Ladies and gentlemen, thank you for standing by, and welcome to the Q4 2020 Gildan Activewear Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Ms. Sophie Argiriou. Thank you. Please go ahead.

Thank you, Paulie. Good morning to everyone, and thank you for joining us. Earlier this morning, we issued a press release, announcing our results for the fourth quarter and full year of 2020. The Company's management's discussion and analysis and consolidated financial statements are expected to be filed with Canadian securities and regulatory authorities and the U.S. Securities Commission tomorrow, Friday, the 26th of February, and will be available on our website. With me on the call today, we have Glenn Chamandy, our President and Chief Executive Officer; and Rod Harries, our Executive Vice President and Chief Financial and Administrative Officer. Shortly, Rod will be providing commentary on our results for the quarter. After which, a Q&A session will follow. Today's conference call includes certain statements, that 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. And with that, I will turn the call over to Rod.

Thank you, Sophie. Good morning, everyone. Thank you for joining us on our fourth quarter call. And as always, we hope everyone is staying healthy and safe. We are pleased to end 2020 with a strong finish despite the ongoing pandemic and having to successfully navigate through unexpected weather-related headwinds in the quarter. And we are extremely proud of our teams who throughout the year have delivered exceptional operational execution. From the beginning of the pandemic, we acted swiftly, putting our people first, while maintaining a strong focus on our key priorities. We took the necessary business decisions and actions to strengthen our competitive positioning for the long-term and accelerated our efforts under our back to basic strategy. The work we have done this year gives us great confidence that we are entering 2021 as fundamentally a stronger company. Our fourth quarter performance showed a strong sequential recovery from the previous quarter and compared to last year. We grew sales 5%, increased adjusted operating margin by 120 basis points, delivered adjusted EPS growth of 10%, generated record free cash flow of $278 million and concluded the year with a strong liquidity position of approximately $1.6 billion. We also continue to push forward with our Back to Basics strategy during the quarter with further focus on rationalizing our product portfolio. Specifically, in line with what we previously communicated, we were planning to do when we reported our third quarter results, during the fourth quarter, we conducted a detailed strategic review of our retail product offering and took the decision to rationalize part of our SKU base, which resulted in an inventory charge in the quarter of $26 million. At the same time, we also took a small charge of $6 million associated with the discontinuance of PPE SKUs. With the streamlining…

Thank you, Rhod. That concludes our formal remarks, and we'll be starting the Q&A session. [Operator Instructions] I'll now turn the call over to the operator for the question-and-answer session. Paulie?

[Operator Instructions] Your question comes from the line of Brian Morrison with TD Securities.

Rhod or Glenn, can you just talk about where your manufacturing facilities stand right now with respect to the impact from the hurricanes? Is everything back online? Or then what capacity utilization rate do you plan on running maybe through Q1 or currently? And how should we think about period cost as a result going forward?

Well, the capacity side of the question. While we're continuing to ramp up, we're at a point where our current capacity right now is exceeding our POS requirements. We've got to the point where we've built the production up to surpass the ongoing current POS trend in the market. And we're going to continue to produce at a higher rate than our POS through this quarter end. By Q2, we think will be fully caught up. And that will allow us also at the same time, is once we get our production up to these levels, to take advantage of any upside as we go into recovery into the market in the back half, if there is a recovery from the pandemic back to normalization. So I think we're in relatively good shape. We're sort of -- we'll be in a better position as we enter Q2. And I think we'll have enough capacity as we look forward into the remainder of the year to capitalize on any material upside to improvements of the pandemic and social gatherers.

And I just add on with respect to period costs, Brian, if you look at the capacity levels that we're currently running at, as Glenn said, we're running ahead of POS and now we're running basically at levels where we don't expect to see any real significant period cost out of, let's say, period absorption that we normally have seen as we've moved through the 2020 period. So period costs are pretty well behind us. All of our period costs for the most part. Now we're rolling into our inventory, and we don't expect to see any significant impacts as we move through Q1 and into Q2.

Okay. And then just second question, if I can. With respect to the big run in commodity prices here, if I can just go back to sort of cotton 101. I know you're hedged out six to nine months. But are you able to put price increases or cost mitigation to offset this? Maybe just remind us the percentage of COGS that cost in your conversion costs make and the recent increases has baked in your 18% long-term margin target guidance?

Well, I would say that for fiscal 2021, we're very comfortable with our cotton position. Historically, as cotton has gone up, we're able to pass that cotton increases to our customers. So if cotton remains at these types of levels, we'll see pricing go up as we move into 2022. I think that's the way you should look at it. So we're diagnostic, I believe about our pricing cost.

Your next question comes from the line of Paul Lejuez with Citigroup.

It's Tracy, filling in for Paul. You guys mentioned the POS trends were trending somewhat below 4Q. And I'm wondering if you could parse that out between the current period and fourth quarter by region. So what does that look like in the U.S. versus fourth quarter in Canada and in your other international markets?

Well, quarter-to-date, Rhod had mentioned in his commentary, we were down around 10% to 15%. That's pretty much across the board. The only thing I would add to that is that in the U.S., I think early in the quarter, we were running more similar to Q4, but the weather has been dramatically bad across the United States, which I think has put an impact on the POS. So I think in our U.S. market, I think it's more like Q4, but having weather impact and the rest of our markets are around that 10% to 15% range.

Got it. And then just a follow-up. What's your view of cotton aside, the current pricing environment in your key categories? What are you expecting in terms of pricing and promotions for this year?

Well, look, we're going to continue to leverage our Back to Basics strategy. We're going to continue to leverage our manufacturing cost savings. I mean if you look at our whole Back to Basics strategy, it's focused on growth, improving underperforming areas of our operations, leverage our costs, drive market share, increase margins, increase returns and increase our return capital to shareholders. That's what a Back to Basics strategy is. So we have the luxury to continue being priced aggressively, which we will continue to do this year as we move through this year. Our pricing has been pretty stable. I would say as we once we launched our Back to Basics pricing strategy, probably we came back early in July, we've been continuing pricing aggressively. And that price is winning for us. We think we're getting share. Our business is performing very well. And I think one thing that we had to also look at is that with the market even being down 10% to 15%, 70% of our total market in the United States or in the principal market is related around social gathering. So our market has evolved through e-commerce. And we think that as we see this recovery, with our continued Back to Basics strategy, we're very optimistic as we move into -- out of '21 and into '22.

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

I was wondering in the quarter, if you could help us understand the impact on sales and gross margin rate of the mix shift.

If you look at the mix in the quarter, mix was strong, right, in Q4. So effectively, we were up 20 basis points year-on-year, but the mix impact was 190 basis points. So it's strong. And as I said in my remarks, it was in line with what we expected. So if we look at where we were in the second quarter, mix was a negative impact on margins of 600 basis points. If you look at where we were in the third quarter, it was a negative impact of 280 basis points. And as the sales came back as we expected, effectively, we get the mix impact along with that. And so mix turned positive for us in the third quarter. It was a bigger driver of our margin improvement. Back to Basics also was a big driver. So if you look really at what's going on, the mix is coming back and then the Back to Basics really driving margin improvement as well overall, and very pleased with what we saw in the fourth quarter. And again, expect that to continue as we move into 2021.

Okay. That's helpful. And into Q4, how much of a factor on mix was fleece? And should we expect the fleece seasonality to return back to normal in 2021?

If you look at Q4, we did have good fleece sales. Fleece has been a good category, a good category through the pandemic, and it continues to be a good category. But overall, we did effectively see, I would say, broader mix that we were expecting, right? And we talked about this in the past, as the sales come back. We do see what we call fringe products effectively coming into the mix and driving margin. So fleece was good, strong category, very good, continues to be very good, but also with other areas of our business as well as driving that mix impact.

Once the fashion basic side of our business is also growing at a much faster clip today, which is also providing a mix improvement.

Okay. And just a last one here. With respect to Back to Basics, obviously, the Company is making good traction on that and continues to, how much of that strategy are we starting to see the benefits of now flowing through the P&L? Are we -- is there big benefits yet to come? Or are you kind of early days still?

Well, if you look at the strategy overall, again, I think we're particularly pleased if you look at Q4 and you look at the margin levels that we've been running at both from a gross margin perspective and an SG&A perspective, effectively, we're back to operating margin levels above where we were actually in 2019 in that range, let's say, on lower sales. So effectively, the benefits of Back to Basics are really coming through, but they will continue to come through as we go forward, right? As effectively as sales continue to increase, all of the benefit from the reduction of the product portfolio, the SKU rationalization, the impact that has on manufacturing on distribution, all of that will play through. So this is a strategy that, as we've said many times, really takes the business back to effectively a business model that we know can generate strong sales, very good margin performance and very good, I would say, capital utilization as well as we drive the business forward.

Your next question comes from the line of Stephen MacLeod with BMO Capital.

I just wanted to circle around on a couple of things here. You talked about the one Q1 or being a little bit weaker. Is there -- I know you sort of addressed this a little bit in a previous question, but is -- are there any specific areas where you're seeing incremental weakness? Or is it fairly broad across the board as it compares to Q4?

Well, no, it's across the board compared to Q4. But I mean, honestly, I think it's somewhat weather related. I mean, see what's happening in Texas and the Northeast got hammered with back-to-back snowstorms. So when people stop buying, they stop buying all together. So I would say it's across the board. But I would say, like I said earlier, I think that the market is more like a negative 10 in the U.S. and 10 to 15 [indiscernible], and weather is drove down on February, driven down the U.S. market to the minus 10% to 15% range that we said before. So we're encouraged that it's improving.

Okay. Okay. That's great. And then I just wanted to follow up on the cotton price inflation, which has been quite dramatic, and I understand that you historically had the ability to pass that through. But are you seeing any pricing movements on behalf of your competitors or any demand disruptions or order disruptions from some of your imprintables customers related to this price inflation that we've seen on the cotton?

Well, we're the price leader in the industry, right? So we're going to continue to price aggressively. So people either match or give up market share, and we're going to continue to do that through the course of this year. We feel very comfortable with our product position. And as we move into next year, cotton maise at these central levels, we'll see inflation and pricing going up. I think that's how we're going to play the year. We're well positioned and we're building up our capacity. And really, what we're looking forward to is the recovery in the back half of the year because we should have capacity to support additional growth as the recovery happens.

Okay. Great. And then maybe just one more, if I could. On the last call, you made some interesting comments about the addressable market exiting the pandemic being even bigger than it was when you're coming into the pandemic. Have you seen any data points that would change that view at all? Or anything that would give you more confidence that, that, in fact, will be the case?

Well, we -- look, it's going to be at the end of the day because the market is pretty robust right now, and social gatherings have not really occurred. I mean they're starting to slowly come back. But the corporate promotional area, I mean, people are still working at home so that whole market is dried up completely. Travel and tourism is not really robust, I can tell you that. So all the literally baseball, schools, everywhere where the rock concerts, I mean, all these events have been the driver of our market historically. So the fact that the market is even minus 10% to 15% is phenomenal. So our view is that if you look back in our investor presentations 10 years ago, we said that the size of the market was $4 billion. The market has evolved and grown in the last four years of investor presentations. We estimated the market would be $6.5 billion. I would say that this market post-pandemic is going to be moving up from that level. And we're also getting the effect of onshore as well. We're in a business where you can buy product at once buy our shirts, if you need be change the labels if you have to. So the fact is, is that I think that, that's also going to help drive demand with the product offering that we have today and capabilities we have in the market. So all of these things really, I think, are -- we're poised to [indiscernible] the recovery, I think, in a very good position.

Okay. Your next question comes from the line of Jay Sole with UBS.

Glenn, could you talk a little bit about your -- how the Back to Basics strategy is impacting what you're doing with American Apparel and also sort of relate that to your comment about pushing forward with your imprintables pricing strategy. Like what do you see in that brand? And what's the outlook for -- specifically when like the ring-spun kind of fashion T-shirt market?

Well, the brand is going to be focused on really more our wholesale B2B type business. I think that's where we're taking the brand. It's going to be the fashion segment of our print work imprintable markets. We won't have some of the products being sold online that you can see on some of the big online retailers. But it's going to have a niche. It's going to be a little bit higher priced. It's going to be a little bit different. So we have a two-brand strategy. We have built in, which is really the core breadth and American Apparel, which is step-up with a little bit of differentiation in product and fabrication and the assembly of the government. So it's got a home within Gildan band. It's doing good. Obviously, it's not that the size of where Gildan is because we're huge history of market share. And we also have Comfort Colors, which is another brand, which is basically, again, a little bit more unique as it's garment [indiscernible]. So we have a good brand portfolio. We've narrowed down the SKU base of all of our brands so that we're really focused on what's going to sell, and we're comfortable that our portfolio is what we need today to continue driving our Back to Basics strategy. And on the Back to Basics strategy is really making sure that we grow is the pillar of our strategy is growth. The second pillar of the strategy is making sure that we peel out in the underperforming parts of our business. Because how do you get margin expansion, it's not necessarily by having to raise prices or be more effective. It's also by taking the margin to lower profitability products you have in your line or complexity out that ultimately increases the overall mix of your margin without doing anything. A couple of that with driving at leveraging our better cost position because you have less capacity. That will drive share. And that's what we feel very comfortable as we move forward, margins will continue to move up, returns will improve our return on net assets will improve as we perform in terms of using less working capital. And ultimately, that will allow us to return more capital to our shareholders. So it's comprehensive. We've got a good plan. We've got the right product, and I think we're positioned well in the market.

Got it. Maybe, Rhod, if I could ask one more question. Just on SG&A dollars, like how are you thinking about budgeting the first quarter and for the rest of the year, just to help us with our models a little bit? I mean should we continue to expect the same kind of run rate of SG&A dollars that we saw in 4Q versus 2019 as we go in here into 2021?

Yes. I mean, look, if you look at the first quarter of every year, right, generally, it's a little bit lower sales quarter. So our percent of sales generally goes up, right as far as from an SG&A perspective. But if you look at the dollar amount effectively on a quarter-over-quarter basis, I mean, we've done a great job on our SG&A, and we're going to stay focused on that as we go forward. We're working towards that 12% target overall. And so that really is where we're trying to get to when we look at it on a full year basis. So if you look at our SG&A, there is -- I mean as the environment normalizes, some cost is coming back into the system. And I think you'll see that effectively for all companies. If you look the cost employee-related costs, you got travel. Things are coming back in. But we've done a very good job. I would say, Jay, on our SG&A, we're going to keep it at those levels as we move forward as we drive towards that 12% target overall.

And your next question comes from the line of Chris Li with Desjardins.

Glenn, just based on your comments about an expanded addressable imprintables market. Is it fair to assume that you do not necessarily need to see the traditional social gathering or corporate promotional end user segments to fully recover in order for your sales to be back at pre-COVID level?

Well, look, we're down to 10% to 15%. So the answer is we definitely need some type of recovery of social gathering really to take our sales back up to the normalized level. Otherwise, we'd probably be there today. So that would say, no, we did not have that recovery happen. But if you take the percentage of sales of the social gathering type products in our universe, it used to be 70% of our market, right? So people are buying products in different places, they're buying them online. So there's been a little bit of -- I didn't go to the local fair to buy my t share, not going to go buy it online, but they bought their share, right? So it's not going to be a duplicative increase because social gatherings starting to occur. So I would say net-net, the market will expand I think we've had an efficient distribution system, in general, in the overall market. And time will tell to see what happens once the recovery takes place.

Okay. That's helpful. And then at your last Investor Day, I seem to remember, and I could be wrong, that you mentioned that you had about 20% to 25% market share in the fashion basic segment, and there's a lot more room to grow. Do you have that number updated, given everything that's happened?

Well, it's growing. I mean I think we've definitely grown it significantly this year. I mean I haven't got the exact number to give you today, but I would say that we definitely have significant growth. I mean the two big areas of growth in our POS, our fleece and fashion basics, and that's what's really driving our unit volume growth. So we definitely hear for sure we're driving growth.

And your next question comes from the line of Luke Hannan with Canaccord Genuity.

Rhod, I think you touched on in your prepared remarks that you guys are going to be free cash flow positive. You expect to be free cash flow positive for the year. And I know part of that is going to be running at sort of lower inventory levels just as a result of the Back to Basics strategy. But how should we be thinking about, I guess, your production schedule and how that's going to affect your inventory balance the course of the year? Is it going to be more normalized as in historical years where you're sort of building up that inventory balance in the first half of the year and sort of drawing it down in the back half? How should we be thinking about that?

I think that the inventory -- look, we're tying on inventory now as we're catching up during the hurricane. So until we get to Q2, basically, we're just -- we're going to be in a catch-up mode on our business. And as we get into the back half, like I said earlier, our manufacturing capacity is running at a rate which is outstripping the POS at the current level. So if that happens, we keep producing at these levels, we're built a little bit of inventory at the end of the year. And if the market recoveries, we'll probably have similar type of inventories from higher sales. So what is it to lap.

Got it. And then, Glenn, I know you touched on this earlier in the call, sort of how you're thinking about online and the rest of the addressable market throughout the course of the year. But as the pandemic sort of made you reconsider or view your channels a bit differently and trying to access that customer through online versus other channels, have you guys given internally any thought about expanding those capabilities?

Well, the thing is that back in 2018, when we came to the market and we started our Back to Basics strategy, we looked at the market as we just have retail market and we had a printwear market and we say, look, if the world is emerging, it's all of a sudden, there are two markets we're merging into one. That's what happened this year because the lion's share of all the sales that are being sold through our distributor network are heading on to online type selling, either people buying online from our distribution network that they're servicing online sellers, the local print fishing guy, let's say, for example, in Myrtle Beach, who never sold online are selling online today. I mean, so the whole world has gone online. And I think that we're still getting the benefit of that without having costs associated with servicing, shipping, picking. And that's the reason why we got out of last year shift pick to the piece business. And focused on our core competency and leveraging everything we have in our Back to Basics strategy. So it's definitely working. We're still being able to address those markets, but we don't have the costs associated with the individual onesies and twosies. So I think that's sort of why we're so confident in our ability to grow sales and reduce costs.

Your next question comes from the line of Patricia Baker with Scotia Bank.

Rhod, I wonder if you could share with us your anticipated time line with respect to getting your net debt within your targeted range of 1 to 2x?

Well, I think if you look at our leverage ratio, and you think about LTM EBITDA, Q2 was a very tough quarter last year. So I think the first thing you have to look at that, Patricia, it will drop away out of the calculation, right, as we move into Q2. So I think that will effectively have a big impact on bringing the ratio down. We're 3.5x on a reported basis at the end of Q4. And as we go forward, effectively, we'll see how things play out. Ultimately, we are, as we said, I think we're very pleased with the way Back to Basics is running, what we're doing with the business. We'll see how the first quarter plays out, see we are in the second quarter. But I think that the movement of that EBITDA out of our ratios will have a big impact as we get to the second quarter.

And our next question comes from the line of Mr. Jim Duffy with Stifel.

This is Peter McGoldrick on for Jim. As we think about the long-term 30% gross margin target, what factors are needed to bridge from run rate levels today? Is this a function of capacity utilization from existing manufacturing? Or does it rely on the new capacity ramping or more pricing? Just what other drivers might be required to build to those targeted 30% levels?

It's just a function of us continuing to drive our Back to Basics strategy as all the components come together as we maximize our manufacturing, continue to improve our underperforming areas of our business, grow the top line, improve our mix. All those things combined will allow us to achieve our targeted 30% gross margin as we move to the future.

Then near term, as we think about the 10% to 15% imprintables point-of-sale versus 2019 levels. Can you provide any insight into the view of distributor inventory alignment with these sell-through dynamics? Is there any contemplation near-term of restocking or destocking?

Well, I would say that the current inventory in the channel is normal low, but on a current POS basis. So in other words, with a negative POS basis. That's really where we are in the channel today. So if the market would materially come back, there would be a little bit more inventory required to support those sales in the channel at a low level.

And our final question comes from the line of Mark Petrie with CIBC.

I just wanted to come back to the topic of the end markets and sort of the evolution that you're seeing with your sort of final -- with the final customer, and I guess my question is, does that shift have implications for the profitability of those products for you or your distributor? Or does it have other implications with regards to sort of your manufacturing footprint and the efficiency there?

It doesn't change anything for us or our customers because we still ship full cases, full truckloads on mass to our customers who do the distribution function, and that's what they do. So we're the brand, we do the marketing and the manufacturing of our products and our distributors do the distribution function. So basically, for them, it's just going to a different outlet instead of going to necessarily screen printer, it's going to an online screen printer or a screen printer that it could even be the same customers we're selling to, but he's now instead of selling it in his retail outlet, he's now selling online to consumers, right? So it's just the question how the net consumer gets the product, but the channel and the functionality is still exactly the same. It's just a question of how is getting to the end user because even though we don't sell necessarily with more of a B2B type business, the fact is everything ultimately ends up in the consumers' hands. And it's just a question as where they pick come up.

Does it lead to any shift in mix?

Not really, I think the mix is pretty much consistent. And I think mix is more driven by style changes like our preferences, like fleece has become a casual wear item and that maybe be again back to people working at home, leisure where leisure was is a growing category, if you look at all the fashion brands. So they have a -- they're getting out to suit and ties and going on to sweaters and other things because people are working at home. And I think that trend will not change. I think that could be also a big driver of our success because people are becoming more casual. This working home thing basically has taken off to suite for short, right? So I think that's one area. So fleece has been a big driver of fashion. T-shirt basically is obviously [indiscernible] category. The area where the basic side of our business, I mean that's really conducive to large gathering and large events. I mean, if you go and look at the opening day at the baseball game, I mean they're not giving away fashion T-shirt we're giving away our basic type products. So that's where we'll really get the big push, I think, on the recovery is when the basic side comes back because of the big gatherings, rock concerts, NASCAR and et cetera, et cetera. So I think we're well positioned. We have everything we need. We have all the products. We've got the brands. We've got the capacity. We're very excited about Bangladesh coming on, which is going to be the big evolution to the overall manufacturing of Gildan, which is going to support our international sales as well as support the continued fashion basics segment for us. So overall, I think we're well positioned, and we're looking forward to the recovery. I think we prepared quite well this year relative to all things being equal. So as we get recovery, I think we're going to be rocking.

And you guys had just touched on it, but I just wanted to ask about Bangladesh. Could you just remind us in terms of the timing of that being a contributor to your business?

Yes. Well, that's going to support -- it's going to come on in '22, and it's going to support really '23 sales, I mean, by the time it comes on in '22.

And at this time, there are no further audio questions. And are there any closing remarks?

Thank you, Paulie. Again, I thank everyone. We thank everyone for joining us this morning, and we look forward to speaking to you very soon. So have a great day. Thank you.

And thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.