Ladies and gentlemen, thank you for standing by, and welcome to the Q2 2023 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 Jessy Hayem. Please go ahead.

Good morning, everyone. Earlier, we issued a press release announcing our results for the second quarter of 2023. We also issued our interim shareholder report with the Canadian Securities and Regulatory Authorities and the US Securities Commission, which are available on our corporate website. Joining me on the call today are Glenn Chamandy, President and CEO of Gildan; Rhod Harries, our Executive Vice President and Chief Financial and Administrative Officer; and Chuck Ward, President, Sales, Marketing and Distribution. This morning, Rhod will take you through the results for the quarter and a question-and-answer session will follow. Before we begin, please take note that certain statements included in this conference call may constitute forward-looking statements which involve unknown and known risks, uncertainties and other factors, which could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. We refer you to the company's filings with the US Securities and Exchange Commission and Canadian Securities Regulatory Authorities. During this call, we will also discuss certain non-GAAP financial measures. Reconciliations to the most directly comparable IFRS measures are provided in today's earnings release as well as our MD&A. And now I'll turn it over to Rhod.

Thank you, Jessy. Good morning to all and thank you for joining us on the call today. This morning, we reported our second quarter results, which came in slightly ahead of our expectations [Technical Difficulty] top line and operating margin. We ended the quarter with $840 million in net sales with better-than-expected sales volumes in activewear, which offset weaker-than-expected product mix tied to current market conditions, which I'll speak about a little later. During the quarter, we believe we outperformed the industry in a challenging environment, supported by positive activewear POS trends and the breadth of our product offering, which provided flexibility in what appears to be an increasingly more price-conscious environment. This speaks to our strong competitive position and our ability to continue to drive market share gains. This said, while we continue to expect our revenues to grow year-over-year in the second half. We believe it is prudent to lower our outlook for the full year to reflect the impact of current market conditions on activewear mix as well as near-term uncertainty related to the broader macro environment. I will take you through the details of our revised 2023 outlook a little later, but first, I'd like to highlight that we remain fully committed to our capital allocation priorities having returned $175 million to shareholders year-to-date supported by strong free cash flow, which we continue to expect will exceed $425 million for the full year. As such, with our existing NCIB program expiring, we announced this morning the renewal of our NCIB program to repurchase up to 5% of the company's issued and outstanding common shares over the next 12 months. Now let me turn to the specifics of our second quarter results. Net sales for the second quarter came in at $840 million, down 6% year-over-year, reflecting…

Thank you, Rhod. [Operator Instructions] Josephine, you may begin the Q&A session.

[Operator Instructions]

Josephine, we're ready to take questions.

[Operator Instructions] Your first question comes from the line of Jay Sole. Your line is open.

Great. Thank you so much. I'm wondering if you can elaborate on the current market conditions that you're talking about that are unfavorably impacting the activewear. What exactly is going on? Is it sort of a customer issue? Is it a consumer issue? Can you -- if you can elaborate that would be very helpful. Thank you.

I'll start with that one. Look, I think, what we're saying is that our market conditions are actually pretty strong ourselves. We're gaining share in the market. The overall market, we think is down low double-digits in terms of activewear in the North American market. But obviously, we're gaining share with a positive 2%. The real change and I think what we're looking at is that the customers that are buying products are actually changing the type of product they're buying. So they're buying lesser-value type products. So for example, in instead of buying a hoody sweatshirt, they're buying a crewneck sweatshirt, instead of buying some of the fringe items that we sell, they're buying more basic items. And then one area we're seeing is a shift back to basic product from the fashion product as the price points are lower. So that's really what's happening. But the unit volumes are good. It's just a shift in the mix of product, which is reflecting the actual net selling prices that we sell to these consumers, but our volumes are on track. Our volumes are good. We're taking share in the market, although the market is weak and being challenged, that's really what's happened.

Got it. And then Glenn, can you just talk about just the factory closure and maybe put it in context for us how that decision came about and sort of what the implications are?

Look, we're -- I wouldn't take that factory closure as anything, but the continued optimization of our whole manufacturing supply chain and optimization in terms of really focusing on our Back to Basics. So it's not a capacity-driven thing. We're still running our capacity relatively at the same levels we were in Q1 and Q2 and where we are today. So we haven't changed our capacity. We're just continuing to optimize in these markets. I mean, we're not running at full. Like what we said last time is we're running between 85% and 90%. We're still at those levels, but we're constantly optimizing our structure, our cost structure and positioning ourselves to be low cost as we move forward into the future. So it's more of a Back to Basics approach than anything.

Okay. Thank you so much.

Your next question comes from the line of George Doumet of Scotiabank. Your line is open.

Yeah, thanks. Good morning, Glenn and Rhod. Glenn, I think last quarter, you mentioned we're seeing pretty good yielded POS for fleece. I think you mentioned high single, low double. Can you just talk a little bit about how that's been trending now?

Chuck will answer that.

Good morning. Yes, we're still -- fleece is still trending well. It's not as strong as it was. I think the big thing that Glenn mentioned is sort of we're seeing a mix change between hoods and crews, which the hood seller, a slight premium to the crew. So we're seeing more of a mix shift, but fleece is still performing well.

And the mix shift is significant. Like just to put things in perspective, the price difference is in the neighborhood of 40% differential in price between a hood and a crew. So we're selling the unit volume. The share is going up. We're still in mid-single-digit type growth in fleece. But the thing is that the price point of the items from a crew to a hood is significant. It's in the neighborhood of 40% difference between a crew and a hood. So they're just buying a lesser-priced item, but we're still selling the unit volume.

Okay. That's helpful. And maybe on the 380 basis points of contraction on the gross margin, can you talk a little bit about how much of that was cotton? And just how should we think of maybe Rhod, how should we think of the second half that recovery in the margins driven by lower price cotton? Anything you can maybe help us out there just to model that out. Thanks.

Okay, George. So if you look at the margins, what happened in the second quarter, margin actually, our performance was better than we anticipated, right? We had said last quarter that for the second quarter, we would be up 100 basis points to 150 basis points over the first quarter, and we actually came in a bit stronger. So I think I would say we're very pleased with that overall. And if you look at what happened with our margin, actually, mix, as we said, drove a weaker margin overall, probably about 170 basis points of headwind in those numbers. But because of our performance on our cost structure, performance on SG&A and other areas, effectively, we were able to achieve a good operating margin of 16.5%. If you look at the fiber impact, we had a headwind in the first half, and then as we go into the second half, that abates and it turns into a tailwind. So if you look at the second quarter, basically, if you look at cotton or fiber on our cost of sales, we had a -- we still had -- or sorry, if you go into the third quarter, if you look at what's going to go on there we're still going to have a little bit of a headwind. But it's -- as we move through the quarter, basically, you're flat. And then as you go into the fourth quarter, it turns into a tailwind for us. So if you look at our margins overall, good performance in the second quarter. We're very pleased with the way it unfolded. And then if you look at the third quarter, effectively you get a sequential improvement in our margins. So if you look overall, we're probably going to be just below the low end of our target range in the third quarter from an operating margin perspective. And then as you push into the fourth quarter, we're going to get to the high end of our target range. And again, our cost structure is really well under control. And that really will drive us as we move into the back part of the year. And obviously that sets us up very well as we move into 2024. So I would say we feel very good about our overall cotton position and our overall cost position as we go forward.

Great. Thanks for the color.

Your next question comes from the line of Stephen MacLeod of BMO Capital Markets. Your line is open.

Great. Thank you. Good morning, guys. Good morning, everyone. Just circling back on that last question about the color you gave on the margins. Can you -- I know you were talking specifically around the operating margin. Do you have any incremental color you can provide around the gross margin and how the balance between gross and SG&A gets you into that -- those consolidated margins you're talking about?

Yes. Look, if you look at effectively what's going to go on, it's all really going to flow through for the gross margin, right, as we go into the back half because all of that cost structure, improvement in cost structure will be reflected in gross margin. We will have the weaker mix, right, that effectively will continue in the third quarter and the fourth quarter, as we called out for the second quarter. And really, if you look at our full year outlook, our total outlook and you look at our sales outlook and the way we've moved it, it's all being driven by weaker mix. So the real move from our prior guidance to where our current guidance is flat to down low single-digits. If you go to the midpoint, it's all being driven by weaker mix. So -- weaker mix that is flowing through in the back half very definitely. But our cost structure is really improving as we move through the year. And effectively, that will offset it. We get the improvement in margin, as I said. And again, as we go into 2024, we'll see what happens from a macro perspective. We'll see what happens from a mix perspective. But because of that strength in cost structure, we feel very, very good that they set up at the end of the year and as we move into '24.

Okay. That's great. Thank you. And then, Glenn, you mentioned that the overall market is down low double-digit, but Gildan was up. You are up 2% in activewear. Can you talk a little bit about where you're seeing those share gains? Is it partially driven by the fact that you're so much -- you have such a strong position in basics so you're capturing a trade down or are there any other factors influencing that?

Well, Stephen, I'll take that. This is Chuck. Yes, I think, we're seeing gains in multiple places. I mean we're seeing gains in the basics. But we're still gaining share in the fashion ring-spun area as well. The ring-spun is not as moving as fast as it was up a few quarters ago, but we're continuing to gain share against those competitors. Also, we're seeing more in the national accounts that service retail customers. They're more up mid-single digits as retailers have continued to experience improvement in sell-through and they're doing continued replenishment.

And then for -- this is -- and also maybe just to add to that is where our fashion is maybe not as strong as it was. It's still high single-digit positive, but our basics are now low single-digits positive as well. So that was a big turnaround from what happened in the last previous quarter. So we're starting to see people trade down to, obviously, the basics, which is great. And those price differences, there's probably like 30%, 35% between a basic and a fashion. So it's just like in the same as the fleece category, people are just trading down and looking for value in the market as we see it. But we're diagnostic, and it doesn't -- and I think one other key point for us is even though there's somewhat of a shift in buying preferences from a crew to -- from a hood to a crew or a fashion to a basic, we -- our manufacturing facilities are able to be very flexible to be able to support whatever selling, right, because it's all made on the same equipment, which is a key part of our flexibility in our overall manufacturing processes. So we've adapted to these types of changes and we're continuing to service whatever the customers are buying.

Great. Thank you.

Your next question comes from the line of Luke Hannan of Canaccord. Your line is open.

Thanks. Good morning, everyone. I just wanted to ask a question on what the promotional environment is like. It sounds like the change in guidance is more related to, as you mentioned, Glenn, the fact that people are trading down. It sounds like volumes are still fairly healthy. I'm just curious to know if you are seeing anything from your competitors on the promotional side of things, whether now with consumers trading down, do you expect there to be a little bit more competitive pressure to be able to capture that customer?

Well, we've seen some pricing action, particularly from some of the brands in the fashion category. However, even after they've adjusted some of the pricing, we're still significantly below them in the tune of 20%, 25% in certain cases, right? So we're positioned well on price. And with our product portfolio and all the different price points that we have, we think we're well-positioned that we'll see our price deteriorate on mix, we won't see it deteriorate because we're lowering prices. I mean I think that's the way to look at how we're positioned.

Okay. So then in other words, if you look also at the rest of the competitive set, I know you've mentioned before in the past that there's been this lever where you guys can take price because you're seeing inflation, not just on fiber costs, but on a variety of different cost buckets. As it stands today, are you seeing any evidence of competitors more broadly looking to take price as a result of those -- that cost inflation abating?

Well, I don't know, if it's so much cost inflation, but I think that from we say, like I said, some of our fashion competitors have lowered prices, but are still significantly above us. It may not be because of inflationary reductions, but it's maybe more from business by business. I mean, I think that they're losing significant share. We're gaining share in this market. So one of the things that we just mentioned earlier is that the market is down it was low double-digits, and we're positive low single-digits. I mean, so we're obviously taking share, and there is a reaction. But we're positioned ourselves perfectly because of our product portfolio, the different levels of pricing, basics are coming back now. We're diagnostic of what's being sold. I mean hood or crew, we really don't care, and we're taking share. So I think we're well-positioned. And I think more importantly, even one of the things that Rhod said that even with this mix, which is factored into our forecast, we'll be at the high end of our operating margins in Q4. And we would have been higher than that if the mix obviously would have been better because you got added a couple of like Rhod said, the impact is 200 basis points or 170 for example in Q2. So we would have been higher than even the high end of operating margins in Q4, but we're still there. We're well-positioned. We have a good cotton position. We have good visibility on our manufacturing. So as we continue to move into the future, despite the mix change, I think we'll be well-positioned to move into '24.

Okay. Thank you.

Your next question comes from the line of Vishal Shreedhar of National Bank Financial. Your line is open.

Hi. Thanks for taking my question. Just on the comments about being down 12%. Can you maybe elaborate on that? Is that industry units? Is that industry sales? And how does that reconcile with what you saw last quarter when the April trends were down, call it flattish to slightly down? And maybe you can give me the time period of that particular data point that you mentioned.

Well, I think, last quarter, we said we were slightly down. This quarter we're positive mid low single-digits. But what we're referring to is that the overall market is down low double-digits basically. So I think that's the question. It's the actual market itself and the conditions within the market. So we're gaining share within this market. And that answers your question.

Yes. Is that market -- that's market in units? And is that that's for --

Yes, that's all unit -- that's all unit for the -- that's for the quarter.

That's units for the quarter.

Units for the quarter.

Then how -- what July trend? Worse or stable?

July for us is trending better. We're mid-single digits positive on our activewear products. Our underwear and sock products because of the new launches, we're basically probably low double-digits today, and we expect that to actually grow to probably high double-digits as we move into the future Q1, Q2, Q3, Q4 as we continue to see momentum on our new products. And also where mid-July is like mid-single digits for us, but as we also move into Q4, we're going to be comping -- easier comps for us. So we should see that grow a little bit as well just from a comp perspective. But we're continuing to take share. I think we're taking more share in beginning of Q3 than we did in Q2.

Okay. And with respect to the mix shift, is that something that you deem to be more of a base that we should reflect permanently in our earnings forecast? Or is this more of a transient thing, and next year, that mix might come back a little bit? Or have to lap that in Q1 and Q2 kind of thing, and we should build our earnings off this new guidance provided.

Look, look, it's not -- I think it's not structural. I think it's going to come back. It's just -- it's a risk-off type environment where people have to make a decision to buy something, they're going to buy the thing that probably is the least risk for them and also looking at potentially margin impact in terms of what the end use would be or the end selling price. So there's -- in our case, you got to remember that, we sell T-shirts, we sell to distributors, they sell them to a printer, we sells them to somebody else, and they go down. So the average shirt that we sell for $2.50 ends up at $25, right? So it's going down the pipeline. So people are looking not to be stuck with inventory. It could be a souvenir stuff, for example, where they had tank tops or pockets or long sleeves or hoodies, for example. So they don't want to take that risk. So they're taking the risk off themselves in terms of their purchase habits today because of the macro environment. So -- but that's all going to work itself out. I think that that's part of what we're seeing. I think it's all driven by really the uncertainty in the environment. And ultimately, I think people will revert back to normal behavior as we see things subside.

Thank you.

Your next question comes from the line of Brian Morrison of TD Securities. Your line is open.

Thanks very much. Question for Glenn or for Chuck, the dichotomy here of your market share gains relative to the decline of low double-digits for the industry. How is the channel inventory looking for both your products and maybe the industry in general, is there more destock that has to take place or are we now in a pretty lean position?

Well, look, the inventory at the end of Q2 was flat to Q1. It was slightly higher than we anticipated. And we believe there will be some destock in the back half of the year in our plan.

Okay. And then I guess two small questions. The sub-10% SG&A margin, is this achievable on an annual basis? And if so, is that sustainable? And then, Rhod, maybe free cash flow, what's your working capital assumption with your free cash flow guidance? Will this be positive for the year?

Yes. I mean, look, if you look at SG&A, right now -- out there we have a target of around 10%. We did 10% last year. This year, effectively, it's going to be around that level, right, as we finish the year. This quarter, we did 9%. And as we go forward, I mean we're going to try and drive those levels. But I think given what's going on from an overall sales perspective, you get a bit of a deleverage. But I would say, longer-term, we really are trying to drive down below that 10% level, Brian, when you think about SG&A. And we think we can do that. We think as we continue to grow and given what our business model is, we can get operating leverage off SG&A, and that's a real competitive advantage for us. So again, we're very focused on it, and we see it as an area that we can manage well as we go forward. On the free cash flow for the full year, free cash flow, we're calling above $425 million. Effectively, if you look in the first quarter, we had negative free cash flow. We had good free cash flow in the second quarter, and we expect good cash flow in Q3 and Q4. If you look versus last year, we had inventory build going on. Now we do not have inventory build overall. We're as we talked about earlier, our inventories are coming down, and that provides good support to free cash flow. So I would say we feel very good about our free cash flow. And that supports our competitive position in the market. We've got a strong balance sheet. And we're very pleased about it that we can return capital to shareholders. We had good return this past quarter, and we're planning for good return as we go forward with the announcement of the new 5% NCIB program.

No, that's very helpful, Rhod. Just a question, you have $325 million of negative working capital in the first half of the year. Where will that end up by year-end? Will that be flat, positive?

If you look at working capital basically this quarter, we are around 45%, 46% of sales, right? If you look at it on a LTM basis. What we called out in prior calls and we're still focused on it is effectively working capital at around 35% by the end of the year. So we'll drive that working capital basically to the, I would say, closer to our target level as we get to the end of the year. And so we do feel good about the way that's unfolding.

Thanks for the color

Your next question comes from the line of Martin Landry of Stifel. Your line is open.

Hi. Good morning. I just want to come back on the guidance revision. Your sales for the quarter came in ahead of expectations. Your point-of-sale trends were positive in Q2 in North America. So I'm wondering what's driving the -- what's changing in the outlook? Are things decelerating in July for you to revise your guidance lower? Anything would be helpful just to understand, given the positive trends you've seen lately?

Yes, I mean, the simple way to think about it, Martin, overall, is it is the mix that's driving effectively the change in the outlook for the full year. So, yes, we came in better than we anticipated for Q2. That was driven by volume. And as we talked about the positive POS and activewear overall, flat POS in underwear and hosiery, which is improving now as we go into the back half. Glenn talked about the distributor inventory in the channel was flat, but it came in a bit higher than we anticipated. And that will reverse out as we go through the back half. But it's mix. Mix is the real driver ultimately of what's going on in the forecast. And if you look again for the full year, the full change in our outlook is driven by mix, and we'll see that in Q2, and we'll see it in Q3. We have -- the POS is actually performing well as we've talked about and we're driving market share gains in volume. If you look full year, it is exactly where we expected it to be. So we feel very good about the business overall. But this shift in the marketplace that's going on to lower price point products, obviously, we're dealing with that. And the good news is we have the broader range to be able to deal with it, and we have the cost structure to be able to deal with it. So we are well-positioned as we move through the end of the year into 2024.

Okay. And then just a follow-up, just to better understand that mix shift. Is it happening across all your end markets because you do have end markets that have very different dynamics. You have some that are more recession resistant and more -- some that are more cyclical. Just trying to understand a little bit, is this across the board or in certain end markets?

Martin, I would say it was across the board. It's pretty consistent across the markets and categories.

Okay. That's it from me. Thank you.

[Operator Instructions] Your next question comes from the line of Chris Li of Desjardins. Your line is open.

Good morning, everyone. Maybe just one question left from me. I know it might be a difficult one to answer, but I'm just curious to see how confident you are that the cut is sort of -- that's it like what sort of risk that can cause guidance to revise further lower in the back half? Just wanted to see where -- how confident are you in terms of what's on the revised guidance. Thank you.

Okay. Chris, thanks for the question. If you look overall, effectively, as we said, we've given you a range for the full year. If you go to the midpoint of the range, we -- when we see the mix changes that are occurring, effectively, that drives us to the midpoint of the range. And then if you go to the low end, there's -- obviously, what we've effectively done is reflected macro uncertainty. Actually, even a little bit of that is in the -- probably in the midpoint. So we really do feel that we've de-risked the back half with our forecast. What we tried to do is give you what we think is a very good baseline for the overall environment, the shifts that we're seeing on -- with respect to the consumer, how they are effectively trading down, and we factored in some, as we said, macro uncertainty because we know the environment is tough to forecast. It's tough to know exactly what inventory levels people are going to carry especially as the year unfolds. So I would say we feel like we really have de-risked the forecast for the full year, and we feel good about delivering. Actually, we feel good about performing against it. And as we said, as we come out of the back end of the year, we feel we're very well set up for 2024.

Okay. Thanks, Rhod and all the best.

Thank you.

Your next question comes from the line of Paul Lejuez of Citi. Your line is open,

Hey, everyone. This is Brandon Cheatham for Paul. I just wanted to see if you could give us a little more details on the underwear business you've gained. And as it relates to the Bangladesh facility opening early next year, are you having any other conversations with potential customers to try and utilize that capacity that's going to come online?

Well, I'll answer that one. Look, the underwear programs have been rolled out a little behind schedule, I would say, in terms of actually -- not from our perspective, but just when -- how long it took for us to get the floor set that our retail partners, but they're doing very well. We're continuing to get new opportunities as we move forward. Look, Bangladesh for us is a key part of our whole strategy. I mean, look at the plant is starting this quarter. It's going to be ramped up to about 25% of its full capacity by the end of this year, which is factored into all of our working capital assumptions, our inventory levels, et cetera. And at the same time, it's going to really give us the ability to strengthen our cost structure and really go after gaining share not just in our underwear categories, but also in the fashion basics as well as our international markets. So it's really going to be something I think that's going to be very important in terms of the overall manufacturing cost structure for Gildan as we move into 2024 and 2025. So it's going to give us room to go after new programs. We actually have a stream of programs we're looking at as we move into '24. And a lot of these types of programs will be supported by as we ramp up Bangladesh.

Got it. And how do things shift around as that comes online? Do you shift your underwear business over there kind of wholesale or is it really piecemeal depending on how these conversations go?

Well, we already make a lot of our underwear in Bangladesh today because we still have other operations there. So underwear is being made in that hemisphere today as well as a lot of our fashion shirts. So all of our incremental fashion, basics, underwear, all of our growth will be supported really by the development of Bangladesh as we move into the future.

Got it. And one more if I can. With the shift away from fashion more towards basics, are you able to shift what you're manufacturing to kind of meet that demand? Like how quickly can you change things so that you don't get over-inventoried in a category that isn't selling through as well as you had hoped?

Well, our cycle time is five weeks, so it doesn't take very long. I mean we've already adjusted all of our manufacturing. All of the products in which we manufacture if it's a T-shirt, the fashion shirt, the basic shirt, they're all made on the same machine. So we can adjust our equipment and in the case of our fleece where we make a hood or a crew. It's all made in the same factories. There's just less operations to make a crew than the hood. Sewing is a little more difficult to go from making more hoods than crews because it takes more labor to make this bigger hooded sweatshirt, it's a lot easier going to make more crews to be perfectly honest with you. But we have lots of flexibility in our manufacturing. Our cycle times are relatively short. We've adjusted our manufacturing to reflect all of these types of changes on a daily basis as we get POS from our customers and it goes to our planning groups. Our planning groups make the adjustment. And our manufacturing groups respond to whatever is being sold in the market. So none of that is really an issue for us. And as we've said before, look, we're well-positioned. We have good visibility despite the fact that we've seen some of these mix changes, we're going to be driving at the high end of our operating margins as we move into Q4 with our cotton position, and we've got a good visibility on our cost structure as we move into '24 even with this type of mix. So we're well-positioned and we're excited about as we go into the future.

Got it. Appreciate it. Good luck guys. Thank you.

Thank you.

There are no further questions at this time. Ms. Jessy Hayem, I turn the call over back to you.

Okay. Once again, we'd like to thank everyone for joining us this morning and we look forward to speaking to you soon. Have a great day.

This concludes today's conference call. You may now disconnect.