Gildan Activewear Inc (GIL) 2015 Q2 法說會逐字稿

Welcome to the second calendar quarter 2015 Gildan Activewear earnings conference call. My name is Lorraine and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Ms. Sophie Argiriou. Ms. Argiriou, you may begin.

Thank you, Lorraine. Good morning, everyone and thank you for joining us. Earlier this morning, we issued a press release announcing our results for the second calendar quarter of 2015 and our interim shareholder report containing Management's Discussion & Analysis and consolidated financial statements. These documents will be filed with the Canadian Securities Regulatory Authorities and the US Securities Commissions and are available on our website at www.gildan.com. With me on the call today are Glenn Chamandy, our President and Chief Executive Officer; and Laurence Sellyn, our Executive Vice President and Chief Financial and Administrative Officer. Our call today will begin with Laurence taking you through our second-quarter performance and our business outlook followed by a question-and-answer session, during which Glenn and Laurence will respond to your questions.

Before we begin, please note that certain statements included in this conference call may constitute forward-looking statements within the meaning of the US Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve unknown and known risks and 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 that may affect the Company's future results. And with that, I will turn the call over to Laurence.

Thank you, Sophie, and good morning, everyone. EPS for the second calendar quarter was $0.42 per share, slightly below our guidance range of $0.43 to $0.45 due to lower than projected sales in both operating segments. In spite of the short-term issues which resulted in the sales shortfall, we were encouraged by our continued progress in the quarter against our long-term growth and value drivers. And we continue to be positioned for earnings growth in the second half of the calendar year and in 2016. I will highlight the positive business trends in the quarter and then discuss the short-term issues which negatively impacted sales and earnings.

The positive developments in printwear were, firstly, demand for the Gildan brand in the US printwear market continued to recover strongly, following the pricing actions implemented in December of 2014. Sales volumes in the US printwear market were up by approximately 8% on a comparable basis compared to the equivalent weeks in 2014. The June quarter of 2014 included an extra week included every sixth year to realign the Company's 52-week fiscal year with the calendar year. Number two, we are achieving good penetration and the high valued, higher growth fashion basics segment of the US printwear market, due to the even better-than-anticipated performance of the Comfort Colors brand and the successful repositioning of the Anvil brand. Number three, sales revenues in our newer, higher growth International printwear markets in Asia-Pacific and Latin America were up by over 30% and over 40%, respectively. And fourthly, operating margins in printwear started to recover to historical levels as we began to benefit from declining cotton costs and cost of sales. Margins are expected to continue to improve further in the third quarter.

The positive developments in branded apparel were, firstly, sales of Gildan-branded products to retailers were up by approximately 70% compared to the second quarter of 2014, in spite of the fewer number of weeks in the quarter. The growth in Gildan-branded sales was due to new programs, and the conversion of our largest private label sock program to Gildan brand. Sales of the Under Armour and Mossy Oak licensed brands were up by approximately 20%. Number two, we continue to gain new branded programs, including programs with new retailers, which will primarily impact 2016 and significantly enhance the national exposure of the Gildan brand. We are continuing to follow a policy of not pre-announcing new programs with specific retail partners, but you will see important new programs in retail stores later in the calendar year. As indicated in the press release, Gildan-branded underwear is expected to be sold in approximately 18,000 retail doors in the US by the end of the holiday season, almost double the number of doors compared to the June quarter. Thirdly, we have begun to leverage the Doris acquisition in the US. We will begin shipping the Secret Silky, Kushyfoot solution and Gildan brands in the US food and drug channel in the third quarter. We began shipment of Gildan-branded products in this channel in May. Our next step is to leverage Doris' sales and distribution to build the Gildan and Gold Toe brands in retail in Canada. Number four, operating margins for branded apparel increased to 8.2% in the June quarter, including the impact of an approximate $5 million increase in brand advertising and marketing expenses compared to the June quarter of last year, which impacted operating margins by approximately 2%. We are excited about the impacts of Blake Shelton's role in promoting our brand in television commercials and other brand marketing initiatives, including in-store pallets.

We believe that the issues which negatively impacted our calendar Q2 sales and earnings performance and resulted in the sales shortfall compared to our expectations are short term. Firstly, sales for printwear in Europe declined by approximately 30% compared to the second quarter of last year, due to lower unit sales volumes, the devaluation of the Euro, and the non-recurrence of the extra week of sales in the quarter, partially offset by increased selling prices. Our selling price increases were not fully matched by competitors and we have seen improved sales volumes in June and July as we began promoting of the higher sales selling prices. In addition, we were impacted by some short-term logistical issues with one of our distributors in the UK in the June quarter, which negatively impacted sales volumes and which are now being resolved. Secondly, in branded apparel, shipments in the June quarter were negatively impacted by significant destocking of socks and underwear by a major retailer, which limited our ability to satisfy strong consumer demand for Gildan-branded products and impacted our opportunity to continue to increase our market share. Many of you raised questions regarding empty Gildan packs in retail stores during the quarter. We are working collaboratively with our retail partners to find the appropriate balance between retailer objectives to manage working capital, and at the same time, ensure sufficient inventory levels to support a fast-growing brand with higher inventory turnover. However, we have assumed in our sales guidance for the third quarter that retailer replenishment continues to be below optimal levels to support sell-through to consumers. And number three, consumer demand in US department stores and national chains has been weak, which negatively impacted sales for Gold Toe in the second quarter, although we maintained our leading market share position in men's socks in this channel and continued to grow in the ladies category.

We have provided sales guidance of close to $700 million and EPS guidance of $0.51 to $0.53 for the September quarter compared to sales of $666 million and EPS of $0.50 per share in the September quarter of last year. The impact of strong growth and sales volumes in both operating segments and lower cotton and manufacturing costs is projected to be largely offset by lower printwear selling prices and more favorable product mix in printwear. Results for last year included a $5 million income tax recovery. EBITDA in the September quarter is projected to increase by 15% to 19% compared with last year. When we introduced our full-year earnings guidance in December, we indicated that the first two calendar quarters of 2015 would be impacted by margin compression in printwear, due to our strategic decision to implement selling price reductions in advance of projected manufacturing cost reductions and the flow-through of lower cost cotton into cost of sales. Printwear margins in the third quarter are projected to be in line with historical levels due to the benefit of low cost cotton and projected lower manufacturing costs. Operating margins in branded apparel are also expected to continue to improve sequentially compared to the June quarter.

The transitional manufacturing inefficiencies incurred and inventoried in 2014 to support the fast ramp-up of new retail products have now been fully consumed in cost of sales. We have revised our full calendar year EPS guidance to the bottom end of our range of $1.50 to $1.55 to reflect the lower-than-projected earnings in Q2 and provide for the continuing impact of lower retailer replenishment and lower-than-projected growth in Europe in Q3. Results for the third and fourth quarters are projected to be materially impacted by the timing of fleece shipments compared to 2014. As we have previously indicated earlier in the year, the change in our distributor incentive programs will result in the later shipment of fleece and certain other high-valued products and therefore, shift sales and earnings from the third quarter to the fourth quarter. Although we have not provided specific earnings guidance for the fourth quarter, our full-year guidance implies that earnings in the December quarter will be, by far, a record for this calendar quarter due to the timing of printwear sales; the benefit of lower cost cotton and further manufacturing cost savings from our yarn spinning and other capital investments; and the initial impact of new retail programs in branded apparel.

Results for branded apparel are expected to be significantly improved from Q4 in the last two years due to higher sales volumes and higher operating margins. Consequently, we expect to end 2015 with positive momentum in earnings growth and to be well-positioned for strong earnings growth in 2016. Earnings growth in 2016 is expected to be driven by unit sales volume growth in both operating segments and lower cotton and manufacturing costs. Cotton costs in 2016 are projected to be significantly lower than 2015, especially in the first half of the calendar year. Cotton fixations for the first half of calendar year are essentially complete. Results in 2016 are also expected to benefit from the further manufacturing cost savings from our capital expenditure programs as well as a non-recurrence of the manufacturing inefficiencies in branded apparel which flow through cost of sales in the first half of calendar 2015. We expect to generate significant free cash flow in the balance of 2015 and reduced bank indebtedness by year end due to our strong projected EBITDA in the second half of the year.

Capital expenditures for calendar 2015 are still projected to be in the range of $250 million to $300 million. Our current major strategic capital investment projects are: our new vertical yarn spinning facilities in North Carolina; the expansion of distribution capacity in printwear; further manufacturing cost reduction projects in textiles; and our planned new textile capacity expansions in Honduras and Costa Rica. Rio Nancy 6 is expected to begin production in the fourth quarter of 2016 and Costa Rica is currently planned to begin to ramp up in the fourth quarter of 2017. In addition, we are further expanding production capacity at our facility in Bangladesh to support our projected growth in international markets in Europe and Asia Pacific.

Use of cash will continue to be a focus for the Company as we continue to grow our EBITDA and as annual capital expenditures decrease, after completion of our capital-intensive yarn spinning investment. We have stated that we will continue to seek further new complementary acquisitions such as Gold Toe, Anvil, Doris and Comfort Colors which complement our organic growth strategy and lever our competitive strengths as well as seek to continue to grow our dividend.

Finally, we have announced that my successor as Chief Financial and Administrative Officer, Rhodri Harries, will assume his new responsibilities with effect from August 17, 2015. Glenn and I are fully confident that Rhodri will play an important leadership role in the Company as we implement the next stage of our growth strategies and continue to build Gildan as a leading consumer brand in basic family apparel. I will continue to support Rhodri for a period of time after he takes over in order to ensure a proper transition in my role and responsibilities. Back to you, Sophie.

Thank you, Laurence. That concludes our formal remarks. Before we move to the Q&A session, I ask that you limit the number of questions to two in order to give everyone the opportunity to ask a question. If time permits, we will circle back for a second round of questions. I'll now turn the call over to the operator for the question-and-answer session.

Thank you. We will now begin the question-and-answer session.

(Operator Instructions)

Sabahat Khan, RBC Capital Markets.

Thank you. On the retail side, your expectation of the branded environment to be more modest for the rest of the year; is there retailer-specific issues? Is it maybe the economy? If you could maybe talk a little bit about that?

Well, I would just say that I think people are pretty cautious in terms of -- there's obviously different channels here. You have mass and national chains and so forth but I would say that back-to-school is on its way. It's not off to a banger start but we're being optimistically cautious right now and it's early days.

So we'll know a little bit more as we go through but I think the most important thing for us is that everything's intact for our growth for this -- the balance of this year based on over $120 million of new programs in which we stated in previous calls and the development of all of our brand strategies within the markets. So we feel very comfortable with our positioning but to where we think it will be -- retail environment would be is cautious at the moment.

All right. Thanks. On the printwear side if you could maybe talk about what's happening in Europe and your overall share. Is it -- like are you seeing improvement as a result of the new pricing that you took?

Well, exactly. So look, what happened is we raised prices to in line with the decline of the euro. Obviously, not all of our competitors matched our prices. And it has affected our POS in the quarter as well as with the -- with one of our largest UK customers went through a warehouse transition that affected shipments to him. Since June, we've been promoting our products and off our higher price lift and our POS is back on track, just close to about 20%.

The other part of our International sales though which has really been exceeding our expectations is our Asian business is now -- was up 30% and it's now our third largest market in the quarter. And our Latin America business is growing substantially as well so we're still very comfortable with our whole international exposure and commitment, but unfortunately, the pricing and exchange rates affected us this quarter. Saying that though, I mean, over time, pricing and currency will get in alignment and we expect that as we go through the balance of this year, we'll have a more equivalent balance between the two of them.

Thank you.

Anthony Zicha, Scotiabank.

Glenn, is there a risk that other retailers may follow suit with lower inventory replenishment?

Well, look, I guess the -- we can't predict what every retailer's going to do but maybe just to rest the issues that we've had and how it affected us is twofold. We can -- look, when you reduce inventory, it's a one-time, nonrecurring event, right? Because destocking -- you can't destock to zero. You can destock and bring your inventory levels down. That's the first thing.

So once you've been destocked, that means theoretically, you should continue to sell based on your POS on a go-forward basis. Where we are and how it affected us maybe a little bit more, is that because of the velocity and the turnover our product, our products in both underwear and socks are the -- probably had the highest turnover of products within our major mass retailer. And it's not a question but we've been working with them and it's not a question of the inventory levels. It's a question of how they get inventory back into the stores to be replenished. One of the things we've been working on is to move more inventory from the warehouses into the stores so to balance the inventory better because the new system and the system just doesn't -- couldn't understand maybe the velocity of the sell-through of some of our products.

So that's really resulted in two things. One is, we got destocked, obviously, which is a one-time event. But two is, it affected our POS to the consumer because we didn't have enough goods in the stores. So from March till June, our share is relatively flat around 7%. It's up 10% over last year, but it didn't grow where we wanted it to, particularly in April and May. As we got into June and we worked closely with this retailer to bring more product from the warehouses to the stores, we've seen a big improvement in our POS. So we're very encouraged by that and hopefully, this will concur to strong sales going forward. But saying that, I think, look, at the end of the day, we've expanded our space in the existing retailer that we have had -- been doing business with last year and as well as we've continued to take new programs with new retail partners, basically as we go through the year.

Now one of the things that's happened is we also set a lot of our new retail programs in the month of June so they're not really -- have been recorded in terms of our market share, and as we continue to sell our underwear in the over 18,000 doors, which will double from the June quarter, we will continue to see our market share grow to our objective, stated objective 10% by year end. So we feel very comfortable that we're on track. Obviously, we're working through very closely these issues with -- but we feel very comfortable with our positioning and everything is pretty much in place to hit our objectives that we stated earlier in the year.

Maybe we should add, with regard to the replenishment issues, that we and our retail customers have a common mutual interest to be positioned to drive growth and sales to consumers.

Okay. Great. Glenn, just one quick one, your new retail wins in terms of speed, is it as good as you expected or is it better? And then maybe if you could give us some color on the market share data when it relates to men's underwear?

Our men's underwear market share, like I said, is around 7%. It's flat from the June -- from the March quarter and it's up about 10% on a year-over-year basis. As far as our new wins in retail, we're on track from our stated $120 million worth of new programs and that's a combination of growing within the existing customers as well as new programs in mass, food and drug and sports specialty. We've doubled, like I said, we've doubled our store count in Gildan underwear. We've completed the transition of the starter sock private-label program into Gildan. The Gildan brand shipments in the June quarter were up 70% on a year-over-year basis. And we're very excited about the development of, obviously, Blake Shelton and the TV ads we've been running as well as you'll see a lot of pallet displays in the retail stores for back-to-school.

One of the things we've been very successful on this year which is included in our $120 million is leveraging the Doris acquisition. Now Doris has opened doors to us in the food and drug category. And we've been able to obtain new business in Sheer under the Kushyfoot and Secret Silky brands. But as well as we've levered socks into TherapyPlus and we levered our Gildan underwear and activewear into this category. So it's been very successful for us into levering. We're also looking at levering the Doris acquisition into other product categories, under Gold Toe, which is shapewear and Sheer and looking at also expanding the Sheer category into mass.

So we've been very excited about everything we've set forth. Our strategy is right on track. We're looking to expand going forward as well as the Doris and levering the Doris acquisition into Canada. So we have a great momentum I think. Everything is intact. We've got all the business and we set our guidance early in the year. We really set our guidance for all the programs that we've attained. We're still working on new programs which we will probably obtain in the holiday season. They won't be material to the impact our sales and earnings growth for this year but they will be material for 2016. So everything is on track.

With the bump in the road a little bit, but with the destock and the market share and our European pricing, but all in all, we feel very comfortable. And I just want to maybe go to printwear for a second because I don't want to underestimate where we've and how successful we've been in printwear. Our growth was up 8% this quarter, which is obviously significant on a large base and we really reinforced our leadership position in the category. Not only driving our basics, which we've realigned our pricing strategy but also reinforcing all of our fashion products which is through the acquisition of Comfort Colors and the Anvil, redevelopment of the Anvil brand, and really also developing all of our ring-spun products by levering our success in our yarn spinning. So we feel very comfortable with our positioning. Sales are strong in printwear and we've got all the brand positioning and placement in the branded category.

Excellent. Thank you very much.

Chase Bethel, Desjardins Securities.

So I had a follow-up on the printwear commentary that you just gave, Glenn, I was hoping that you could maybe go a bit deeper and maybe talk about where you're seeing that volume growth? Are you seeing it mostly through your distributors or are you seeing some of that national accounts business grow as well?

Well, the way we look at the market is aggregate today. So basically, look, with our new pricing strategy, a lot of the growth is driven through our distributors as they're able to reach more customers because of our pricing. And that was really our objective is to work with our distributor partners, basically, to make sure they can broaden their reach and using our pricing and our low-cost manufacturing and our value proposition for them to achieve that goal. So we look at everything in aggregate today.

At the same time, a big focus for us is developing our fashion segment. Basics has historically been about 60% of the market; fashion being 40% of the market; and with Comfort Colors, Anvil and our ring-spun program -- T-shirt program, that's also driving significant share gains for us. So we're really positioned well, we think. It's been -- we've been off to a great start and it's a combination of the two because having the right price also helps drive the overall brand image and everything else we're doing so it's a combination of all of the events.

Okay, thanks for that. And then are we at a point now where all of your yarn plans are in ramped or in the process of being ramped? How soon could we see you make further investments in yarn spinning?

Well, what we've done so far is completed the ramp-up of the two major facilities we have in Salisbury. So they're up and running at 100%. The last big project that we had which is in Mocksville, North Carolina, which is a very large ring-spun plant started production in June and is going to be fully ramped up over a nine-month period. So a lot of the production will come online, obviously, for the balance of this year and 2016.

A lot of the -- but however, I would say that all of -- a lot of the savings from our yarn initiative will flow through in 2016. Because the major initiatives that we had in Salisbury, as we brought them on, a lot that savings is in our cost of goods sold and will flow through our costs into 2016 as well as Mocksville will continue to allow us to have additional cost savings in 2016 and 2017. So we're on track for $100 million cost initiatives. We will have $25 million of that flow through this year and the balance of our cost initiatives, which is really baked into all of our yarn facilities will happen in 2016 and 2017.

Are you at a point where you think it's time for another wave of investments in yarn? Or do you think you'd want to, I guess, get some of these savings through before you take the next step?

Well, we're always constantly looking at it but, look, we're going to manage our expansion of our yarn based on we manage our capacity expansion and textiles. And as we expand our textiles right now, we're expanding textiles in twofold. We're building our Rio Nance 6 facility which will come online at the end of 2016 to support 2017. Now this plant is going to be a little bit different than the traditional Gildan planned because it's going to be producing a lot of performance-type products and fashion products, okay? So which is a complete difference. So, like, for example, when you're making performance you don't use spun yarn. You use texturized polyester which is not something we're producing today. And the idea with driving Rio Nance 6 is that we're really looking to develop new innovation and new products that would drive topline sales both in the printwear and in the branded segment in activewear.

This is going to be, I think, is going to be pretty important to the overall success as we continue to drive our sales. What we're in the process of doing though is we're actually developing a lot of these products because as you remember, when we bought Anvil, we put in technology to produce a lot of these performance-type products. So a lot of the development in new products and new innovation are actually being developed as we speak so that as we bring on Rio Nance 6, we can commercialize these products and obtain large topline sales through the innovation that we're developing in our textile facility. So a lot of that will take into account so we won't support yarn to answer your question, to make some of those products. But as Costa Rica comes on, at the end of 2017 to support 2018, that's going to be more of a basic type product, with a combination of ring and open end and we would definitely consider bringing on new capacity in yarn-spinning to support that build up.

Okay. Thanks and best of luck.

Martin Landry, GMP Securities.

I'd like to get a little more color on your Q3 expectations. You mentioned that there's been some destocking in Q2; that was a one-time item. I'm not too clear as to why you're still expecting this destocking into Q3 and I'd love to hear a little more color on that.

Well, the first thing is we're not 100% sure, to be perfectly honest with you. Inventories have come down. We're not sure if our retail partner wants to bring the base inventory down a little bit further. So that's something that we don't know so it may or may not happen. So we're just being prudent, just to -- in case it does.

And the other thing is that we're working through obviously, making sure that we get our POS up. And that's going to be the key, which we're very comfortable, based on what we see in June, but again, we're just being a little bit prudent in terms of how long that's going to take, let's say for example, to get it to where it needs to be. So it's more being conservative, I think, than anything else.

Okay. Just on the timing of Rio Nance 6, I think you mentioned that the production is going to start in calendar Q4. I was under the impression that it was going to start in calendar Q3. Are you behind the schedule or am I missing --

No, I said last time that it was the end of Q3 was what I said in the last call and it's going to be close to that but could fall into Q4 but you're talking months.

Okay. So everything's on schedule and everything's going well?

Yes.

Okay. Thank you very much.

Kenric Tyghe, Raymond James.

Glenn, in your earlier comments, you referenced on generally cautious retailers. Looking beyond the rebalancing on a retailer-specific basis and just at the broader landscape, would generally cautious retailers not actually be a relative positive for Gildan given your proximity to market and security of supply? And is that not something that perhaps could actually be -- play to your advantage as we look through the back end of the year and if this persists into next year?

Well, look, If the retail environment is somewhat flattish, it means that consumers are looking for value. And I think that plays into our hand because what Gildan stands for is the best quality products at the best price. So we're well-positioned. We feel very comfortable that we will still maintain significant POS growth. That's why we're confident in driving our POS and our market share in underwear from 7% to 10% by year end so we think we're positioned. I think the overall broader market is somewhat, I think, questionable in terms of how strong back-to-school will be. We definitely think that the department store and specialty chain areas are a little bit weak. We see that with some of our Gold Toe sales although we're still taking share in that category. But as far as the mass is concerned, we will continue to drive, I think, market share and be very successful in any environment.

Thank you. And just a very quick one on your, on the socks program, the socks program conversion. Is that now -- is that particular program now fully complete or are those still couple of loose ends to be tied up through the back end of the year? Or can we now move forward on that as a completed transition?

At our end, it's fully complete. We're only shipping Gildan brand today but there's still some Starter that's actually going through the retail stores as they flush it through, but as far as we are -- Gildan is concerned, we're only selling Gildan at this point in time.

Great. Just one quick one to put in there. Correct me if I'm wrong; was Europe last year -- or Europe and Asia-Pacific last year were up some 40%, if I'm correct? I'm trying to look at this on a two-year stacked basis in terms of it -- I'm not incorrect in saying it was a particularly tough comp in Europe, aside from the specific issues in the UK. Is that correct?

Yes, it's definitely and we don't look at it like that because, look, we need to get growth every year -- every quarter and that's really how we measure ourselves. Last year is somewhat history but at the end of the day, look, we feel very comfortable with our positioning. We started promoting in June. And POS is back up, close to 20%, so we're back on track to where we need to be. And once the currency gets aligned with pricing, I mean, we should be able to have actually margin expansion again as because obviously, we'll see that as well. So we're spending a little bit more money to make it happen right now. And we still feel very comfortable with our positioning but to answer your question, that's definitely correct. And we're positioned, we think, to continue growth.

Great. Thanks. I'll leave it there.

Derek Dley, Canaccord Genuity.

Just wanted to be clear in terms of your higher cost cotton inventory, was that completely cycled through in Q2? Or was it actually cycled through a little bit ahead of the Q2?

Well, the cotton costs are coming down through the year. So each quarter, the costs are coming down as we go through each one of the subsequent quarters. And that's -- we'll see margin expansion continue to grow as we go through the year.

Okay. And in terms of the pricing at wholesale, is it relatively in line with your current cost of cotton into Q3?

Well, we set -- we established new pricing basically. We established it based on the future price of cotton. So the answer is yes and our pricing in wholesale is very stable and has been stable all year.

Okay. Great. That's helpful. And then I just wanted an update. I know it's early days but any -- can you give us any color or any update on the integration of Comfort Colors?

Well, Comfort Colors is almost 100% integrated. I mean, all the order to cash, the back-office, has been totally integrated. This acquisition has been a great success for us. It's been seamless. And there hasn't been any major restructuring at all in terms of integrating the acquisition, so we're really, really excited about how well we've done in integrating Comfort Colors into Gildan.

We've started to produce garment-type products in Central America to support the growth in 2016. We're expanding the brand and the product offering in the brand. And we're also going to be introducing Comfort Colors in international markets in 2016, so we really, really, really are excited about it. It's been a total home run and it's hit all of our objectives both topline and bottom-line. And we think we're going to lever this for years to come.

Great. Thank you very much.

David Glick, Buckingham Research.

Laurence, just a question on free cash flow. Obviously, the number has bounced around a bit the last several years, just given changes in working capital and levels of CapEx and this year, being the peak of your investment cycle. I just wanted to get a sense for what you see as the free cash flow this year. Is $200 million a good number? And then what's a normalized level of free cash flow once we get beyond this peak year? How much do you expect capital expenditures to pull back? And what kind of return on invested capital are you targeting once you start to get some returns on these investments? Thank you.

So your estimated free cash flow for this year is in the ballpark. Going forward, we would see free cash flow increasing, as I said in the introductory comments, because our EBITDA is going to increase as we continue to implement our growth strategies. And CapEx should decrease, because we will have been completed our initial investment in yarn spinning. So we're looking at more and more cash flow and a big focus will be our reinvestment of cash. We're going to continue to invest in high-return projects to support our organic business. Our main use of excess free cash flow will be acquisitions like the ones that we've done that complement our organic growth strategies. We'll also seek to keep increasing our dividend.

Okay. Is there a level of normalized CapEx? I know it can be lumpy, but obviously, $300 million or so the last couple years; it's really bounced around a lot. Just trying to get a sense for what's a reasonable run rate.

Reasonable run rate for us is about anywhere to $150 million to $200 million, I think, is an ongoing number you should use, Dave.

Okay, that's very helpful. Thank you very much. Good luck.

Taposh Bari, Goldman Sachs.

Laurence, I was hoping you could provide some more context into the quarter itself. Looks like you missed revenues by about $35 million. Can you disaggregate how much of that was a function of European printwear versus the branded restocking -- or destocking? And then as we think for the rest of the year, looks like you're reducing printwear sales by about $30 million versus prior guidance in branded -- by about $42 million versus your prior guidance. I'm hoping if you can give us a sense of how much of that was 2Q versus forward six months reduction?

Okay, there were a lot of pluses and minuses in sales in the second quarter and I think it is helpful to provide more detail in that. On the printwear side, our sales compared with last year were down about $5 million. The 8% growth in sales in an equivalent weeks basis contributed about close to $30 million to sales in the quarter, which was largely offset by the non-recurrence of the extra week for a net of about $5 million increased sales volume. As Glenn said, Comfort Colors was a very strong contributor to our sales, with close to $20 million of sales in the quarter. Europe and Canada were both down by a combined $20 million, and other international markets, as we mentioned, were up by close to $10 million. And across all the international markets, the impact of currency was negative 10%.

Pricing was negative, close to 20%. So on the printwear side, the positives were volume in the US, other international markets and Comfort Colors. And the minuses were the extra week, Europe and Canada, and pricing. On the branded side, we had about 70% growth in Gildan brand which contributed about $35 million to sales and that was offset by something like a 30% decline in private label which reduced sales by about $15 million and the balance of $6 million was mainly Doris. Replenishment in branded negatively impacted sales. We estimate by $15 million to $20 million. So our sales, instead of it being $236 million and branded would have been $250 million to $256 million, up more than 20%. So in terms of the sales shortfall in Q2, it was, let's say, $40 million relative to our expectations which was equally divided between Europe and the replenishment issue.

Very helpful. So as we think about the forward six-month period, it sounds like the European issues are largely behind, yet you're reducing your printwear guidance by about $30 million? Is there an element of conservatism there? Can you help me better understand?

Well, we have, as Glenn said, just to that these two factors do continue to impact our sales in the third quarter. So in the third quarter, we're assuming double-digit volume growth in both operating segments. Continued positive sales impact of Comfort Colors, similar to the second quarter. Pricing in printwear will be down, similar to Q2. ForEx will be, again, about $10 million negative impact compared with last year. Mix will have a big impact, a big unfavorable impact in Q3 versus last year. I think I misspoke when I was going through the script. I said favorable but it's unfavorable Q3 because of a shift from Q3 to Q4 so that's a big negative in the third quarter.

Great. Last one for Glenn, sounds like there's some cautious commentary on US retail, particularly in the department store channel, yet your printwear business seems like it's performing quite well and I was curious to know why that would be -- why that channel would be unaffected by what seems to be a fairly mixed retail environment. I guess the question implicitly is, how comfortable are you with level of inventories in that distributor channel? Thank you.

Well, I think that the printwear growth has come from reinforcing our leadership position on price, really, at the end of the day. And it's driven -- it's driving our success, is really -- it's what's driving our POS as well as in line with all the new products and Comfort Colors, the ring-spun T-shirts. I mean, so we're rationally going after other segments we never even went after which is that whole 40% of the basic category so it's a combination of those two things that's really driving that market. And we feel very comfortable where we are. As far as the inventory and the market and the channel, it's very in balance. And we're projecting to have conservative levels of inventory throughout the year including the year end. So we're very comfortable with our positioning. Our inventory's in balance and our businesses are doing very well and performing and we will continue to be successful there.

As far as the retail environment, look, I gave you a general comment. Just like printwear, I'm not sure if all my competitors are doing as well as we are, but at the end of the day, in branded, we feel very comfortable with our positioning so I don't want you to misunderstand what I said. We definitely feel we're on track to achieve all of our objectives. We've got the new programs in place, $120 million of new programs. We're driving new programs for holiday that are not in our forecast that won't be significant to this year. They will affect more 2016. And with our pricing strategy today in mass retailer, it only is going to benefit us in the weaker environment one way or the other. So we're priced to win. We're very comfortable with our positioning. We will have strong POS. We're still projecting our market share to go from 7% to 10% so I just gave you an overview of the overall macro market, but as far as Gildan is concerned, we think we're well-positioned to continue to take share and grow the top line.

Good. Thank you very much. Good luck.

Stephen MacLeod, BMO Capital Markets.

I just wanted to follow-up on the weakness in Europe. I'm just curious. How much of that was driven by FX and how much of that was organic declines in sales?

It was driven by three things. It was driven by the exchange and the fact that, look, we lost POS because we raised prices and obviously, not all our competitors matched. And those are the main two contributors as well as we had one of our customers that put up a new distribution warehouse management system that wasn't able to take product in that affected shipments to him. So those three things combined were really the negative impact to Europe.

Okay, in terms of the distribution disruption, is that now behind you?

Yes.

Okay, great. Thank you. And then just wondering if you could talk a little bit about -- you referenced strength at Anvil and is that coming from national accounts, the distributor segment or both?

It's mainly the distributor segment. And that's -- we've repositioned Anvil brand which is basically more contemporary today. We've put in some new fabrications this year that have been very successful. And the lion's share of all that product is being sold through our distributors today. Yes, to answer your question.

Okay, great. Thank you very much.

Mark Petrie, CIBC.

Wondered if you could just comment about your comfort with your relative positioning coming into back of our -- coming into back-to-school and certainly how it's progressing vis-a-vis your competitors and the relative price position there?

Well, we're very comfortable because we're the price leader at the end of the day. So we have promotions for back-to-school. You'll see pallets dropped in the retail stores. But typically, we are the price leader and the value product on the floor. So we're positioned where we need to be.

Obviously, there's issues just in terms of the destocking and that's hitting everybody, but are you seeing competitors respond to your market share gains? And is that in line with your expectations?

Well, I don't really talk about my competitors, but I think, look, we've -- we're building a business for the long term. And a lot of what we've been able to do is start off with our product and we think our products are far superior than what's available in the market and we are able to do that by levering our low-cost manufacturing and all the investments we're making and that's really the backbone to our strategy. So how I would look at it is that it's taken us years and billions of dollars of capital investment to be able to develop, what I say, the secret sauce, basically. And that's really been our brand positioning and that's what we stand for in the market is best quality, best value. And we're positioned perfectly.

Now we're combining that with branch strength with Blake Shelton basically supporting our brand, the advertising on TV as well as the pallets you'll see on the floor. So as we continue to resonate our brand and we have the Starter sock transition. We have more Gildan products in the store, and our Gildan sales being up over 70% over last year, we've -- these are all things that we'll continue to reinforce our positioning in the market, and allow us to continue to grow the top line for years to come.

Okay. I know it's small, but on the Bangladesh, what are you planning in terms of capacity expansion? What's the timing on this?

Well, the timing is now. I mean, we're expanding the plant over the next six months, so it's going to expand. Bangladesh is still our smallest plant but we're going to increase the size of the plant by about 50% and that's going to continue to support our growth that we have in Asia, which is up over 30%. It's right now our third largest market and growing relatively fast and as well as we're going to continue to support continued growth in Europe.

Okay. Thanks.

Vishal Shreedhar, National Bank.

Just wondering what your thoughts are on the acquisition market? If you're continuing to find suitable companies to acquire if prices are reasonable? And if the focus is still on tuck-ins?

Well, the first thing is our focus is on, obviously, driving our topline sales. That's been our strategy from day one. And that's why we purchased Doris, which gave us product category expansion. Distribution expansion, both in food and drug and sales infrastructure in Canada. Shapewear, Comfort Colors gives us the fashion segment so every one of the acquisitions we've really have done over the years has always been, I would say, relatively strategic in nature to help our topline growth and our organic growth strategy.

So we're going to continue to look for acquisitions that meet that criteria. And so it's got to be either new products, new channels of distribution, brands. I mean, those are all the things that are our criteria and that's what's going to drive our acquisition criteria. So I don't want to say anything right now, this second but that's really where we're focusing our energy on and as we see things that will fit our criteria, we'll look at them.

Okay. Thanks. In terms of the POS you were talking about at the retail level, you said that POS was better in June. You've given us some data, the 7% market share data. I was wondering if you can give us some indication of how POS tracked through the months so we can gauge what the trajectory is?

Well, it was up pretty good in June, and it wasn't so good in April and May, to be perfectly honest with you. So we ended up flat, but a lot of that came towards, as we fixed the in-stocks in the stores, so when -- we're in good position so far in July so it's improving. It's not where we want it to be but it's improving steadily as we go forward. So we're cautiously optimistic on that.

So is June market share -- I know it's a piece of it, but is June market share better than the total quarter and is July better than June?

The answer is yes.

Okay. Thank you.

Andrew Burns, DA Davidson.

I was hoping for a little more clarification on the doubling of retail doors by year end to 18,000. I know you don't want to disclose a lot of specifics, but I was hoping for some incremental color in terms of what types of doors they were in terms of food and drug, or mass and department store, or largely the Doris expansion or any color on men's underwear, Gold Toe or Gildan Platinum would be helpful. Thanks.

Well, 4,000 of the doors were basically food and drug. I can tell you that. The rest of them were mass and there was some support specialty expansion as well. So the bulk of the growth is in the mass channel.

Great. Thanks. And in terms of your market share target exiting the year at 10%, is the bulk of the lift from 7% to 10% of the sock program transitioning to Gildan brand? Or does it also include some step-ups in your men's underwear market position?

That number is only underwear. Men's underwear. That's what we're measuring right now. So we haven't reported sock brand share yet. That's something we'll do once the transition, obviously for Starter is complete. We'll start giving you some sock share, but if you combine even today the Gildan socks and Gold Toe socks, we're pretty much the -- we're going to be very close to being a leader in the industry.

Thank you.

David Hartley, Credit Suisse.

Just, really, on capacity utilization and your low-cost manufacturing, first of all, how comfortable are you with capacity utilization and your ability to stay at the low cost benchmarks you want to be at, particularly as you transition into some new facilities over the next two years?

Well, our track record has proven that adding capacity has been the Company's success factor. So that's something that we've proven -- we've done time and time again with Rio Nance 1 all the way to Rio Nance 5. So I don't think that's a concern for us. What we also do in terms of how we add capacity is we make sure that we understand what products are being made and what facilities. For those of you that have visited our facilities, we have different product categories going into different plants to make sure that, A, we maximize our cost structure and B, manufacturing as efficiency as possible.

So when we bring on Rio Nance 6, it's going to be a different configuration than we did with Rio Nance 5 which is a basic commodity type plant. Rio Nance 6 is going to be designed to produce performance products, and fashion products, stretch, Lycra, all kinds of different product categories that will support, really, the fashion segment and performance segments of our growth strategy. So -- and Costa Rica will be more of a basic plant that continues driving our basic underwear and activewear sales growth. For each one of these plants, we bring them on in incremental capacity expansion but we have the infrastructure and the skill set that's been proven and track record to bring on capacity.

Okay. And with the -- your low-cost abilities, I mean, what's your sense in terms of the market your competitors catching up to you and getting their costs lower and perhaps closing the gap with you? And how are you able to measure that?

I think that the only way you can measure it is how much money we're spending. At the end of the day, we're spending close to $250 million to $300 million this year. We spent about $1 billion in the last three years. The one thing I can tell you is that anybody can write a check, but it's not writing the check that is important. You've seen a lot of companies try and move offshore into low jurisdiction -- manufacturing jurisdictions that failed. So we just -- we combined continuous development of our manufacturing capacity expansion and continuous (technical difficulty) capacity as well as cost reduction programs like our yarn spinning, our energy projects, et cetera.

It takes management's time and energy to do these things. So that's really where we can measure it and we are continuing and committed to making sure that we invest a significant portion of our free cash into constant cost reductions, and that's what's ingrained in everybody in this Company. This is a part of our DNA, basically, that we continue to look at how we drive costs, add value to our products, and give consumers better value.

Just final question on the new facility Rio Nance 6, where you'll have more performance wear, et cetera in there, is there opportunity to introduce a new brand to fit that product offering, or will you stick with existing brands and how is that going to start to take shape?

Well, the answer is we can add brands to our portfolio and that's part of our growth strategy and potentially part of our acquisition strategy. So we have a diversified manufacturing portfolio today. We are making different quality products at different price points. We're servicing different channels of distribution. Gold Toe is a high-end. You've got Gildan basically being in the mass; we've got Anvil being contemporary so look, we've got Secret Silkies. We got Kushyfoot. We've got TherapyPlus. We have a whole slew of brands and portfolio brands. We have Mossy Oak, that we've -- that we're producing those products which are a little bit different in terms of their technology. So we've -- we're building up a portfolio of brands and that's the most important thing.

We talk a lot about Gildan because that's driving our core share in underwear and socks which is really our mission statement, but the same time, we're surrounding ourselves with other brands because there's other categories that are important and one brand can't do everything. And we need to have a multitude of brands to be successful and a multitude of different products. And we're not just investing in manufacturing of one item; we're investing in manufacturing to support all brands, all categories and all products.

Okay. Thank you.

Jim Duffy, Stifel.

I'm hoping you can help build the bridge to the implied fourth-quarter guide. I recognize there's a unique compare against the price action in the December quarter 2014 but that makes it particularly difficult for us to assess the printwear outlook. How much -- can you isolate things like the shift of fleece, expected to new branded program shipments for the fourth quarter? That would be helpful. Thank you.

I think it's probably for the reason you say easier to bridge against the fourth-quarter two years ago because the fourth quarter, December quarter of last year was a tough quarter that was impacted by all the charges. And in the fourth quarter, there is growth in the printwear side, which will benefit from the lower cost cotton and the manufacturing cost savings. And the real driver of growth is on the branded side where we'll have significant volume growth as well as expansion in operating margins from the lower cost cotton and the manufacturing cost reductions.

Okay. I guess I was hoping there would be more specifics around that, Laurence, in terms of like new program contribution, perhaps the expected increase in volume in printwear, you talked about a shift of fleece from shipments from timing from third quarter to fourth quarter. Can you put a number around that, please?

So fleece will be up compared with the fourth quarter of last year. I don't think we necessarily want to guide to the magnitude of that increase. But fleece is down compared with last year in the third quarter and up into the fourth quarter compared with last year. And as we said, we have new branded programs which we can't specifically talk about, but they will drive strong volume growth in the fourth quarter in branded. And the main impact of these new programs will be in 2016 when we'll have a full-year benefit.

Fair enough. And then my next question is more conceptual. Just thinking about this large retailer, which has reduced inventories. With inventories as tight as they are, do you think that's manageable both for the retailer and can Gildan keep pace with the expected velocity given your systems and infrastructure?

Our systems and infrastructure are adequate to support significant growth in the category. We have good inventory levels right now so if you look, obviously, we're carrying ample amount of inventory. And it's just a question of getting the shelves filled and making sure that consumers have enough product to buy. But we feel very comfortable with our inventory levels and it's just a question from our major partner to make sure that we can get the product on the pegs and fill those pegs and keep them full.

Okay. Thanks very much.

Brian Morrison, TD Securities.

You provided a lot of detailed answers recently so I just have two very brief questions. First, when you talk about new branded wins in the 120 million new contracts. Last quarter, you talked about a split of about $60 million of that falling into 2016. Has anything changed with that commentary with the ongoing this quarter or could you at least update the incremental branded sales that are in the book for 2016 at this point?

Well, the answer is that the ones, the 120 million on an annualized basis gives you that extra 60 million. I think that's the point. So those programs are -- will flow into next year because we're only shipping a lot of these new wins, of the 120 million, we've only set a lot of the new floors and programs in June, July, and some are coming actually even in the holiday season. So that's how you have to look at it and as we anniversary these for the full year, we'll pick up additional volume. At the same time, look, we're still looking at obtaining new programs for 2016. We're working very hard with our retail partners to continue looking for new programs that will -- this is a consistent thing we've done. In 2015, we had new programs build to 2016, 2016 will go to -- 2014 to 2015, 2015 to 2016, and then in 2016, we'll hopefully obtain some significant new programs that will continue our momentum in years to come.

Understood. I just want to know if anything had been pushed out on that front at it sounds like it hasn't.

Not at all. In fact, we're looking to expedite and bring in new programs, to be honest with you.

Okay. And then that's great. And just the last housekeeping question. When you take a look at cotton and you look at your manufacturing gains, is it fair to say that $35 million of cotton benefits and then the lion's share, which would be probably another $35 million-plus from cost savings, that should just fall straight down into operating income for 2016. There shouldn't be any offset to that?

We're not giving 2016 guidance right now. So I don't want to commit myself to that. But there's definitely significant opportunity in terms of cost reductions, both from cotton and manufacturing costs.

Thank you.

We have no further questions at this time. I will now turn the call over to Ms. Sophie Argiriou for closing remarks.

Thank you. Once again, I'd like to thank our audience for joining us this morning. This concludes our call and we look forward to speaking to you soon. Thank you, everyone, and have a great day.

Thank you. And thank you ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.