Gildan Activewear Inc (GIL) 2016 Q2 法說會逐字稿

Welcome to the second-quarter 2016 Gildan Activewear earnings conference call. My name is Katie and I will be your operator for today's call.

(Operator Instructions)

Please note that this conference is being recorded. Our two Nicole over to Sophie Argiriou, Vice President of Investor Communications. Please go ahead.

Thank you, Katie. Good morning, everyone and thank you for joining us. Earlier this morning we issued two press releases, one announcing that we have signed a definitive agreement to acquire Peds Legwear and a second release announcing our earnings results for the second-quarter of 2016.

We also issued our interim shareholder report containing management's discussion and analysis and consolidated financial statement. These documents will be filed with the Canadian Securities Regulatory Authorities and the US Securities Commission and are available on the website at www.gildan.com.

With me on the call today are Glenn Chamandy, President and Chief Executive Officer and Rhod Harries, our Executive Vice President and Chief Financial and Administrative Officer. Our call today will begin with Rhod taking you through our second-quarter performance and our business outlook, followed by a question and answer session during which Glenn and Rhod will respond to your questions.

Before I turn it over to Rhod, 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'll turn the call over to Rhod.

Thank you, Sophie. Good morning everyone and thank you for joining the call. Today we announced our second-quarter results, with adjusted net earnings essentially align with our expectations despite sales coming in slightly below what we had expected as market conditions were mixed in the quarter.

We also updated our sales and earnings guidance for the full-year to reflect our Q2 performance, moderate assumptions for the balance of year as well as the impact of the AlStyle acquisitions which closed on May 26. In addition we also reflected in our guidance the impact of today's announcement regarding our agreement to acquire Peds Legwear, a marketer and manufacturer of branded foot apparel that primarily services US retailers. This acquisition is a nice addition to our branded apparel business bringing complementary brands and products to our portfolio and additional platform to drive growth, which I will cover in more detail later in the call.

Despite the market softness in the impact of headwinds our strategy continued to play out well in the quarter. We continue to gain market share for the Gildan brand in the Men's Socks and Underwear categories and in Printwear, we achieved strong unit sales volume increases in the faster growing Performance and Fashion Basic segments and in International Markets.

We also executed on our capital allocation priorities. With second-quarter in July share repurchases, we completed the NCIB we initiated in February and received TSX approval to increase the program. We also raised $600 million in long-term debt at attractive rates in order to support our leveraged target, the 1 to 2 times EBITDA, which we communicated at the beginning of the year. Finally, we generated strong free cash flow quarter of $130 million.

Overall, we remain well-positioned from a cash flow and balance sheet perspective to support our key priorities of continuing to invest in our business, pursuing complimentary acquitisions, and returning capital to shareholders. With that brief overview, let me start with the detail of our second-quarter results. We reported adjusted EPS of $0.41 for the quarter, slightly below adjusted EPS of $0.42 last year.

Lower Printwear pricing in the impact of headwinds in the quarter, including the exit from retailer private label business, Printwear distributor inventory destocking, and foreign currency were largely offset by manufacturing cost savings and lower raw material costs as we continue to deliver stable operating margins in the quarter.

Excluding the impact of 20 basis points of short-term dilution from Alstyle, consolidated operating margins of 15.5% were in line with last year's level. Consolidated sales of $689 million in the quarter, which included approximately $19.5 million from the acquisition of Alstyle we're down 3.5% over last year. The decrease in sales was due to anticipated headwinds as well as softness in the marketplace.

Customer traffic retailers particularly within department stores and national chains, remained weak in the quarter, despite promotional activity. At the same time, we understand math was mixed with some retailers performing better than others. In Printwear, we saw positive POS in the quarter, but not as strong as expected.

Printwear segment sales in the quarter of $471 million were down 1.4%, compared to the second-calendar quarter in 2015, and slightly below our internal expectations due to higher than anticipated distributor destocking. In addition to distributor destocking, which included the impact of distributor warehouse consolidation in the US, the decline in sales compared to the second-quarter last year was due to lower net selling prices and the negative impact of foreign exchange. These factors more than offset positive POS growth in the US and international markets and the impact from the Alstyle acquisition.

Our faster growing segments in the US Printwear market performed well. We achieved double-digit unit sales growth in Fashion Basics and Performance Products, including continued strong performance from our Comfort Colors line. In addition, unit sales volumes in international Printwear markets increased by 15%.

As a result of lower sales, Printwear operating income of $111 million in the quarter was down 2% from the same quarter last year. Operating margins for Printwear were 23.5%, down 30 basis points compared to the same quarter in 2015.

The slight decline in margins resulted from the diluted impact of the Alstyle acquisition. This dilution will be transitional, as we expect the benefit from integration synergies starting next year.

The Alstyle integration is off to a good start and we feel confident that we will be able to achieve strong manufacturing and supply chain synergies as the operations are integrated into our Printwear business. This includes incorporating our textile manufacturing practices and processes and increasing capacity utilization at AlStyle's large Mexican facility.

Excluding the acquisition of Alstyle, operating margins in the quarter were up 30 basis points to 24.1%. The combination of lower raw material and other input costs and manufacturing cost savings, more than offset the impact of lower volumes in net selling prices and the negative impact of foreign currency exchange rates.

Branded Apparel sales of $218 million were down 8% compared to the same quarter last year. The decline reflected the impact from the planned exit of $65 million in private label programs in 2016, which we have previously highlighted. It also reflected lower sales the Department Store and National Chains channel and higher promotional spending in the quarter.

Turning to the positives, we continue to be pleased with the market share performance of the Gildan brand this quarter. According to NPD's retail tracking service, our unit market share for Gildan branded Men's Underwear increased to approximately 9% at the end of June. During the quarter, we started to see better In-Store positioning for Men's Underwear programs, which we believe will continue to drive further market share gains for the Gildan brand in this category. And overall, we feel we are tracking well to achieve our initial Men's Underwear market share target of 10% this year.

We were also very pleased to see that NPD confirmed that the unit market share for Gildan branded Men's Socks at the end of the June quarter was approximately 22%, making Gildan the number one brand in this category.

Operating income in Branded Apparel of $17 million was down just over $2 million in the quarter compared to last year, due mainly to lower sales. Although Branded Apparel operating margins of 7.8% improved sequentially by 40 basis points from the first quarter of this year, operating margins were down 40 basis points over the prior year period. Primarily as a result of lower sales including higher promotional spending partly offset by the benefit of lower raw material and other input costs and manufacturing cost savings.

Moving to Gildan's strong cash flow performance, we generated $130 million of free cash flow in the quarter, about $110 million higher than last year. The increase was due to lower capital expenditures as our spending on yarn spinning winds down with our last facility Mocksville now ramping up.

We also generated cash from working capital during the quarter from the sales of approximately $47 million of trade receivables. These were high quality receivables, which are not efficient to carry on our balance sheet and which were sold under a new $100 million receivables facility.

We ended the quarter with cash and cash equivalents of $55 million in outstanding debt of $738 million. The company's net debt leverage ratio at the end of the quarter was 1.3 times adjusted EBITDA.

During the quarter, we repurchased 5.2 million common shares and another 1.7 million shares in the month of July, completing our12.2 million share repurchase program initiated in February. Today, we are announcing that we received approval from the TSX to amend our normal course issuer bid program and increase it from its initial size of 12.2 million shares to approximately 20.7 million common shares, or 8.5% of the shares issued and outstanding as of February 19, 2016, the reference date of the NCIB.

With our strong free cash flow and our balance sheet capacity, we believe we are well-positioned to drive organic growth, pursue complimentary acquisitions, while at the same time returning capital to shareholders. As communicated in February, we set a target net debt leverage ratio of 1 to 2 times EBITDA, which we believe will provide us with a strong and efficient capital structure.

In support of this objective, we raised $600 million of long-term debt during and shortly after the quarter. Of the $600 million, $300 million was in the form of unsecured, five-year term loans and yesterday we closed $300 million, seven and ten year private notes offering in the US private placement market. Proceeds from the notes, are expected to be received during the latter part of August and will be used to repay drawings under our revolving credit facilities and for general corporate purposes.

Now let me cover the acquisition of Peds, which we announced today. Peds manufacturers and sells socks, shear hosiery and legwear products, including no-show liners under the Peds brands. It also sells wellness hosiery under the MediPeds brand in the US and Canadian retail markets.

The company currently generates annual sales of approximately $80 million and the acquisition further enhances Gildan's product and brand portfolio particularly in the ladies and the therapeutic hosiery categories. The acquisition offers a number of growth opportunities.

By leveraging Gildan's distribution within the US retail market, there is opportunity to expand Peds current customer base and product sales for the Peds and MediPeds brands. The same time, we also see the potential to expand these brands into other product categories manufactured by Gildan.

Finally, the acquisition provides us with broader access into the footwear channel. We see this acquisition as a good complementary addition to our branded apparel business, which we can integrate easily into our operations.

Moving to guidance. We have narrowed our earnings guidance and are now projecting full-year adjusted EPS for 2016, to be in the range of $1.50 to $1.55 compared to our initial EPS range of $1.50 to $1.60.

We are now forecasting adjusted EBITDA of our approximately $545 million to $555 million, compared to the company's previous projection of $545 million to $570 million. Consolidated sales for the year, are now projected to be approximately $2.65 billion, compared to our previous forecast of sales in excess of $2.6 billion.

Printwear sales are now projected to be approximately $1.65 billion, up from our previous guidance of sales in excess of $1.6 billion and Branded Apparel sales for 2016 are expected be approximately $1 billion, compared to our previous guidance of Branded Apparel sales in excess of $1 billion. We updated our full-year guidance to reflect sales performance in the second quarter, moderated sales assumptions for the remainder of the year in light of current softer market conditions, and the impact of the acquisitions.

We are currently expecting lower than previously projected sales of fleece in Printwear in the third quarter. While our peak selling season for fleece occurs in the third quarter of the calendar year, the level of fleece pre-order bookings by the end of June, have been below what we typically expect for the end of the second quarter.

In addition, in the context of the current softness in the retail marketplace, we felt it prudent to temper our branded apparel sales outlook for the second half of the year. Despite current market conditions, we do however feel we are well-positioned to deliver on strong sales growth in Branded Apparel in a second half of the year.

We expect to benefit from shelf-space gains and new retail program shipments, while the impact from the exit of Private Label programs will subside in a second half of the year. We also incorporated in our projections the sales and earnings impact of the acquisitions of Alstyle and Peds.

We are forecasting a sales contribution of approximately $115 million for the year, although we expect EPS impact from the acquisitions to be minimal in 2016. Having progressed on our acquisition integration plans, we're confident that we can generate strong integration synergies from these transactions, which are expected to flow through in 2017 and 2018 and which will reach an EPS accretion exit run rate of more than $0.13 by the end of 2018.

We also adjusted our estimates for capital expenditures for the year. We now expect CapEx for the full year in the range of $150 million to $175 million, compared to our previous projection of approximately $200 million. In light of the large textile facility in Mexico, which we acquired as part of the Alstyle acquisition, we believe we can add the required capacity to support growth with lower CapEx.

At the time of acquiring Alstyle, the facility in Mexico was running at about 1/3 of its potential capacity. We are currently increasing capacity utilization at this facility and we have the capability for significant further capacity expansion at the facility, which will be dedicated to basics textile production.

With this increased flexibility, we're proceeding with the development of the Rio Nancy Six facility, however start of operations at the facility is now targeted to begin in a second quarter of 2017. Overall, we continue to expect our capacity expansion plans to provide production capacity to support up to $1 billion in an incremental revenue over the next three to five years.

So just to wrap up, while current market conditions are not what we would like them to be, we believe we are making the appropriate adjustments in our business into our 2016 projections. Further, we are pleased with our strategy is unfolding.

Gildan market share penetration retail is building momentum and we feel we are well-positioned to achieve strong Branded Apparel sales growth in a second half of the year. In Printwear, we are continuing to drive further market share penetration in the faster growing product segments and in international markets.

We are executing on our capacity expansion plans in a more cost effective and efficient manner, to drive higher returns on incremental capital invested. And we are generating strong cash flow and using our balance sheet efficiently to support all of our capital allocation priorities.

Although we've now provided guidance for 2017, we believe the outlook for strong earnings growth remains promising. In 2017, we expect to benefit from volume growth in both operating segments and continued expansion of Branded Apparel operating margins.

In addition, the benefits of the acquisitions we have made this year, will start to flow-through as we execute on our integration plans and drive synergies. Lastly, we expect to continue to generate significant manufacturing cost savings from our capital investments in yarn spinning and other capital projects and benefit from the nonrecurrance of some of the headwinds we are managing through in the current year.

So in short, we continue to be excited about our outlook. This concludes our formal remarks today, I will now turn the call back over to Sophie.

Thank you, Rhod. Before we moved to the Q&A section, 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 second rounds of questions. Operator, we are now ready to take questions at this time.

(Operator Instructions)

And our first question comes from Sabahat Khan from RBC Capital Markets.

Thanks. Can you talk about where (inaudible) in the US basics channel in terms of your calling out lower fleece sales, how are the basic t-shirts doing and what's the overall outlook for the rest of year?

In Printwear, we basically -- the markets -- we've got pretty good POS or okay POS in general in the channel. Could be stronger, obviously, but what's really doing well for us, is all of our Fashion Basics, our Performance, our Comfort Colors, which are growing at the rate of 20% and our international business we've seen POS around 20% as well.

Where we see a little bit of negativity is in our larger national accounts area, where they service big retailers. That business, which is mostly Basic Products, is a little weaker than we anticipate. But overall we still have positive momentum in Printwear.

And as far as the fleece is concerned, what way -- typically would drive our fleece in Printwear, is that we have two big shipping periods and the second period of shipping is in Q3. Which we obtain orders pre-books for fleece in the second-quarter and based on those pre-books we -- obviously they did not come in as strong as we anticipated, so we are prudent.

We have the inventory to support more sales. We think that people got caught with inventory because of the weather last year but if it gets cold, we could see some of this coming back in Q4, which we have not anticipated in our guidance. But to be prudent based on what we see we've tapered our expectations in Q3.

Okay, thanks and on the acquisition that you announced this morning, can you talk about the margin profile of that business? And you got a manufacturing facility with that but is there opportunity to consolidate production with your prior Doris acquisition given it's a similar business line?

We haven't finalized all of our integration plans. The plant that they have in US is very small. It produces Made in USA product specifically for dedicate programs for one of their retailers.

The margin expectations are similar to, I think the overall stock environment. We think that this is a premium brand.

It gives us big benefit in terms of new products that we are not currently selling in terms of the no-show liners. They have a really great positioning in the wellness category, with the MediPeds which is growing quite rapidly. So overall, it is not a large acquisition, but it definitely fits like a glove for us in terms of allowing us to continue to have more growth and to lever what we have in terms of our products and our customer base.

And more importantly it is a sales base for growth for next year and we expect not only from Peds, but as well as from Alstyle $0.13 of accretion as we go forward. So we'll get good returns on investment capital for both these acquisitions.

Thank you.

And our next question comes from Mark Petrie from CIBC.

Good morning. I wonder if you could circle back and talk about the retail trends by channel and then an update on your outlook for new programs over the next 12 months?

Okay, great, like what Rhod said in his comments things are soft overall. We see worse conditions in department specialty channels, with a more promotional environment.

Masses is okay, but the thing is we are doing well. I think we are well-positioned. I think the most important thing to point out here is that our Gildan brand continues to perform very well and continuing to gain market share.

Our Underwear share at just under 9% and heading towards our target of 10%, we think we will be there pretty early in Q3. We've got a lot of momentum.

Our sales are strong and we are well-positioned. Our Socks basically, Gildan brand, has now become the number one brand in Men's Socks with 22% share. So, really what we are driving is our Gildan share.

The softness is everywhere. The thing is that it is not just one area of weakness basically or one brand, it is split out a little bit over everywhere. A little -- a lot of little things come up to be, where we've tapered our expectations a bit but I think we are very excited about our positioning and we are well-positioned. And as we go into 2017, I think we are well-positioned there as well.

If you look at the -- just starting off with the acquisitions that we have, the balance of sales on a full annualized basis will add about $130 million in sales revenue in 2017. The space gains from 2016 on an annualized basis will add another $70 million -- $60 million in Branded.

We will definitely get on negotiating new programs in our Branded category and we're not going to have the recurrence of the -- by vesting of the Private Label which affected us in 2016.

Our Printwear business will continue to grow next year and Fashion and all the international markets. We have a lot of cost savings coming in 2017, which is the bounce we committed to the market of the $100 million, which is approximately $30 million.

And another thing to be positive in 2017, we're seeing higher cost, input costs in terms of raw material, which would allow us to -- I would say that eventually we will see some less price pressure, let's say for example in both segments of our Underwear and Branded as we see higher input costs for us as well as the industry.

We definitely have ample capacity to support the additional growth with the expansion of and acquisition of Alstyle as well as (inaudible) coming on. And we will continue to use our balance sheet effectively and to acquire or look at other complementary acquisitions. All these together I think for 2017, we feel we are really well positioned to have a great year.

Okay, thanks that's helpful. And just a follow-up on your comment with regards to capacity. Can you give us a bit of an update in terms of what your expectations are in terms of ramping up volume throughput through the Mexico facility that came with Alstyle? And then what you expect run rate for Rio Nance VI by the end of 2017?

Let me put this in perspective for you, this Alstyle acquisition we think is a great opportunity for us. The fact is, is that the plant was running at 1/3 of its optimal capacity.

We've already, in the process of increasing capacity and by the end of the third quarter, the plant will be running at 50% greater capacity than the time that we purchased it and will be running at cost structure similar to our Honduras facility. So that's the first thing.

So everything that we originally had and planned for Rio Nance VI in terms of its ramp-up of capacity will be installed, that capacity will be installed already in the Mexico facility running at a cost structure that will support 2017. And it is going to come in without any negative manufacturing efficiencies because the plant is already running and being ramped up.

So that's a benefit for us in 2017. So we are still proceeding with Alstyle, sorry with Rio Nance VI. But it is going to start in a second half or in a second quarter of 2016 and it is going to support as we go forward really in 2018. That's the way to look at it.

We have capacity -- in the Rio Nancy VI for 2018, but we also can continue to grow our Mexican facility, so capacity is just not an issue for us. The other thing is, is that we are also prudent in terms of managing our cost -- our capital structure and with the increase in capacity, it is short-term coming in at a lower cost base. And ultimately, the most important thing I think from the markets perspective is, is that we are still increasing our capacity and have available capacity to support over $1 billion in sales with excluding the Costa Rica opportunity that we will have as we look forward to Costa Rica.

So there are no issues with capacity as we go forward. For us, our focus is going to be to continue driving top-line sales and our overall strategy.

Okay, that's very helpful. Thank you.

And our next question comes from David Hartley from Credit Suisse.

Thanks for taking my question. I had a question on sales placement. Could you give us a little bit more color on linear footage and things of that nature, wells and drops in-store and what you see it going to, or where it is at now?

I really don't want to get into specifics but I would say to you is that the big factor in terms of driving our Underwear as well as our Socks share is typically better placements with our retailers.

That was big push for us in terms of 2016 is to make sure that we've got better placement amongst our retailers which is really driving better placement and more shelf space obviously. But the placement, combined with the shelf space, is what's driving our success in both Underwear and Socks.

I think we are well-positioned. Like we said earlier, we've got new programs this year with $130 million in the beginning of the year, $70 million flowing through this year, $60 million going into next year. So everything is intact.

With the only caveat is, that we're seeing just broader overall weakness I would say, in the particularly in the Department Store and Specialty Channels but things are in place as we laid out in the beginning of year.

Okay, thanks and on the Gold Toe Brand, we haven't talked about this I think it was even (inaudible) at all, you talked a little bit about some of the metrics there in terms of sales. And I'm noticing a lot more Gildan brand placement as you referenced earlier, are you transitioning any of the Gold Toe brand into Gildan? Has there been changes in placement there?

No. Look, we are still number one brand in Gold Toe, so we've got a great positioning. But a number one brand in the market, which is probably the softest segment let's say for example of our portfolio, so we're still doing very well.

We are growing the brand. We are growing the product in terms of its distribution, so we think that we are well-positioned. The only headwind there a little bit, is the overall environment in that category.

Are you still looking at extending that brand. I believe you had some performance wear, GT, T-shirts, Underwear. How is that going and where are you at with that?

It is going okay. We're continuing to lever the success and heritage of a brand. It is got an 80 year heritage. It is well received and we've maintaining our positioning and so it continuing to do well for us.

It is not going to have the growth rate as Gildan. Really when you look at the opportunity for us is that our Gildan brand strategy is going to grow at sequentially way faster. It is in the mass, it's in a price point category, so that's why -- that's where our growth engine will be in terms of really driving top-line sales I would say. You really want to look at it that way.

Just for clarity that Gildan brand, does that include the Gold Toe brand in terms of that market share you mentioned?

No. That's strictly Gildan brand. 22% in the Men's category.

What would Gold Toe represent in terms of market share then?

Gold Toe is 22%. But in the department and national chain but in overall Gold Toe, I don't know. I will have to check it. We will get back to on that.

Okay, thanks.

And our next question comes from Martin Landry from GMP Securities.

Good morning. I was wondering if you could talk about your online sales, give us some color on the trends there? And also if you can comment also on your online partners like Amazon, how that's playing out for you guys?

It is definitely a growth opportunity for us. Online represents about 5% of our revenues in Branded today. And is growing pretty quickly.

So we are putting a lot of emphasis, resources and money behind making sure that we continue to grow with all of our retail partners, online as well as developing our own platform. It's something that's definitely a growth, it is coming off a small base, but it is definitely a growth opportunity for us.

That 5%, does that include Amazon?

Yes, that's Amazon, all of our retailer online.

Okay. And just on the Alstyle acquisition, I believe you mentioned, that Mexico has a free trade access to South America. Is there an intention for you to penetrate that region down the road? Also if you can touch a little bit about accessing the mass retailers in Mexico?

What we said in our last call is that the real focus for Alstyle is a couple of things. One, is that presence in the existing Printwear market is primary located in the West Coast, which is an area where we think we can still grow and gives us a base of opportunity in a segment even within Printwear that we have very little penetration. That's the first thing.

Second thing is, is that with the supply-chain from Mexico, now we can incorporate all the products that we have in our US product line into the Mexican market will allow us to expand Mexico because we are limited on our product availability to go into the Mexican market for Printwear.

Those same products can be sold in those South American markets that have now opened up that have free trade or trade agreements with Mexico. But also gives us the ability to supply even some of these products into Canada, believe it or not, that are NAFTA friendly, to allow screen printers in Canada to support product on both sides of the border.

Then the last piece is, is that it gives us an opportunity to support retail initiatives in Mexico. We have zero sales in the Mexican market in terms of retail and that's something that we'll definitely look into as we go forward and we build into capacity to support our future growth.

It is really strategic in terms of driving top-line sales but at the same time what we really excited about it the same time, is the cost structure and the available capacity and the cost of that capacity coming online, in terms of what we are doing in the manufacturing. All of this together, this has been really great acquisition for us. And we are really excited about the future.

Okay. Thank you.

And our next question comes from Kenric Tyghe from Raymond James.

Thank you, good morning. Glenn, I wanted to touch on the pricing dynamic given the recent move in cotton.

Would it be fair to say that the recent move in cotton is at a minimum supportive of current prices and if it were to stick looking to 2017 it should be -- not just supportive of current prices but perhaps supportive of price increases versus the price decreases that we've seen over the last couple of quarters? Is that a reasonable characterization?

I would say it's -- I would characterize it as, if cotton stays at these prices, definitely it would be supportive of price increases. To put things in perspective, every $0.01 per pound is $0.02 of EPS right? So cotton has moved from $0.60 to $0.73, $0.74 a pound, so it is a quite a big move.

It is substantial and the other part of it is that it is not just the price of cotton it's also the physical cost of buying it, which has increased as well. Definitely if cotton remains at these levels, they will be price pressure in 2017.

Glenn you are well-positioned in terms of those movements and necessarily, you've always commented on the balance within that market. So fair to assume that looking to that, that would provide some relief across your businesses? That's a reasonable assumption as well?

Yes.

Great, I will leave it there. Thanks very much.

And our next question comes from Stephen MacLeod from BMO Capital Markets.

Thank you, good morning. I wanted to focus in a little bit on the Printwear business.

You mentioned some inventory destocking from consolidation of customers. Would you say that most of that is behind you or do still see some of that continuing in the back half of year?

I would say that's, most of it is behind us. There might be a little bit more in this quarter but most of its behind us.

Okay. Can you talk a little bit about what the pricing dynamic, what you are seeing in the Printwear business domestically?

Pricing is pretty stable. It is probably more stable than it has been in a long time. It is just a question of not gang buster POS but I think the areas that are doing well are the Fashion segment of our market, our Fashion Basics, Comfort Colors, Performance and our International business. Particularly Europe to be honest with you, is performing very well. So that's -- I think that's the overall dynamics but pricing is very stable.

Okay, that's great, thank you. Just finally, can you give a little bit of color around you expect to see terms of the cadence of EPS in the back half of year? Are you still looking for Q4 to be the strongest growth period as those new retail programs come online?

Yes, Stephan it's Rhod. That's the way we are seeing the Q3, Q4 unfold, so as we talked about -- we've got Glenn and my comments, we talked about fleece, what we are seeing there and we know that that will impact Q3, with the softness in the retail side. So when you look at the general cadence of the way that the back half will unfold, we will see the strength more back end in the fourth quarter.

Okay. That's great, thank you.

And our next question comes from Derek Dley from Canaccord Genuity.

Yes. I was wondering, as it relates to the acquisition you announced this morning, are there any new retail relationships that you may be getting here from Peds? Whether it be some cross-selling opportunity. We have seen you guys do this in the past, with Doris and some of the other and Gold Toe for example. Any potential for that going forward?

Yes, exactly. I think there's two potentials. One is that they don't have the reach or didn't have the reach of all the existing Gildan customers that we are currently selling to. So we've actually think there's opportunity to expand their brand particularly in eCommerce area and other channels that we can move the brand is well-positioned for.

At the same time, they're big footwear business and footwear channel, which we don't have a lot of penetration. And this third thing I think it for us is, there's definitely room for category expansion here in terms of driving their brands and putting some other product categories that we currently manufacture. So we think there is a good synergies from the top-line side and to continue the growth of the brand and will help the overall portfolio of everything that Gildan is selling to its customers.

Okay. That's helpful. Touching on the inventory destocking. We've seen this now for well over a year, should we be expecting this to relent at some point or can you explain what the dynamics are there?

The destocking you were talking in the Printwear channel?

Yes.

Some of that has to do with distributor consolidation of warehouses. And that, like I said in my last comment will subside -- basically, most of it's gone but there will be some of it in Q3, which we have now forecasted.

Perfect, thank you very much.

And our next question comes from Vishal Shreedhar from National Bank.

Hi, thanks for taking my questions. On the buyback here, you indicated that you amended the buyback higher. I wanted to get your thoughts on how you buy back stock, for example is valuation a consideration? Is outlook a consideration? Or is it more of an automatic program?

Vishal, think when we look at buying back stock, what we're doing is effectively working within our broader leverage target that we set one to two times and we're also focusing on shareholder returns, or ultimately driving shareholder value.

It is the combination of those two things that is effectively driving the actions that we are taking on the buyback front. And we -- being active with the first part of our buyback and as we go forward we'll use those guidelines really to drive us as we think about buying back stock.

Okay, thanks for that. And on the US Printwear segment and actually the broader Branded segment as well relating to cotton. As you cycle through your current cotton that you've purchased in advance, and you look towards raising prices, does the current soft backdrop restrict your ability to raise prices to some degree? Any color you can provide on that?

No, I would say that typically prices go up before the cost gets passed through. And typically prices go down before like which as you've seen the last cycle as cotton has come down.

To be honest with you we won't wait until -- if cotton stays at these levels we would not wait for all of our cotton to flush through basically before we raise prices. That's maybe a different way of looking at it.

Okay and does your -- the amount of capacity you have coming onstream also give you pause on raising prices? Given that you want to drive the units through those facilities?

I think we want to drive units through our facilities because we think that we're going to sell and gain more market share in the products that we are selling. So we are already the price leader in every single category in which Gildan sells.

Price is really not a factor, it is more function of making sure we have capacity to support the opportunity. I think that has been our Achilles' heel since day one.

This is probably going to a changing point because we're finally going to have ample capacity with all these -- with the Alstyle acquisition, and the ramp up of Rio Nancy VI, really to take advantage of -- to increase our market share. We don't need to do it with price because if you go and do any research in retail or in Printwear, we are the price leader basically as we speak today.

And not only are we the price leader but we're the value leader. Constantly selling the best quality product at the best price. And we are also going to use a lot of this capacity for new product opportunities. We are expanding in our Fashion Basics. We're going to be expanding in our Performance.

One of the big initiatives in our CapEx for 2016 is we're expanding the capacity of our Comfort Colors availability, which has been hindering our sales there. So we are continuing to invest in product technology and we will see how it goes in 2017.

Okay and lastly my understanding is that there's certain contract periods to -- when you negotiate with these large retailers, how many of these periods are there in a year and when is the next one coming up?

Typically is there's two periods in the year but I would say that the cotton impact in retail is not as significant as it is in the Printwear business because when you look at a sock, how much cotton does it take to make a sock? Not a lot, right? And underwear basically, bottoms, is also not a big huge driver of material.

When you get into the Printwear business, you have basically a larger consumption of overall cotton and in that segment, prices can go up anytime we want. In fact, our customers enjoy price increases believe it or not.

Thanks for your comments.

And our next question comes Andrew Burns from D.A. Davidson.

Thanks, good morning. Looking at the softness in the fleece wear pre-order this season, could you give a little more color in terms of the underlying dynamics there?

Does it reflect the current inventory levels on hand in your opinion. Or distributors tempering their sell-through outlooks or anything else from a competitive or product standpoint to callout there?

No. I would say that -- look at what happened was, is that in the end of Q4 last year, inventories in fleece in general were higher because of the warm weather. That inventory got worked through in Q1 basically, so that affected some of our mix in Q1 in terms of our mix and our volumes in Q1, which we reflected in our guidance in the beginning of the year.

And what's happened is, that as we go through into -- so the inventories where in good shape and as we go through and looking into 2017, the first wave of orders were on line with expectations and the second big wave of orders for fleece, which usually sells in Q3, were below expectations.

So we think that POS is okay in fleece like it is in general. So there's no reason for the pre-books to be lower than our POS, but I think we think that customers are basically being careful because they don't want to go into the same predicament as carrying that inventory again and buying more than they need.

Depending and now that the weather breaks and if we have a good, cold fall, we probably will make up a lot of that business in Q4, which we haven't included in our guidance but we can only include what we see and we just want to be prudent and that's where we stand today.

We have the inventory available to support more sales. The question is, what will happen and we will see what happens as this thing unfolds.

Thanks and just a follow-up on the Peds acquisition, you combining it with stores you have a broad range of brands there. Do you see any potential consolidation of brand strategies? Then also looking past the clear benefits from category and distribution expansion opportunities, could you refresh our view on legwear and hosiery why that's attractive to Gildan? Whether it is organic growth, manufacturing leadership, anything to call out there?

Just to give you an example, they sell sheer into the mass in the United States but they don't actually make that sheer, they source it. So that's an area where we're going we are going to be able to manufacture the products at a better quality, look at opportunities for us to grow.

The products that they -- a lot of the products that is currently being sold by Peds is sourced so those -- that's another area of opportunity for us as we integrate some of these products into our manufacturing. At the same time, we think that the brand has legs in terms of category expansion, within the market they're currently selling.

There's a lot of opportunity here and it fits well into our portfolio. It doesn't conflict with any other Gildan brand. We think we are well-positioned that's why we bought the company, and it fits very easily into our organization.

Thanks and good luck.

And our next question comes from Jim Duffy from Stifel.

Thanks, good morning. Rhod, question for you with the lower than planned volumes, is there a utilization hit to absorb in the margin or do you expect inventory to build as the year progresses?

I think one of the stories that, I think we feel very good about for this year is that when you look at our margins, if you look at our operating margins, we came into the year saying that Printwear operating margins would be basically stable and in line with last year. And we saw progression in Branded. And we still very much see that as the year unfolds, Jim.

So I think when you look overall from a margin perspective on gross margin, I think is it very good story for us. I think we are very comfortable with how the margin story is unfolding.

Also one of the things I think just to add to that is, we're benefiting from our cost reductions and which are continuing to benefit the margins as well.

Okay. Question on the Branded side, Glenn mentioned the broader overall weakness in the channels, you've referenced the NPD market share data. What is that data say about volumes for the category and what's the data retailer inventory positions in some of those more troubled channels?

The department and specialty and national chains, the volumes are down. In mass, the categories are either flat or slightly up I would say. That's maybe a good way to look at it.

Okay. Then last one if I may, how much of this $65 million Private Label headwind for the year has been absorbed through the second-quarter and how much is remaining for the second half and how do you see that floating across quarter?

Jim, I think we would say 2/3 of it as been absorbed in the first half and the remaining 1/3 will effectively flow-through the back half, half-and-half between Q3 and Q4.

Thank you.

And our next question comes from Keith Howlett from Desjardins Securities.

Yes, I had a question about the promotional products industry. I wonder if you can speak to whether they are equal buyers of Fashion Basics and Performance wear or whether there's a channel shift as your sales move towards the Fashion Basics and Performance?

The overall market basically, is broken up into three categories. We call it by Basics, Fashion Basics and Performance really is how we look at it.

Obviously the Basic segment is the largest and fastest-growing today in the market is, what would say the Fashion Basics and that's the part of our business which is going the fastest as well within the Printwear channel. But it is really all going to the same end user let's say for example, or the same channel as we defined. It still us growing but it's growing on a smaller basis basically relative to the Basics.

And is there a price uplift per unit so to speak? I presume --

That is a good point. These items sell for higher price points then you would see in Basic product apparel.

Just another question on the market. In Asia, is the promotional products industry similar in its structure say in China? Or is it a different usage of the product in China than in the US?

No. It is exactly the same. I think that every one of the markets in which we sell our products through the Printwear channel, are relatively the same in scope.

The only difference is, is that the scale of some of the markets are not like the US, you know what I mean? And that's -- maybe a little bit more fragmented or maybe not developed as much.

Europe for example is more developed but still fragmented and China is just in the development stage of growth really. But at the end of the day, if you look at what people use T-shirts for, souvenir, travel, tourism, sports, corporate events. So these things happen everywhere in the world.

So that's why it's really relatively the same everywhere. And just a function of

Thank you.

And our next question comes from Anthony Zicha from Scotiabank.

Glenn, when can we expect Gildan to enter the retail activewear market? And how big of that is an opportunity for Gildan?

Well it's obviously a big opportunity for us. When I can't tell you today. But our focus is we've got pretty good business already in activewear.

We have a substantial amount of customers, particularly in the craft channel and as well is in a lot of the specialty stores, so we are continuing to plug away. We have also big activewear business in some of the dollar chains, so we have substantial size of activewear.

We think it can grow. It is the roots of the Company and it could be meaningful as we go forward in the future. But it still has a lot of growth opportunity for us.

We don't have the same type of share as we do in socks and objectively is we want to have the same share in underwear as we continue to grow and as well as in activewear.

Okay and Rhodri, when we look earnings accretion stemming from acquisitions, you mentioned that an exit run rate of $0.13 in EPS pick up. How should we look at the earnings accretion like for FY17 and 2018? Is it something like a 1/3, 2/3 ratio backloaded for 2018? And what are some of the key assumptions behind those numbers? Thanks.

Yes, I think if you look at the accretion as we said we will see in an exit run rate from 2018 of $0.13. As that you will see that coming through in 2017 and as we move into 2018.

I would say that probably we are looking at something like 1/3 half in 2017 then we move up in 2018. I think as far as the drivers as Glenn said, I think we feel very good about these acquisitions. We feel very good about integrating Peds very definitely, it's straightforward.

It should fit very nicely into our organization and we look at Alstyle. Alstyle, we continue to be very excited about because of all of the different positives from that transaction. Not only on the front end but on the manufacturing side.

We talked earlier about sales into Latin America, Southern America, and Mexico, and so there's all these drivers that will be coming through as we drive that EPS accretion.

One last point as the accretion that we've put forward is, we've tapered base it on the sales side. So for example, like in Alstyle breaking into Mexico retail, going into some of these other markets, we do not put that into our modeling in terms of the accretion. That would be obviously upside to anything that we would get in the future.

Okay, thank you gentlemen.

And our next question comes from David Glick from Buckingham Research.

Thank you. Just had a follow-up on your Branded apparel growth in a second half. Can you parse out for us, it looks like it is about hit your plan about $90 million increase versus last year. Could you walk us through how much of that increase is driven by new programs, by the acquisition, and by organic growth?

I guess there is may be a small slightly offsetting in Private Label impact. But if you could help us understand really what the underlying core growth assumptions are that would be helpful, thanks.

I'll start off and Rhod will finish though, so what we said at the beginning of year is a new program wins for 2016 were roughly about $130 million. $70 million is flowing through in the full year of 2016. And a lot of that's related in the back half.

We also have annual wins from 2015 that flow-through for the full-year, more evenly split of around $60 million, from 2015. And then we had the impact of the negative Private Label of about $65 million. Then maybe just look at it and say that we tapered our sales expectations somewhat the $10 million that we were a little short in Q2. And we had probably another $20 million in Q3 for both $30 million and that's maybe looking at it. Then the acquisition (multiple speakers) probably added another $30 million on top of that.

Thank you very much, appreciate that.

And our next question comes from Brian Morrison from TD Securities.

Good morning, I just had a housekeeping for Rhod. In terms of the receivable factoring that was a nice benefit to the free cash flow this quarter, I see in the notes it expires within a year. I want to get an idea how active you plan on being with this program over this timeframe and getting and idea of additional cash availability you may have with any future leverage targets from this?

Yes Brian, I wouldn't focus too much on the expiry date of the program. I think when you think about receivables, what we will be looking at really is making sure that we are very efficient and the way that we manage receivables.

And the receivables that we are selling, as I said in my comments, are high quality receivables, makes a lot more sense for, basically to -- for us not to be carrying those receivables because of the quality.

And so we put in place $100 million receivable program. We expect that to be in place on an ongoing basis going forward and we are going to really focus on ensuring that we are very efficient as to what is on our balance sheet, what we do carry and what we shouldn't. And high quality receivables, like the types of receivables that we've sold, we believe our best kept off our balance sheet.

So this isn't going to be a couple $100 million over the course of year?

As I said, we put in place a $100 million facility so think you can use that as guidance.

Thank you.

And our next question comes from Neil Linsdell from Industrial Alliance.

Thanks. Turning to the International markets can you talk about the regions or the countries specifically where you are seeing the best traction? Can you specifically talk about the different product lines? I think there's a lot of SKUs that you could push into those markets that are not currently exposed there.

Yes, exactly. I would say that the overall market in terms of International and Printwear is running plus 20%, which is really what we expected. And it is really performing equally as good and all of the markets. That's really -- each market doesn't necessarily -- is not as mature as another so we have more SKUs in Europe than we do in China.

And as we continue to penetrate these markets we have the opportunity to continue adding product like we did this year and that's what keeps driving our top-line sales. A combination of taking market share as well as introduction and developing our brands within these channels.

We introduced Comfort Colors for example, in the UK this year. We didn't roll it out everywhere because we did not have capacity to do it. But that's a good example of how we are continuing to grow our overall International volume. We have a lot of runway here still its just a question of development in certain cases as well. We are very excited -- (multiple speakers)

Are there a lot of partnerships you are still looking to make with the distributors to be able to get that penetration?

Depends, like in Europe we really have full distribution so it is just question of adding product categories in those markets. In China we are continuing to grow. It's really in its beginning stages. It's actually our third-largest market to date.

But there is definitely room for growth. It is just a huge market right? So we have limited distribution and we have limited product offering, and it's our third largest market, so we'll just continue to evaluate and it will continue to evolve as we go forward.

Okay and then just tied into that could you talk about the expansion that you previously indicated that you are looking at in Bangladesh?

We expanded in Bangladesh. That's going well.

It is part of our CapEx for this year. We are writing pretty good amounts of capacity there and which will really support mainly our Asian business and some of our European business. But primarily our first focus for Bangladesh is to support Asia and then Europe will support the balance of that capacity. It will either come into Europe, or we'll service Europe from Honduras, we have a choice there. So it is going well and it is on plan.

Okay, thank you.

Thank you. This concludes all the time we have for today. I'll now turn the call back to Sophie Argiriou for concluding remarks.

Once again, thank you all for joining us and will forward to speaking to you soon. Thank you and have a great day.

Thank you ladies and gentlemen. This concludes today's call. Thank you for participating and you may now disconnect.