating structure as a result of that reduced skew count? And what sort of runway do you see for this sort of further -- potentially further reduction in working capital are we sort of at a relatively stable level, once we see the further benefit in Q4?

Unlike you work on it right away.

If you look at the working capital, as we simplify our overall structures, we've effectively worked on our product portfolio and everything associated with Back to Basics will translate ultimately into improved working capital, better terms. And so we've done a lot and you're seeing the benefit come through. But we still have more do, as we said; we were working on our retail portfolio. And we'll be doing that in Q4. And those types of initiatives they ultimately translate into a better working capital performance as you move forward. So I wouldn't say that we've done we've done a lot, but I wouldn't say we're done yet and mark and we will be looking to drive better efficiency as we move into ‘21 on the back of I would say stronger performance in ’20.

And then not only does it improve our working capital, but also going to lower SG&A and improve our efficiency of our distribution centers and other parts of our business. And also, it will allow us to keep more inventory, even though our inventories are coming down, we're going to have more inventory in the area so that we can improve our availability in our service to our customers, basically. So it's a win-win, less inventory, lower cost, and better availability. That's what the basis is all about.

Yes, understood. Thanks. And just with regards to the performance in retail, and your private label program, how much and the growth there, I guess, also in the Gildan brand too, but predominantly private label, it sounds like so how much of the growth there was increased shelf space versus improving velocity? And is there any visibility to any further change in shelf space or are you sort of stable with where you are at today? Thanks.

Well, I think that the growth is because of [Indiscernible] based on philosophy it really intended to pay right. So we've continued to take share, our products are doing very well. And we're looking to continue growing and as we move forward in the future. So we're pretty excited about the level of growth. And this is a continued operation as we move forward in this.

Okay, appreciate all the comments. All the best.

And your next question is from Luke Hannon with Canaccord.

Thanks. Good morning. Glenn, I was wondering if you could give a little bit of color on the retail segment of the Activewear division, just curious to know what the trends are like for the different sort of end customers there specifically like the retail, the specialty channel, and maybe mass and maybe just some of the other different customers and how POS is trending amongst those?

Yes, retail sales overall, were flat, but our mass products were actually up and some of our products that we sell to Global Lifestyle brands were down in the quarter. So our mass is actually very well.

Okay, thanks. And Rhod, you touched on that manufacturing policy was 75%. I think, as of the end of the quarter, just curious to know if that number has changed significantly since quarter end?

We pushed it up right. So effectively, we're 75. And we've continued to bring it up, as we moved into Q4.

And we're bringing it up in line with the trends of POS in the industry, right? Still keeping in mind trying to manage working capital and inventory levels, so that's sort of how we distribute that.

Good. Thanks for the comments.

And our next question is from the line of Brian Morrison with TD Securities.

Good morning, I just want to follow up on that point, actually, Rhod, can you just maybe put a number to Q4 capacity utilization, maybe an early outlook for 2021? As it's going to impact, expensive period cost? And then just in terms of mix, are you simply referring to lower fleece and higher retail in terms of the weight on gross margin right now?

So look at capacity utilization, I mean, I think, again, we're not giving guidance for the quarter. But effectively, I think, given where we are currently running, probably around 85%. Is a good number, right ultimately, probably where we're going to settle up for Q3 and Q4. And then, if we look at the gross margin, effectively, the impact of gross margin, it does normalize, as we revert back to, I would say, the historical levels, and as our sales moves up, because, again, I would say across all of our product lines, right, we get a better mix, I would say, on average, but if you look at Q4, I mean there will be some things that will drive it, as I said, as well, as you touched upon period cost will help. Fleece is going to help more generally. And so again, I think the way to think about that, that mix impact, we were 600 basis points, we were 280 basis points down this quarter. And then I would say there's just a steady progression as we keep moving forward as our other sales come back.

Okay, thank you. And then Glenn, just in terms of opportunities with global travel restrictions and your cost structure improvement and obviously more just in time requirements. I'm curious if you're seeing hot heightened opportunities in GLB, your private label that's typically out sourced from Asia?

We're seeing a lot of demand for large screen printers that service all the retailers and online sellers. I mean, that's really been a big catalyst to our POS growth. Because look, at the end of the day, people that have brands and want to repurpose a shirt, they can take a Gildan product in their fashion basic or fleece, all of our garments have tear away labels, they can quickly change the label on the product and rebrand all of our products. So, we're a conduit for success for quick turn on shoring. I mean, just in general, when people look to make regularly a screen printed of that product, I think that the part about the bigger picture about the on shoring global supply chain. And I think that's still a big opportunity for us as we move into ‘21 because a lot of big companies, retailers, are large users of product have been fending off COVID and managing their overall global inventories and crisis management, etcetera but that settles, and people look to grow and how they're going to manage your business as they go forward. Obviously, the lack of travel, the convenience of purchasing in this hemisphere, I think is going to be a big plus for us, and also the speed of five weeks versus the five months almost major. So I think we're well positioned. Right now we're getting a lot of that at once. This has been scripted that's being servicing a lot of the mass retailers as well as the online sellers. And I think that the next step for us is to see some big opportunities potentially coming our way as the markets recover.

And so, are you stating that based on discussions today or just your intuition?

My intuition and partly some discussions? Yes.

Okay. Thanks very much.

Your next question is from Jim Duffy with Stifel.

Thank you. Good morning. Hope you guys are doing well. I have a question on the retail market landscape. Can you speak to any differences that you're seeing in POS versus your reported sales? I'm curious to what extent growth in 3Q was replenishment of depleted inventories exiting in 2Q, how that compares to POS trends. And then, if you could speak about quarter-to-date, POS trends and how that fits with what you're seeing in your shipments that would be helpful?

Well, Q3 is obviously the biggest part of the year for underwear in particularly so and have all of our POS was driven by point-of-sale. And basically, we're actually chasing product right now to be honest with you because of our sales were so strong. So it's all point-of-sale, we've seen POS slightly come down a little bit from these levels in the first part of October. But that's seasonal, I mean, you have a spike back to school. And then basically, you have a big spike towards the end holiday season. So I thought overall, we're very encouraged. It's all based on growth on point-of-sale, consumers buying our products, basically at retail.

Thank you. Glenn can you comment on the competitive environment and imprintables or competitors matching your promotional stance? And then, it sounds like you think distributor destocking is complete here. At what point would you expect to get to a more normalized pricing environment?

Well, we think to look at our objective is to leverage back to basic strategy. And the first way of our back to basic strategy actually spent skew rationalization is price availability. So we're going to continue to be very aggressive on price for the foreseeable future. We think we can do that still obtain our marginal taxes, because we're going to be driving, manufacturing efficiencies as well as SG&A reductions associated with our Back to Basics strategy. So, our objective right now is continue to build our leadership position, right market share in the categories that were underdeveloped, particularly in the fashion basic principles category. And we think we're going to do this foreseeable future through 2021 is definitely our plan. And it's paying dividends because we're seeing, market share growth. And we're also seeing, I think we're getting market share gain, and gaining market share through the pricing strategies where you can continue to do it. We don't believe that our competitors have the staying power to continue this type of pricing is because we're leveraging our low cost manufacturing, and they don't have the same cost structures. So maybe some short-term competitors matching, but on a longer term basis we believe that price and availability will win for us and we're going to get back on the offensive and making sure that we continue to drive share on all categories.

And just one quick follow up, if I may related to that, is the market environment now stable enough such that if there were M&A opportunities that presented themselves, you'd be ready to capitalize on that?

Well, I think we're very happy. And we believe that the capacity we got coming online, breaking up pre-COVID levels, and then expanding our capacity beyond including the expansion of Bangladesh. We can continue to do that organically with all the opportunities that we do have. And that's part of our Back to Basics strategy is now focus on maximizing our capacity utilizing it. And we have like capacity that's available between the repurchasing of our Mexican capacity as well as the Bangladeshi capacity coming online, which is only phase 1, we also have a phase 2. So we know we've got enough in front of us, we think, to continue driving sales. And that's why we're focusing on our price our availability on our market share.

Thank you.

And your next question comes from online [Indiscernible] with UBS.

Hi, good morning, and thanks for taking my questions. I want to ask if you could provide a little bit more insight on how the end users that men have behave throughout the quarter. I mean, particularly very interested to see how you're seeing someone like the corporate or and also like the social events, you see, how do you see that evolving maybe next year? And how much would you expect that to come back?

Well, right now, the good news is that the end users still getting our products through different opportunities. In other words, mass retail, online selling, they're making up, I think of that tourism and travel. So the question is going to be, it’s all function of the pandemic, when social gatherings commence again, and then we'll see the traditional business come back. So I can't really answer that question. I don't know when that will happen. But the good news is that, despite all these events not occurring, we're very encouraged with our POS, almost coming back to normalization. And that's a function of us taking share, as well as the market recovering and finding ways to bring product to the end user. So that’s probably answer that question.

Okay, understood. And just one quick follow up, you were also mentioning that probably sales might rebound next year to around 80%, 85%. Pre-COVID? So how should we think about the SG&A because I mean you have implemented the Back to Basics strategy. So just wondering like, how much of the SG&A should we see that bounced back next year, assuming there's like a more normalized environment?

We will see volume driven distribution costs, right, that will roll into our SG&A. But I mean, I think the way to think about SG&A more broadly, is that we're driving to this 12% target, right. We have two targets, our gross margin target, our SG&A target. And the 12% SG&A is something that we think that we're very close to we were below that this quarter, and we think we can run at that level or better as we move into ‘21.

Understood. Thank you very much and congratulations.

And your final question comes from the line of Sabahat Khan with RBC Capital.

Thanks. Just on the commentary in the press release around the rationalization, kind of the retail offering. Maybe we talk about the $25 million potential charges, can you talked about which focus areas within your portfolio that might be from and sort of what's driving this rationalization or just review of the strategy on the retail side? Thanks.

Well, we're just continuing to optimize our business. We're going to simplify our retail business as the market continues to consolidate. We have mass growing, we have basically online selling growing so we want to focus on our growth drivers and making sure that we have our products associated with those areas of distribution, and simplifying our product line the amount of assortment that we have the complexity of the products we're selling and reducing the SKUs in order to improve efficiency, like we did in [Indiscernible]. We think that all this will help us as right sales as we go forward, reduce our inventory levels reduce SG&A and actually improve margins. And ultimately, that's what we're looking to do is implement the same Back to Basics strategy and retail, as we did in the couple of market. So you can see from our results [Indiscernible] it's paid the big dividends, we think we'd have the same type of opportunity and just focus, same focus [Indiscernible] front and we're looking and very excited about our positioning of where we are on.

Okay. And then I know, there's been a bit of discussion on the call around, kind of the current POS being down only 10% versus prior year. And it seems like even in the absence of any large gatherings, other channels like online and resellers have stepped up. And when the pandemic started, there's a bit of concern that if the corporate spend goes away, maybe not all it comes back, how are you thinking about this new channels that have popped up, like the online demand work from home consumer buying some of these products, like getting maybe that adds to the end market overtime maybe replaces some of the last demand that might be there on the corporate side? When we come out the other side of how are you thinking about how the market looks today, and the fact that you're 90% of back to kind of 2019 levels, even without large events?

I would say that intuition will tell you that the market is going to grow for us recovery really happens. And that's probably the way we look at it. I mean, when you think about it, we're very efficient supply chain between the online and also, we're also servicing a lot of large screen printers and by-products that are servicing retailers mass market, things it gets pre-printed traditionally. So, I think that overall, I would say to answer your question, the market is growing, because the channel distribution is expanding. And so when travel does come back and corporate promotional spending does come back. Definitely, we will have a bigger market than we had before.

All right. Thank you.

And there are no further questions at this time.

Okay. I'd like to thank everyone for joining us today. And we look forward to speaking to you very soon. Have a good day, and stay safe.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. I now disconnect.