Gildan Activewear Inc (GIL) 2015 Q4 法說會逐字稿

Good morning, and welcome to the fourth calendar quarter 2015 Gildan Activewear earnings conference call. My name is Brandon and I will be your operator for today.

(Operator Instructions)

Please note this conference is being recorded. And I will now turn it over to Sophie Argiriou. You may go ahead.

Thank you, Brandon. Good morning, everyone, and thank you for joining us. Earlier this morning we issued a press release announcing our earnings results for the fourth quarter and FY15 and business outlook for 2016.

The report to shareholders containing management's discussion and analysis and consolidated financial statements will be filed tomorrow with the Canadian securities regulatory authorities and the US Security Commission, and will be available on our website www.gildan.com.

I am joined here today with Glenn Chamandy, our President and Chief Executive Officer, and Rod Harries, Executive Vice President and Chief Financial and Administrative Officer. Our call today will begin with Rod taking you through our fourth-quarter performance and our business outlook, followed by a question-and-answer session during which Glenn and Rod will respond to your questions.

Before we begin, let me remind you 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, 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 Rod.

Thanks, Sophie. Good morning, everyone. Today we reported record fourth-quarter results for calendar year 2015 and initiated guidance for 2016. We also announced a 20% increase in our quarterly dividend and initiated a normal course issuer bid to repurchase up to 5% of the Company's outstanding shares.

We achieved our Q4 sales and earnings targets. And we delivered a strong quarter of top-line growth, despite the impact of unseasonably warm weather in the quarter and a weak holiday period in retail. Our Printwear business continued to reflect the benefits from the pricing actions taken in December last year and we achieved strong sales growth in Branded Apparel. Results in the quarter also benefited from continued manufacturing cost savings driven by our capital investments and lower raw material costs.

Adjusted EPS for the fourth quarter was $0.28, which was a record for a calendar year fourth quarter. As you may recall, in the corresponding quarter last year, we reported a net loss of $0.15 per share due to actions we took to lower Printwear net selling prices in advance of realizing lower manufacturing and cotton costs.

Compared to the previous record in the fourth quarter of 2013, adjusted EPS was up 56%. Net earnings for the quarter reflected strong unit sales volume growth in both operating segments and strong operating margins, driven by manufacturing cost savings, lower cotton costs and lower SG&A expenses.

Consolidated sales for the fourth quarter totaled $544 million, up 39% from the same quarter last year. Printwear segment sales were $285 million compared to $160 million in the fourth quarter of 2014. And Branded Apparel sales of $259 million were up approximately 12.5% from a year ago. Consolidated net sales came in above the Company's guidance as a result stronger unit sales volumes of T-shirts and lower than anticipated seasonal inventory destocking in Printwear.

Moving to our segmented results. On the Printwear side, excluding the devaluation discount in the fourth quarter of 2014, Printwear sales were up 37%. The increase reflected strong unit sales volume growth in North American and international markets, partially offset by unfavorable product mix driven by a lower proportion of fleece sales and the negative impact of foreign currency exchange rates relative to the US dollar.

Unit volume growth in the US continues to demonstrate that the pricing strategy we put in place in December of last year is paying off. Point of sales from US distributors to screen printers remained strong in the quarter, particularly in the T-shirt category. Volume growth also reflected lower seasonal distributor destocking compared to the same quarter last year.

We also continued to gain ground in the performance and fashion basic segments of the market where we continue to see good opportunities for growth. In this part of our business, Comfort Colors is proving to be a strong addition to our Printwear brand portfolio. Shipments in international markets were also up, but the benefit was offset in part by foreign currency impacts.

Printwear operating income was $63 million for the quarter compared with operating loss of $21 million in the corresponding quarter 2014, which included the impact of the $48 million distributor inventory devaluation discount. Printwear operating margins for the quarter were 22%.

Beyond the non-recurrence of the distributor inventory devaluation discount, the strong improvement came from manufacturing cost savings that we continue to generate as a result of our capital investments, particularly in yarn-spinning. These investments are generating cost savings and are allowing us to differentiate our product offering with higher valued ring-spun products, which we've incorporated in our Anvil line and in some of our Gildan branded products.

Lower cotton costs in the quarter also contributed to the significant improvement in Printwear operating margins. Finally, these positive factors were in part offset by unfavorable product mix and foreign exchange headwinds.

Moving to Branded Apparel. The holiday season was disappointing for many retailers as the effect of unseasonably warm weather hurt store traffic and affected some product categories more than others. Despite this weakness, we were able to grow our Branded Apparel sales by 12.5% in the quarter to $259 million due to the benefit of space and program gains with new and existing customers.

The increase in branded apparel sales reflected an 85% sales increase in Gildan branded products, including the impact of the conversion of private-label programs. It also reflects the strong sales of licensed brands, which combined with the Gildan branded sales more than offset lower sales of private-label and Gold Toe branded products.

While we've maintained our leading market share position in Gold Toe men's and women's socks in the department store and national chains channel, Gold Toe branded socks sales were affected by the overall weakness in retail traffic during the holiday period which is more pronounced in the department store and national chains channel where our Gold Toe products are predominantly sold.

In the underwear category we grew our sales in the quarter by 21% compared to the prior-year quarter. At the end of 2015, as we previously projected, Gildan branded underwear products were selling in approximately 18,000 retail doors. With this expanded underwear distribution footprint, we continued to target market share of 10% for Gildan branded underwear by the end of the first half of 2016.

Branded Apparel operating income of $31 million for the December quarter increased significantly compared to $8 million for the same period for 2014. Operating margins were 12%, significantly up from 3.6% in the fourth quarter last year. The margin improvement was primarily due to the retention of cost savings from our capital investments, lower cotton costs, and a 300 basis point improvement from SG&A leverage and integration benefits from acquisitions.

Branded Apparel operating margins were partially offset by unfavorable product mix from a lower proportion of higher value Gold Toe product sales as a result of weakness in the department store/national chains and sports specialty channels during the holiday period.

Moving to Gildan's cash flow performance. We generated approximately $160 million of free cash flow for the calendar year after capital investments of $230 million. These investments were primarily related to our new yarn-spinning facilities in the US, textile projects at our Rio Nance manufacturing complex in Honduras, and for the expansion of our Printwear distribution center in Eden, North Carolina.

Capital expenditures came in slightly lower than the $250 million we were projecting due to the timing of some expenditures flowing into 2016, although we remain on track with our manufacturing cost savings projects and overall capacity expansion plans. The Company ended the quarter with net debt of approximately $324 million.

Moving to guidance. Our projections for 2016 take into account current market conditions. We plan to leverage our competitive strengths and the benefits from our continued investment in manufacturing to reinforce our positioning in the markets in which we compete. The strategic pricing action taken in Printwear in December 2014 reinforced our leadership position and contributed to strong unit volume growth and further market share penetration in 2015.

In 2016 we plan to continue to lower Printwear net selling prices in order to drive further growth in Printwear basics and increase penetration in the fashion basics and performance categories. Adjusted EPS for 2016 is expected to be in the range of $1.50 to $1.60. We're forecasting consolidated sales in excess of $2.6 billion, with Printwear sales to be over $1.6 billion and Branded Apparel sales in excess of $1 billion.

EPS growth in 2016 is expected to be driven by unit volume growth in both segments, the benefit of manufacturing cost savings from our capital investments and lower cotton costs. These positive factors are projected to be partially offset by lower Printwear net selling prices and the negative impacts of product mix and foreign currency exchange rates.

In addition, we are projecting higher volume-driven SG&A expenses. And income taxes are expected to increase due to a projected higher proportion of profits in Branded Apparel compared to 2015. For 2016 we are assuming an income tax rate of approximately 5%.

In Printwear, we expect strong POS in the US to continue into 2016, including higher growth in the fashion basics and performance categories as we leverage the Gildan, Anvil and Comfort Colors brands. International shipments are also projected to grow strongly by approximately 20%. POS growth in the US, however, is expected to be partially offset by the non-recurrence of distributor inventory restocking which occurred in 2015.

Higher unified volume growth in Printwear in 2016 is projected to be offset by lower net selling prices, unfavorable mix due to a lower proportion of fleece sales and negative FX. Overall, Printwear operating margins in 2016 are expected to remain stable compared to the prior year, as manufacturing cost savings and lower cotton costs offset the impact of lower net selling prices, mix and FX.

In Branded Apparel we're projecting strong unit volume growth from the annualized impact of program gains in 2015 increased shelf space gains in 2016 and new retail programs which will be partially offset by our decision to exit certain private-label programs. After you adjust our sales by approximately $65 million related to the exit of the private-label programs, growth of the remaining floor sales space in Branded Apparel is projected to increase in the mid-teens range this year.

We're projecting Branded Apparel operating margins in 2016 to continue to expand as we benefit from projected manufacturing cost savings from our capital investments, lower cost cotton and SG&A leverage, including synergies from the integration of acquisitions. These positive impacts will be partially offset by unfavorable product mix, as the current weak retail market conditions continue to impact the sale of higher valued retail products, particularly in the department stores, national chains and in sport specialty retail channels.

If we look at our sales profile for 2016, Printwear sales in the first quarter will face the headwinds of lower US distributor inventory restocking compared to the first quarter of 2015. For the sales for Branded Apparel are expected to decline slightly in the first half of the year due to the impact of the exit from private-label programs. However in the second half of the year, Branded Apparel sales growth is expected to be strong as the benefit of the increased shelf space and program gains flows through.

Capital expenditures for 2016 are projected to be approximately $200 million. This will be invested in Rio Nance VI and other textile capacity expansions at our existing facilities, including our facility in Bangladesh which is supporting growth in our international Printwear markets. We will also be completing the ramp-up of our new yarn-spinning facilities in Mocksville, North Carolina and investing in the expansion of further sewing capacity to support growth.

We are proceeding with the development of Rio Nance VI which is still targeted to start production before the end of 2016 and to ramp up over 2017 and 2018. However, Rio Nance VI will now be a larger basics facility, larger than our Rio Nance V facility and similar to the original plans we had for the facility in Costa Rica.

We will be leveraging our other existing operations, including Anvil facility, which will be further expanded to support growth for higher valued, more specialized performance and fashion basic products previously planned for Rio Nance VI. In addition, as mentioned, we are further expanding our Bangladesh facility, which will continue to support growth in international markets.

At capacity, expansion plans for Rio Nance VI and our existing facilities are expected to satisfy our capacity requirements over the next three to four years until new textile capacity is developed in Costa Rica, which we now expect to occur beyond 2018. With these plans we remain focused on adding similar new capacity, as we previously planned, but in a more cost-effective and efficient manner, driving higher returns on incremental capital invested.

So wrapping up. We continue to feel very good about our prospects and the plans we're putting in place to position the Company to drive future long-term growth and strong shareholder returns. While we're dealing with near-term headwinds, our growth drivers remain intact.

In Printwear we are continuing to execute on our strategy to gain further market penetration in North American and international markets. In Branded Apparel we are increasing our presence with new and existing retailers by leveraging our manufacturing cost advantages and enhancing our value proposition to customers and consumers.

We expect to generate strong free cash flow going forward, which we intend to use to both grow our business and provide returns to our shareholders. On the balance sheet side, we have set a target net debt leverage ratio of 1 to 2 times EBITDA, which we believe will provide us with an efficient capital structure.

With our strong free cash flow and our balance sheet capacity, we believe we are well-positioned to drive organic growth and pursue complementary acquisitions while at the same time increasing our dividend and moving forward with share buybacks, in line with our announcements today. Overall, we believe the outlook remains very bright for Gildan.

This concludes our formal remarks today. And I will now turn the call back over to Sophie. Thank you.

Thank you, Rod.

(Caller Instructions)

I will now turn the call over back to the operator for the question-and-answer session.

(Operator Instructions)

Sabahat Khan, RBC Capital Markets.

On the Branded segment margins, you had called out the negative product mix shift as a headwind next year. I'm assuming that's largely Gold Toe. Is that segment in the department store channel negatively impacted as a whole? How's your share doing there? And your margins on your basic Gildan stuff, is that improving in line with your expectations over the course of next year?

Sabahat, thank you for the question.

If we look at the mix impact for next year, it's largely driven by two things. It's driven by fleece in Printwear, and we're seeing that basically as a result of a number of things. But we've seen fleece inventories build at the end of last year due to warm weather. And we will bear the impact of that in 2015 -- 2016, sorry. And that will impact our fleece sales. And that's impacting mix.

We are also seeing some impact on Gold Toe sales. That's driven by the weakness in the department and national chains channels, as I called out when I gave my comments at the beginning of the call. We do see that continuing in 2016.

In the Gold Toe space, obviously we have leading market share. We are very well-positioned. We're very pleased with the way that brand is unfolding. But again, we are obviously in that channel. We are seeing weakness, and that is impacting some of our sales of higher valued products. And that is impacting mix. But really mix is being driven by fleece, and partly by what's going on in Branded Apparel.

Okay. Just one on the NCIB. You put in place a 5% share buyback. Can you give indication of how active you plan to be, or will that be more opportunistic?

We put the NCIB in place. We plan to proceed with the NCIB, Sabahat. It's very definitely something that we have the capacity to go forward with.

As I indicated in my comments upfront, we've got strong cash flow, we've got strong balance sheet capacity, we have the ability to do, really, all of the things that really we feel are important. Obviously, we're going to investing to support organic growth. We've got the capacity to do acquisitions, which remains a priority. We do plan to increase our dividend and move forward with the share buyback. We've set the net leverage target of 1 to 2 times. And we plan to work towards that target.

Just a follow-up there. Is any buybacks embedded in this EPS guidance? The $1.50 to $1.60?

If you look at the impact of buybacks for the year, the impact overall will probably be a couple of pennies. And that's reflected in our numbers.

Taposh Bari, Goldman Sachs.

Good morning. It's Chad on for Taposh.

Wanted to follow-up first on the Branded Apparel segment. You just talked about the Gold Toe being planned, it sound like down. I'm hoping you can us a little more granularity on how you're planning that business, that segment? We have the $65 million headwind from the exit of private-label. We have Gold Toe down. How are you think about the Gildan brand in terms of how it comps in the doors that it's in, as well as new door introductions? Thanks.

Maybe I will answer the question. First of all, we are very excited about our branded sales as we go forward in 2016. We are projecting new shelf wins as well as the programs that we won in 2015 going into 2016, which will give us roughly about a 15% increase in total revenues, which -- in all of our product categories, which is being offset by the divesting of the about approximately $65 million of private-label.

So when you look at it each one of the different elements, our Gildan brand continues to perform well. Just in reference point our Gildan brand in Q4 was up about 85%. Our underwear sales in the quarter were up about 21%, and we gained -- continued to gain market share in the category. So as we go forward into 2016, we're definitely see ourselves with incremental space in our Gildan core product with our existing customers. We've got new space with new customers, as well.

We're going to be leveraging our doors acquisition. We won a large program and sheer in the Dollar channel. We're actually getting more space in Gold Toe, so the mix is going to be slightly down. But we're still developing and getting more space in Gold Toe. We have a lot of new product entries that we're going to have in Gold Toe through ladies. We are introducing some sheer products and some other categories. We have some new placements in multi-channels of distribution from Osseo. And we're continuing to grow our license business.

We think 2016 is a pretty good year in a not great environment. The department and the specialty channels are obviously not performing. We are being a little bit cautious there. Mass is flat at best, the way we see the market today so far. We are gaining share in a declining market. So we're pretty excited about the outlook for 2016. And on top of that we are seeing, like we said earlier, we're leveraging our cost structure and our competitive strength and increasing our operating margins in the division as we go forward in 2016.

That's really helpful, Glenn. Thanks. A follow up. Just wanted to ask, it seems like in the fourth quarter weather, it was actually a bit of a benefit to the Printwear business on the sales line. Obviously it impacts margin as well. How should we think about how weather impacts your business, through the year or over time?

I think, look. There's a plus and a minus. The plus is we sold a lot more T-shirts at the end of the day. And the minus is we didn't sell so much fleece. So our inventories are in good balance in general as we go forward into next year. The area where they're a little bit high is fleece, which we're projecting to work out of our inventory in the first half of the year, which is affecting our mix. And also there's going to be a slight reduction of inventory in the channel as one of our large customers consolidates warehouse through one of their acquisitions.

But overall I think that we are pretty excited about as we go forward. Our POS is very strong right now. We're doing very well. Our pricing actions have been very successful. We've regained our leadership position. We've got huge momentum. And also as far as our pricing is concerned, as we go into 2016 in the current environment we continue, we think it's an opportunistic time to continue driving share and position our leadership position as we leverage all of the cost initiatives that we put in place. And a big driver of our success as we go forward is leveraging our manufacturing costs, which are flowing to our cost of goods sold in 2016, as well as the lower prices of cotton.

Anthony Zicha, Scotiabank.

Glenn, could you give us a bit of color behind the numbers in terms of Branded growth? You're saying that we're going to grow in the mid-teens ex of private-label. So how much of that proportion is tied to new programs and how much of it is tied to shelf space?

We're going to basically -- the programs that we look at in terms of what we obtained in 2015, we're going to have a about a spillover in 2016 for approximately $60 million. And then we have attained new programs this year for approximately $70 million.

In both cases what happens when our customers set their floors, a lot of these programs will happen in the second half of the year. So basically we get the flow-through in the first half a little bit from what we did last year, but for the whole year. And then we're going to reset a lot of these new programs in the back half. So we have about $130 million of new programs. And like I said, we've exited about $65 million of private-label. And that's what our guidance is built upon.

Tied to that same question, was reference to market share in underwear, mentioned that we're talking 10% by the end of the first half. Could you give us a number for Q4?

No, I'd rather not, be honest with you. Hopefully it's a lot more than 10%. But I don't want to give you a number right now, to be honest.

Okay. Last question. With reference to capacity expansion, why the delay for Costa Rica? And the percentage increase in capacity of Rio VI? Thank you.

Originally when we were looking to do Rio VI, partly we were going to consolidate some of our Anvil operations into VI. So we thought it was more prudent and a better use of our capital actually to expand the AKH factory because it's been really performing well. And we have that skill set in place already. So we're making some basic products there. So those basic products we'll obviously move out of AKH. We're going to make a major investment there to continue to support our fashions and our performance products. And we're going to leave Rio Nance to take advantage of the infrastructure we have in place; the biomass, all the infrastructure we have.

And Rio Nance VI is going to be 30% bigger than Rio Nance V. So it's going to be the lowest cost plant we have. And it will give us the ability to continue driving both our basic T-shirt and our underwear sales growth. And it's -- what we think it's going to be a much more effective use of our capital. And it's going to be much more timely, so that if sales accelerate quicker, this plant can be ramped up.

It's going to be built in 2016, but like Rio Nance V we ramped the thing up 100% in 12 months. It's going to be a function of our sales team, which we're going to put pressure on to drive more sales. And we think it's less risky in the short term and will allow us to generate over $1 billion in sales, of incremental sales between what we're doing in VI, the AKH expansion and our expansion in Bangladesh, which would our support our international growth.

We're also investing in Honduras and expanding our dyeing capacity to support our Comfort Colors. We've been really -- Comfort Colors has exceeded our expectations. And we're working quickly to add capacity to take advantage of those sales opportunities, as well. So we're pretty excited. We've -- one thing I think I would -- to point out is we've spent in the last three years $1 billion. We're the only company making large capital investments.

Our capital investments are driving our lower cost structure. But at the same time they're giving us product enhancements and benefits to the things where we think we can grow sales like our ring-spun products for Anvil and our Gildan fashion styles, as well as driving performance and all of our underwear categories. So we're really excited our positioning. We're going to continue to make investments. We're going to pass those investments on to better value to our customers. And continue to drive our sales for the long term.

Mark Petrie, CIBC.

Could you give an update in terms of your status in terms of in-stock and sell-through at one of your large US customers, US retail customers?

Our in-stocks are improving. Our large retailers obviously focused on making sure that their service is improved as has been publicly disclosed by putting more staff into stores, better systems and tools. And it's a major focus for them. But saying that and look at -- our big opportunity right now is as we continue to get new shelf space and placement. We're going to see our sell-through improve and continue to drive our market share. And we're pretty comfortable with our positioning in 2016. We will see those things happen. And that's why we're comfortable with our 10% target by the end of Q2.

Okay, thanks. Bigger picture. Wonder if you could comment on your view on the long- or medium-term margin potential in the Printwear channel. Clearly you are the dominant industry player, but pricing is highly competitive. And wonder if you could just offer your perspective on the medium-term outlook for margins in Printwear? Could they expand from here, or is flat what we should expect over a number of years?

Well, I think, look, we are the price leader in the channel to begin with. So at the end of the day we are the ones we think that set the price in the market. Our margins in Printwear are quite strong.

We are projecting, even after price decreases in 2016, similar operating margins as we leverage our low-cost manufacturing and the flow-through of lower-cost cotton. So I don't want to say -- I mean, historically the Company has always made huge investments and capital investments in manufacturing, taken those investments, put them into price and we put them into our products. And we shared them with our customers.

We're always looking at ways to continue growing our brand in the market. And I don't want to say what will happen as we go forward. But we will take it one day at a time. And we also take in account the environment in terms, and sometimes in which we are in. I think we have a little bit uncertainty in this environment. So we think that putting the pedal to the metal is a good choice for 2016.

Okay, thanks. Sorry. Just a follow-up on that. In terms of the structure of your pricing model in Printwear, I know you made a change of couple of years ago. Are you satisfied with how it's structured today?

It's proven that our POS is very good and we have pretty good momentum, as you saw through 2015. So we think that we are on track and doing the right things. We just need to do more of the same.

Chase Bethel, Desjardins Securities.

Rod, I was hoping that you maybe could give us -- would you be able to bridge, let's say 2015 earnings to 2016, and call out the impact of volume versus price, as well as what you're expecting for the benefit of yarn and cotton? I'm just trying to get my head around the puts and takes in going from 2015 to 2016.

And then I also have a question on -- I understand the margins being constant in Printwear 2016 versus 2015. But as I recall, when you lowered pricing coming into 2015, you had mentioned that essentially you were moving ahead of cotton with the benefits that come this year. So, I mean, as we stand here at this point with the changes you are making to pricing, is it a fair statement that economics in Printwear are changing?

I will do the economics in Printwear. I would say that they are not changing. It's just a function of a point in time. We lowered our prices in 2014 to go into 2015, we had higher cost cotton, obviously, and we didn't have all the manufacturing savings coming through.

We still have manufacturing savings that are going to continue to occur in 2017, as well as the price of cotton, as you know, obviously continuing to come down slightly since 2015. If you take all that into account, I don't think the economics has changed. It's just more of the same. And we are still positioned, we think, where we need to be with very strong returns in our Printwear division. You want to go ahead and answer the other question, Rod?

On the bridge, Chase, I'm not going to give you the specific details of the various items. If you look on the plus side, obviously we are seeing the strong benefits from volume growth. We are seeing the manufacturing savings and the lower cotton costs come through. That will be partially offset by lower prices in Printwear as we drive further growth. It will be offset by volume-driven SG&A.

We will see higher taxes due to higher Branded Apparel sales. And then as we called out, we will be impacted by mix due to the lower fleece sales and what we talked about on the Branded Apparel side. And FX will also impact us. I suppose maybe to help you a little bit, the one number that I will give you, if you look at the negative impact of mix and FX in the bridge to 2016, that will be just below $0.20 in total.

That's helpful.

On Rio Nance VI, would you be able to give what is the representative end market use of the capacity, understanding that it's going to be higher valued product? Is it primarily on, let's say, Anvil performance and maybe some of the lifestyle athletic brands you used to talk to in the past? How much can you help to drive your core branded growth with that capacity that is coming on?

Rio Nance VI, like we said, it's going to be a replica of Rio Nance V, some of you have visited, but just 30% bigger. So it's going to be our biggest, most effective and most efficient lowest-cost facility that we have. What we're doing also is we're investing in the Anvil facility that we purchased through the acquisition. And that facility will increase significantly its capabilities of producing performance, high-end type products, let's say for example, to support our performance category and some of our fashion categories. That's maybe the way you need to look at it as we go forward.

Wasn't the Anvil around, I think, maybe 10 million or so dozens?

Right. And those 10 million dozens, that was about the size of the plant then. So it's going to get slightly larger than is current, but within those dozens that we were producing, there was still a lot of basic product. The basic product will be shifted as we build into Rio Nance VI. And that facility will give us the ability to produce 100% of the fashion and the performance type products as we go forward into the future.

Which is not just as equal -- it's equal to a better amount of dozens, but it's a much higher value level if you look at actually the opportunity from a sales perspective that will be flowing through that plant. And Rio Nance VI will be in a position to drive our T-shirt cost down, our underwear cost down, and also give us the ability to produce more fleece if we need to in the future.

Okay. That's very helpful. Thank you.

Kenric Tyghe, Raymond James.

Thank you. Good morning.

If I could just focus for a minute on the investments in your fashion basics and performance category, can you remind us, Glenn, just the size of that addressable market on fashion and performance within Printwear? And perhaps a reminder as to what your share is within those categories, given your increased price investments in the category?

The market is what we've defined as about 60% basic and 40% as the fashion and performance. We typically have always had a large share in the basic segment. And we're under-penetrated in the fashion and the performance area. So I would say there that our share may only be 10% today, for example, versus the large share that we have in the basic segment. So that's the reasons why we're investing in new expansion capacity, new products.

All of the ring-spun facilities that we've put in place, which some of you will see in our investor trip in two weeks, are one of the big areas where we're continuing to grow our capacity as we go forward into 2016, is the ramp-up of our Mocksville facility, which is going to be the biggest ring-spun facility in this hemisphere, if not the world. So which will help support some of these initiatives. So that's an area where when we look at the marketplace where 40% of the market, we have such a low share. And it's also the fastest-growing segment. We think that there's a lot of opportunity for top-line sales.

Great. Thanks, Glenn. Just switching gears quickly, on the capacities to the capacity expansion. Is the decision focused on the expanded Rio Nance VI versus Costa Rica? What's the biggest delta? Is it the bolt costs of Rio Nance VI versus Costa Rica, or is a potential ramp cost of Rio VI versus Costa Rica? I'm just trying to better handicap the timing of the decision and the commentary around relative bolt cost, et cetera. One, right now is we need the capacity ASAP. And we don't want to take the risk of going to a new hub right away, let's say for example. I think that's the most important thing for me at the end of the day. For Rod it's the return on capital and making sure that we -- it's a better return on our capital and our infrastructure. And net/net it's going to give us the ability to move quicker, take less risk and get better returns on capital. And it's going to allow us to still increase our volume in sales with $1 billion. We are still going to move quickly on Costa Rica if we see as we go forward into 2017, if sales permit. It's there for further capacity expansion. But I think this point in time it's more prudent for us to take advantage in the momentum we have. And we need the capacity, and we just don't want to take the risk of not having it when we need it.

Stephen MacLeod, BMO Capital Markets.

I just wanted to circle in around the 2016 guidance, specifically around the Branded business. So you indicated that you expect the first half to be a little bit weaker because of the exiting of the private-label programs. And then you have some new programs coming in in the back half of the year. Could you provide a little bit more color around where those programs are, existing customers, new customers and what segments of the market they're in?

The programs are in Gildan. We're obviously getting more shelf space in our Gildan brands with the existing customers. We've got new customers buying products from us, both in underwear and other categories. Like I said earlier, we have one big sheer program from the Dollar chain stores. We're getting more space in Gold Toe in various categories. And we're growing our Mossy Oak and license businesses. All of those combined are really what's driving our sales.

Obviously Gildan is going to be the biggest driver of that, because we're continuing to drive share in underwear, socks and activewear. But all of our product categories will do well in terms of driving share from -- and what I said earlier is that it's partly from the gains that we had 2015 as we annualized those in 2016, And the new gains we're going to get 2016 combined give us about a 15% increase before we exit private-label of about $65 million.

Can you quantify what the flow-through is in the first half of the year versus the back half of the year in terms of new program wins, just to remind us?

I think when you look at Branded, the first half of the year will be flattish, but the sales will be increased primarily in the back half of the year.

Okay. Thank you. Secondly, so you talked about on the 2016 guidance in terms of the higher SG&A. Are you finding that you're not levering that SG&A as quickly as you otherwise would have expected?

No. Look, some of this stuff is variable comp. There's other things. There's units, distribution cost as a percentage of our units being shipped. We're continuing to invest in our brands and our marketing. So it's a combination. It's not a huge increase relative to the percent of sales on a year-over-year basis, but it's definitely going up.

Okay, great. Thank you. Just one more, if I may. I think Rod, you mentioned free cash outlook for 2016. But I don't know if you've disclosed what your free cash flow guidance is for 2016. Did you say what the number was?

No, we didn't, Stephen. I gave you guidance on EBITDA to give you a sense of effectively what where we're going to land in 2016. And we've obviously talked about our plans on the investment side. I didn't give you a specific free cash flow, but I think you can get a good idea that we will have strong free cash flow in 2016.

That's great. Thank you very much.

Vishal Shreedhar, National Bank.

Just on the pricing reduction in Printwear, and I understand that Gildan typically reduces price over time in that segment, but could you give us a sense of magnitudes? Is it across the entire business line? And why the pricing reduction? I'm just -- given that the volumes were so strong in Q1, was it due to industry consolidation, competitive reaction? Any color there would be helpful.

I think that if you look at 2015, our pricing actions and our leadership position has proven to be very successful. And we're still getting very good returns. So I think that's the most important thing. We're continuing to make big investments in our capital investments, in our manufacturing and cost reductions. And our competitive strength is what's made us strong from day one, is they continued driving our market share and passing those savings on in either putting them in our products or putting them in price. So it's not inconsistent to what we've done the past.

I would say that the one thing is, is that the environment today is a little bit questionable as we go forward into 2016. And we just don't want to lose our momentum. We want to make sure we've got continued momentum. And we're also bringing on a lot of capacity at Rio Nance VI, which is going to continue to drive sales.

So you put all these things together, we think that it's a good time for opportunity. And we're going to continue to focus not just on our basics, but we're also going to be spending to continue to support our fashion and performance products as well, which is that category we're underdeveloped. And we think that there's opportunity. So it's all of the above, to be honest with you.

Moving onto Branded. Now, correct me if I'm wrong.

I think you said that market share in Branded for the Gildan product was up. I'm not sure if you disclosed a number, but when you're saying up, are you're talking sequentially or year over year?

Which market share? I said the Gildan brand was up 85% in the quarter of Q4. And our underwear market share was up year over year. It's flat sequentially and it's up year over year.

Jim Duffy, Stifel.

Couple of questions. First, you've made a number of mentions of return on capital. With the 2016 guidance, given the supply chain investments and cost savings including the yarn-spinning, I'm surprised we're not seeing more gross margin in operating lever showing in 2016. Can you walk through how you think about returns on the infrastructure investments, if there isn't yield to the operator leverage?

If we look at our investments, we're very pleased with the investments that we've made in yarn-spinning and our other projects across our system. They really are delivering the savings that we had expected. And that's really flowing through and dropping ultimately to the bottom line.

As I said, as we look at 2016 we are having the negative impacts of mix. We're having FX, that's flowing through and that's impacting our margin. I would say we're very pleased with the returns that we're getting on our investments. And we are very definitely seeing those savings. Those manufacturing savings are coming through. And as Glenn said earlier, we're using those manufacturing savings to really build on our competitive position.

Rod, question along the lines of cash flow. Working capital has been a use of cash the past few years. Is there opportunity for that to reverse in 2016?

I think if you look at working capital, actually if you look at where we ended the year from an inventory perspective, our inventories were down year over year versus the end of 2014. So we've got a lot of focus on management of inventory, on very efficient management of working capital. You would have seen our receivables were up at the end of the year, but that was mainly driven by the sales into the US distributors because of the strong POS, the strong T-shirt sales.

So when you look at our working capital going forward, we are very focused on ensuring that we get very efficient use out of our working capital, and really it's supporting our basis in a very effective way. But I think we're pretty pleased about the way we've managed working capital through 2015 and how we're set up for 2016.

David Hartley, Credit Suisse.

Just a question on visibility of your earnings. I mean, first of all, how far hedged are you on cotton, currency and other things like that? How comfortable are you that your visibility is fairly clear as you look into 2016?

I think we're pretty comfortable, and that's the main reason why we're giving out guidance because we have enough visibility to, I think, to forecast what we think is a prudent guidance number as we go forward. So the answer to your question is, I think we've got good visibility.

On the FX and cotton, do you have any -- could you give us indication how hedged you are against that?

Well, you know what? Typically, we don't like to get out that information because it's competitive. But we have good visibility.

Okay. I'm just thinking about the size of the opportunity. You may remember, Glenn, of course over the years you've provided some pie charts and talked about what the Gildan opportunity is. Are you still comfortable with that opportunity, particularly in light of the changes in retail sales distribution into online? And maybe you can talk about that online opportunity and how you have greater or less opportunity now that channel is developing.

Like everybody else it's a great opportunity for us. And as we partner up with our pure-play customers, working closely with omni-channel and develop our own e-commerce capabilities, and it's part of what our investments this year are to invest in our own infrastructure of e-commerce to support the potential growth.

So as far as we're concerned, we really don't care who we sell the product to at the end of the day and where it ends up. But it's a definitely becomes an opportunity for us to not just lever our core competency, but actually to expand our product offering, because the big benefit of online sales is that you are able to get a much wider distribution of your product offering, where you may be limited in brick and mortar. But we'll discuss all that with you as we go into our investor trip in a couple of weeks.

Great. Looking forward to it. Thanks, Glenn.

David Glick, Buckingham Research.

Just a question on gross margin and SG&A. We were a little surprised at the composition of the fourth-quarter earnings. Gross margins were well below what we had expected, obviously sales well above. And I'm just wondering what that implies for what's embedded in your outlook in 2016.

If you look at your EBITDA guidance, it implies perhaps at the midpoint around 150 basis points of improvement. I'm just wondering how much of that is going to come from gross margin versus SG&A? Are you planning to leverage SG&A, or is it mostly coming from gross margin, given your comments about volume-driven SG&A in 2016?

I think if you look at the fourth quarter and you look at what went on with our margins, I think we're, again, very pleased with the strength of our margins overall. We, yes, would've liked to have to see stronger margins. We could have had stronger margins. The mix was impacting us, really. We had very strong margins. As I talked about with respect to fleece, as I talked about with respect to the department store chains and channels. That had some impact. But overall I would say we were pretty pleased with our performance in the fourth quarter.

As we go into 2016, we continue to see good movement on our margins overall. We do see SG&A leverage. We do see benefits from the integration of our acquisitions. All of that is flowing through.

So I would say that if you look at 2016, we're moving in the right direction. We are getting the increase in margins from the strategies that we've been focusing on, on our investments in manufacturing. We are seeing the benefit of cotton costs. We are effectively -- obviously we're going to drive price to be aggressive. We are effectively going to be impacted by mix and FX flowing through and hitting our margins overall. I would say we're pretty comfortable with the way they're moving. And we are comfortable with the SG&A leverage we're getting.

So it sounds like a combination of both gross margin and SG&A. Is that a fair way to think about it?

Again, I don't want to get into too much discussion around gross margins. But I would say that when we look at our SG&A in 2016 from a margin perspective, it's not moving that much.

Dave, maybe the way to look at it is if you look at the FX and the mix, really, those are negative to our gross margins. But both of them I would say are not necessarily recurring in the future because the FX is just a function of us catching up between our selling prices and the currency in those functional markets. Because if you look at the markets in which we sell, the peso, the Colombian, what do you call it, these things have tanked completely. The peso went from $12 to $18. Canadian dollar's gone from par to $1.40 or something.

At the end of the day, we're going to continue to raise prices. We just can't do it all in one time. As we bring those prices up, we will normalize those margins, basically. So structurally that will come back into gross margins as we go forward.

And the mix, fleece is just a big part of our business. And we're just projecting to have a more weaker fleece sales. I mean, who knows what could happen? Business could be better than we think. But we just got to be prudent based on what we saw this year, where inventories are in the market. So as we adjust for our mix as we go forward into 2017, I would take those two things and say that's really representative of our margins. And that's just impacting the margins straight off. Just a follow-up on Q1. Typically you give quarterly guidance. It sounded like some of the higher level parameters for Q1 indicate that it's not going to be your strongest quarter of the year. But are you looking for EPS flat or down, or do you still expect growth in EPS in Q1?

Look, we've given you an outlook for the full year from a sales perspective. We've talked about effectively what will be impacting the quarters from a sales standpoint. We will see cotton costs flowing through in Q1. And we do expect a strong Q1 overall. So, we've obviously given you some full-year guidance and given you a flavor. But we feel very comfortable about Q1.

Just a longer-term question. Obviously you talked about the $1 billion of investments you've made, the revenue growth this year being held back, combination of the private-label, some FX. I think if you take out private-label you're looking at about a mid-single digit increase. And historically, particularly given the recent investments, I think investors would be looking more toward that high single digit or better revenue growth rate. And that's probably important to get improved returns on invested capital.

So do you look at 2016 as a transition year? And is that the sort of thing you'll be talking about next month on kind of what the longer-term growth rates are and the longer-term improvements in return on invested capital?

Exactly. That's definitely what we'll discuss. Everything is intact, because if you really look at what's happening and you look at Printwear and you look at the restocking on a year-over-year basis, the price, the FX, the mix, those are significant amounts of revenues that on a year-over-year basis as we move into 2017 we'll benefit from.

And as far as Branded is concerned, we're definitely doing very well. We're continuing to take market share. Our branch strategy is working.

And the underlining thing about our Company I would say is, look it, when you have a consistent message, you're consistently investing, the $1 billion we've invested in low-cost manufacturing. We've invested in quality products every single year. I think that our plan is sound. And as we take these investments and we invest in our brand strategy to generate top-line sales as we go forward, I think everything is intact.

We're very comfortable. I mean, the one area where I think we have a little bit of worries is the overall environment, which obviously something out of our control. But sometimes that works into our benefit because we can consolidated industry in a weak environment because of the strength of our balance sheet.

So I would say overall we're very comfortable with our positioning. We're definitely looking forward to meeting with our investors and showing you our new yarn facilities, because there's nothing like it in the world. And we're excited about the future.

Last question. Are you thinking -- I mean, you've made a very specific comment about your leverage ratios, and the balance sheet strength and flexibility. Is this a year, just given the more challenging environment, that you would expect to be more active on the M&A front than typical?

Organic growth is obviously our first priority as it continues, because that's our best return on capital. But we're definitely focusing on M&A as well. I think that one thing for sure is that the reason why we set the debt target is basically because we're going to do all of the above. We're going to continue to look for good M&A opportunities.

At the same time we feel very comfortable that we can buy back shares and increase our dividend. So the Company is generating significant good cash flows as we go forward. And we're going to continue to reinvest in all aspects of our business. So -- and to maximize our shareholder returns.

Great. Thank you very much. Good luck.

Thanks.

Nick Coutoulakis, Canaccord.

You mentioned that FX and mix negatively impact your 2016 EPS by approximately $0.20. When you refer to mix, does that include only the impact of unseasonably warm weather, or both that impact as well as the impact of lower sales of higher value items from department stores/national chains?

The bulk of it is due to fleece sales. There's a small portion of it because of the mix in the product mix. But most of it is due to the seasonably warm weather.

Okay, great. Thanks very much. My other question's actually already been answered. Thank you.

Jonathan Luft, Eagle Capital Partners.

This is Meryl. Thanks for taking the question.

On Comfort Colors, could you talk about how much capacity you are adding in terms of dyeing? When that might be available to customers, the potential for the brands, the revenue now versus what it might be, say, two years from now? Could it be a retail brand or an online brand, something like that? If you could talk about Comfort Colors a little.

You like Comfort Colors, right? It's a great brand.

I think the people like -- the college kids like Comfort Colors.

I'm just joking.

Look it, it's a great brand. It's really hot. It's really achieved our expectations. And what we're focusing right now is actually adding -- we're doing a couple of things. The first thing we're doing is, obviously we've completed the complete integration of Comfort Colors. We opened up a new distribution center in November to support the increased sales, which is literally down the street from our big distribution center for Printwear in North Carolina.

As we go forward, we're going to continue. Our first focus is to add capacity, which we're starting to add capacity. There's machines that are being installed early in the year. And there's be more equipment coming in as we flow through 2016. So we've allocated enough space and equipment to really more than double the size of this business.

We're also working very diligently with our marketing group to add new products in the line. We think there's a lot of opportunity for product extension. And what's great about this business is that everything is -- which we'll explain to you in the -- we meet in a couple of weeks, but it's all what they call PFDs. So you just basically make one silhouette. It's white and then you dye it whatever color you want. So the ability to put more silhouettes in and to drive the fashion side of it to take advantage of the consumer base, which is gravitating to it, I think, is going to be relatively easy to do.

So it's just a function of us to get capacity, put more product in our line, continue the brand awareness, because we think that there is a lot of opportunity to continue spending a little bit more money on the marketing front. It wasn't marketed very well. It got a grassroots following. But there's definitely opportunities to get the word out and continue to market it. So overall, short-term doubling I think is a good expectation for us. I mean, how far it goes from there we will see in the future as we add capacity.

Why is it so slow to add that dye capacity?

Well, it's not so slow. I mean, we bout the company last February. And it takes six months to buy equipment. We've done a lot of work on the integration. The whole business is fully integrated with Gildan since the acquisition. The front end of the business, order to cash, distribution now.

So part of -- also we needed to do is need to understand things. We need to make sure we bought the right technology, because some of the technologies, in terms of what we bought is actually advantageous to give us more features on the garments than what's currently actually even producing today in the existing facilities. So that's what -- how we create a competitive advantage.

So we're there now. All of the orders are -- the equipment is placed. The infrastructure and the equipment is being installed as we speak. So it's a good problem to have.

If we get to June, will you have 50% more capacity than, say, you did at the end of 2015?

Well I'd say that -- we grew the business this year at a pretty good clip. And we are projecting to grow it even bigger next year. We'll have enough equipment to support what our projected sales are. And we will see how it goes. But we will definitely have enough equipment to install to take advantage of the opportunity.

That's all the time we have for today. We'll now turn it back to Sophie for closing.

Thank you all for joining us this morning. I know we've referred to it during the call and during the Q&A session. But one more time I would like to remind everyone that we will be holding our investor day on March 9 and 10 in Charlotte, North Carolina. Our management team will be pleased to welcome you there where they will be presenting an overview of the Company's business strategy and taking you, taking all participants to tour our yarn-spinning facilities, both at Mocksville and at Salisbury.

We're very happy with the response, and we look forward to welcoming you there early March. So with that, again thank you for everything. And we will talk to you soon.

Ladies and gentlemen, this concludes today's conference. Thank you for joining. You may now disconnect.