漢佰 (HBI) 2009 Q1 法說會逐字稿

Good afternoon. I will be your conference operator today. At this time, I would like to welcome everyone to the Hanesbrands first quarter 2009 conference call. After the speaker's remarks, there will be a question-and-answer session. (Operator Instructions). Thank you. Mr. Brian Lantz, you may begin your conference.

Good afternoon, everyone, and welcome the Hanesbrands quarterly investor conference call and webcast. We are pleased to be here today to provide an update on our progress after the first quarter of 2009. Hopefully everyone has had a chance to review the news release we issued earlier today. That release and the audio replay of the webcast of this call can be found in the investor section of our www.hanesbrands.com website.

I want to remind everyone that we may make forward-looking statements on the call today, either in our prepared remarks or in the associated question-and-answer session. These statements are based on current expectations and are subject to certain risks and uncertainties that may cause actual results to differ materially. These risks are detailed in our various filings with the SEC such as our most recent forms 10-K, 10-Q as well as our news releases and other communications. The Company does not undertake to update or revise any forward-looking statements which speak only to the time at which they are made.

With me on the call today are Rich Noll, our Chairman and Chief Executive Officer, and Lee Wyatt, our Chief Financial Officer. Rich will give a summary of our business performance and trends for the quarter. Lee will then provide further detail on various aspects of our financial performance. Following our prepared remarks we have allowed ample time to address any questions that you may have. Now I will turn the call over to Rich.

Thank you, Brian.

Let me summarize. Q1 played out as expected with only a few minor surprises. Q2 looks as if both the sales and operating profit decline rates will improve. And retailers, while still experiencing soft retail sell through are beginning to loosen inventory constraints. This may be a false bottom -- a situation for which we are on guard -- or it may be a turning point. In either case I am comfortable with our overall situation and our ability to operate effectively during this recession.

Overall we are tracking to our expectations for both Q1 and for our full-year with the trends and goals that we laid out in February for 2009 still intact. Specifically, for Q1, sales were slightly below our expectations. Sales results for both Innerwear and Outerwear performed as expected. We did however have a small sales miss in Hosiery and in International, both being impacted by the recession more than we originally thought. Profits were slightly ahead of our expectations due to the tight SG&A expense control. Sales declined 13%, operating profits declined 57%, and earnings per share excluding our restructuring actions was $0.03.

Specifically by segment, we saw a better trend in Innerwear. Sales declined 6% versus Q4's 11% decline. We continue to struggle in average figure bras but male underwear was very strong. As expected Outerwear sales declined 21% versus the decline of 8% in Q4. However, based on advanced booked sales, we expect Outerwear sales trends to improve to declines in the mid single digits or better in Q3. Hosiery has declined 20% for two quarters in a row as both consumers and retailers have significantly pulled back purchases of this already declining category. And in International, the recession is now cascading to the rest of the world especially impacting us in Europe.

For the remainder of the year we have secured or are in the process of securing an incremental $75 million to $90 million of promotions, and new product price compared to last year. These initiatives should go a long way to help us insure that we mitigate revenue declines due to the recession. Additionally, we are in the process of finalizing an agreement with Wal-Mart to significantly expand our Just My Size brand in casual wear. This initiative alone will go a long way in turning around in the Outerwear business next year.

In Q1 we also continue to reap the benefits of cost reduction, as SG&A was down 12%. In addition to our previously announced cuts, we have identified another $20 million to $30 million of reductions, if needed, due to unexpected revenue declines. Given all of this, we may well see improvements in the decline rates in Q2, with total sales potentially declining single digits and operating profits declining substantially less than Q1. For the full year, all of the sales and financial trends that we depicted in February still remain intact. Additionally we are tracking to our goal of reducing inventories $150 million this year, and based on our expectations for sales and our comfort with our inventory situation, we have finalized October 12th as the date for our start-up of our Nanjing facility. Additionally, we remain firmly committed to paying down at least $300 million of debt in 2009.

We are nearing our third anniversary of our spend, and by the end of this year, we will have paid down over $700 million of debt, spent $450 million recapitalizing our supply chain in lower cost countries, and spent an incremental $150 million strengthening our brands, all despite operating in the worst recession in a generation. We have made great progress. Just for one simple reason -- during these difficult times everyone in our organization is working more closely together, much more as a team and much more proactively than before. Through their collective efforts we will eventually overcome this recession and emerge as an even stronger competitor.

Now I'd like to turn the call over to Lee Wyatt who will review our financial performance.

Thank you, Rich.

While the economic environment remained difficult in the first quarter, our results were as we expected. And they confirm our modeling assumptions for the full year as we presented at our February investor day. As I review our results for the first quarter, I will reconfirm goals or clarify any implications for the full year.

Sales for the first quarter of $858 million decreased 13% from the same quarter last year. This decrease was within our previously announced expectations. At our February investor day we outlined two potential scenarios to help investors model our revenues for 2009. One scenario resulted in annual unit volume declines of 8% with annual sales declines of around 5%. The difference being the price increase. The second scenario resulted in unit volume declines of 11%, and due to the price increase, annual sales declines of around 8%. Based on actual first quarter sales, both of these scenarios remain possible, depending on the fourth quarter retail environment.

Restructuring and related charges were $24 million. These first quarter charges represent more than 50% of the expected charges over the year. These charges were incurred primarily as a result of plant closures and consolidation actions. Total restructuring charges since the spinoff is now $234 million compared to the $250 million projected over time. Approximately 50% of the charges have been noncash. The majority of my remaining comments will focus on our results excluding restructuring and other actions.

The gross margin rate of 30.7% for the first quarter was within 10 basis points of our first quarter plan. The first quarter rate was below our expected annual rate due to higher commodity costs and lower margins in the Outerwear segment. Future quarters should benefit from significantly lower commodity costs and improvement in the Outerwear segment margins. Our goal to increase gross margins by 10 basis points to 100 basis points for the full year remains approximate.

We currently have visibility to the impact of cotton costs on profit for the remainder of 2009. While cotton costs had a negative $15 million impact in the first quarter, the second quarter should reflect a cost of $0.49 per pound, approximately $9 million positive impact. The third quarter should also reflect a cost of $0.49 per pound, approximately $12 million positive impact. The fourth quarter should reflect a cost of $0.46 per pound, approximately $18 million positive impact.

Turning to SG&A, first quarter SG&A expenses were $223 million, $31 million lower than last year. The quarter reflected tight cost control including $15 million of lower media, $13 million lower IT expenses, and $11 million other SG&A reductions offsetting $8 million higher pension expense. Pension expense for the full year is expected to be $21 million. These median IT reductions were part of the $40 million in first half discretionary cuts that we discussed at our February investor day. Rich noted additional SG&A actions that could reduce costs by $20 million to $30 million over the next year if necessary.

Operating profit decreased to $41 million. Interest expense for the first quarter was $37 million. We anticipate that interest expense for 2009 will increase approximately $13 million above 2008 to around $168 million. Our income tax rate in the first quarter was 22%. We continue to expect our income tax rate for 2009 to fall within the 22% to 25% previously projected range. And earnings per share were $0.03 for the quarter.

Turning to the balance sheet, inventories were $1.3 billion, and within the expected range. Our goal is to reduce inventories by $150 million by year end. During the first quarter we successfully amended our first-lien credit agreement and our accounts receivable securitization facility. These amendments should provide adequate cushion during the recession.

We are in compliance with all debt covenants. We ended the first quarter with $76 million of EBITDA cushion under the leverage covenant. We anticipate a reasonable level of cushion under the range of sales scenarios previously discussed. Debt at April 4th was $2.27 billion. We have fixed our cap rates on 79% of our debt for 2009. Our goal continues to be to pay down at least $300 million of debt in 2009.

Our cash flow statement reflects $58 million net cash used in operations for the quarter, consistent with normal seasonal business trends. And net capital expenditures were $55 million in the quarter which represents almost 50% of planned expenditures for the full year.

In summary, the first quarter results were as we expected. Sales declined at a rate within our projected range. We executed our cost savings initiatives, and aggressively managed SG&A expense while identifying additional potential savings of $20 million to $30 million. On the balance sheet, we held inventories under plan and successfully executed an amendment to our credit agreement that provides cushion to meet all covenants under a wide range of economic conditions. The first quarter results confirm to us that our expectations, planning assumptions, and goals for the full year of 2009 remain reasonable and appropriate. I will now turn the call back to Brian.

Thank, Lee. That concludes the recap of our performance for the first quarter of 2009. We will now begin taking your questions and we will continue as time allows. Since there's a number of you who may like to ask a question I will ask you limit your initial questions to two or three and then reenter the queue to ask additional questions.

(Operator Instructions). Your first question comes from Eric Tracy from BB&T Capital Markets. Your line is now open.

Hi, Eric. How are you doing?

All right, how are you guys?

Good.

Congrats on a nice quarter. Maybe if we could just dig into it Rich, the mentioning most interesting on a go forward basis, the retailers loosening of their inventory positions, maybe talk a little more on that. Obviously seeing some level of stabilization from a destocking perspective.

Yes, I'd be happy to. First of all I want to start with sell through.

The trends we saw in sell through in Q4 continued in Q1 so there hasn't been a change there. However, retailers were extremely conservative in how they pulled down inventories in Q4. They also tended to do their normal year-end realignment in Q1 as well.

I think what a few of them have started to realize and have begun talking to us about is that in areas where there is very little markdown risk -- which could be mainly our categories, mainly our Innerwear categories -- they believe they may have cut back too far. And they have looking at and some of them already have started to place orders to bring their inventories up a little bit from where they were. We see that as a positive sign.

Absolutely. Okay. And then just in terms of the incremental promotional and new product, the $75 million to $90 million, how we should think about that relative to the pricing increases implemented?

Well, we talked about when we were implementing the price increase -- that we would take a portion of the money and hold it back to use it to drive incremental promotions, and we have been doing that. We are right on track with our net benefits of pricing of $100 million to $125 million this year. But the money that we did hold back is being very effective in helping us and our retail partners come up with pretty darn compelling offers for the back to school period as well as holiday period.

And this is a time where retailers want to show great value in offerings, and so we are going to be able to come out pretty strong this summer with those types of offerings. I look at this as it was all part of our plan as we were coming into this year figuring out how to navigate this tough environment. So it's the thing that's going to help offset some of the impacts of the recession but not fully offset the sales impact.

But so no push back to date from retailers from the pricing perspective?

The price increase is in. It stuck. For the most part, retailers have taken their retail prices up beginning -- actually some of them as early as January and February. Those that have are reaping the benefits of their average unit ring go up for our categories. And as we talked about, they in some categories they went up across the board. If we -- or regardless of whether competition followed -- and those prices are sticking. In some other area it is a little bit more competitive and we are addressing those on a case by case basis and that's one of the reasons we set aside a couple of funds to target strong promotions in those areas where it might be a little bit more competitive than we anticipated.

Okay. Maybe lastly -- talk a little bit about the inventory cadence still to plan down $150 million this year but up slightly I think 6% on a year-over-year basis less than that sequentially but just talk about the inventory particularly as it relates to what I believe is a slightly accelerated ramp of the Nanjing facility. You originally stated -- planning of Q3 but then maybe were thinking about just based on the environment pushing it to early 2010. So maybe just talk about that in terms of how we shall think about the inventory.

We feel real good with the plans we have got in place to draw down inventories $150 million this year. That's our goal.

Pretty much as Gerald talked about in our February investor day, that our current production run rate is about 15% lower than our annualized demand needs even in this -- even accounting for the recession. So we are fairly confident that our inventories will start to drop quite substantially over the next couple of quarters.

In terms of Nanjing, we had talked about we were delaying it to at least the fourth quarter or possible as the first quarter of 2010. So you remember correctly. We are leaving a little bit of flexibility in there in case we saw a further deterioration of the consumer environment. We are not seeing that, POS tends to be stable right now, and so we have solidified the date to the beginning of October. I think it is October 12th I talked about in my prepared remarks.

Great. Thanks, guys. Best of luck.

Thanks.

Your next question comes from from Scott Krasik from CL King. Your line is now open.

Hey Scott, how are you doing?

Good. Thanks for taking my call. The first question -- Lee can you run through -- I know there's more breathing room and -- but it is still a question -- can you talk about what the adjusted debt number would be -- an EBITDA number at the end of Q1 on a trailing basis?

Sure. We completed the amendment in the first quarter, we originally had covenant requirements in the first quarter of 3.75, moving down 25 basis points in each quarter of the year, to 3.0 by the end of the year. The amended covenants in the first quarter is 4.25 moving to 4.20 in the second quarter to 3.95 in the third and 3.6 in the fourth. We had $76 million of cushion at the end of the first quarter in our covenant calculation. It was a actually 3.7 calculation.

And, what was that adjusted EBITDA number?

The covenant EBITDA was $581 million. The reported EBITDA was $355 million. The add-backs were 226 leading to 581. And then just for your information, the covenant debt was $2.149 billion.

Perfect. Thank you. That's helpful.

Rich, International certainly, certainly reversed itself here. How much of the decrease was currency-related? And maybe talk about -- is it weakness in, is it that destocking and weakness in the basics based on retailers just tightening inventories or is it just Outerwear? Talk about that, please.

Lee, if you can talk about the currency and I will talk more generally about the drivers.

Yes, International sales in the first quarter were down $21 million, or 21% I'm sorry. And if you exclude FX, they were down about 10%.

Okay.

So about half of the decline roughly was FX related.

And Scott, the bulk of our sales miss ended up in Europe. And in Europe we have an image wear business. It is where we sell to the wholesalers who then sell to screen printers. That's the segment of our business -- that's less than 9% of our total business -- but it is a segment of our business more prone to recessions. We actually talked about that last October and we have seen it play out here in the United States in this screen print channel. And that's really what is getting us in Europe. So as that channel is really started to ratchet back we are feeling it disproportionately in our European business.

So, generally retailer activity fell through -- it's not as severe as what you are reporting.

Yes. In Europe, it's -- the entire business is through that wholesale printables channel. In Europe it's a little less than $100 million. The rest of it is more traditional retail business.

In Canada, Mexico, and in Asia, we are not seeing the same type of pull back as we are in the United States. Canada is feeling some impacts, Mexico we are actually doing quite well. We have been gaining share there. And Asia is feeling a little bit of the doldrums of the recession as well. But not to the same degree as the US.

Okay. Good. And then just lastly, some of these possible cost cut savings -- the $20 million to $30 million you talked about here, the possible $40 million to $50 million that you spoke about previously. How do we think about in term of you actually pulling the lever and taking those savings?

Well the $40 million to $50 million I talked about previously which was on our October call we have actually put in place. Those are the things that we're doing to actually allow us to offset the pension increase that we are facing in 2009 as well as to try to mitigate any of the deleveraging on the SG&A line that we are having to do.

And that came in a couple of buckets -- some of it was media reductions in the first half, IT reductions in the first half as well as some other things that we didn't specifically identify.

The $20 million to $30 million are things that we have gone through and identified that we could take further cuts and reductions if necessary. Not necessarily things that we want to do because we actually think that in a nonrecessionary environment we may need to be spending at that level. But they are things that we could do and we have already got plans in place if we need to to make those reductions if revenues fall an unexpected amount the rest of this year.

That makes sense. Lastly, Lee, what was the $3.9 million in other expenses this quarter?

Those were fees associated with the credit agreement amendment.

Okay. That's helpful. Thank, guys. Good luck.

Thanks, Scott.

(Operator Instructions). Our next question comes from Omar Saad from Credit Suisse. Your line is now open.

Hi, Omar.

Thanks, hi. Good afternoon.

Good afternoon.

In reading through your release and listening to some of your comments I must say, you sound -- there's definitely a tone of a sense of improvement or some inflection point tones coming out of a lot of the stuff you put in there. Wanted to get a better sense from you, Rich, what's giving you the confidence to put some of this stuff on paper?

Is it a sense for what's happening with the consumer themselves? Is it really your relationship with the retailers and how they're starting to think about their businesses and putting some more stock in the stores? Is there something happening in the women's intimate apparel business where that might be turning at the consumer level?

Help me understand the different pieces that have come together -- not necessary make you bullish on the environment -- but less negative and more optimistic.

Yes, and let me first talk about sell through and what leads me to those conclusions from that perspective. And then let me talk more specifically about some fundamental things in the business, all right?

First of all, in terms of sell through, we have a lot of information that we did -- that we didn't have three months ago -- and that is the sell through run rates are consistent with Q4. So that takes the prospect -- not that it can't happen -- but that we are not seeing further deterioration in the short term. That makes us just more comfortable that okay we have a handle on this and if that continues we've bottomed. Not necessarily turning point yet but at least we don't feel it is continuing to deteriorate and going to continue to get worse. So that makes us feel a little bit better about the future to begin with.

The second part has to do more specific knowledge about our overall business. One is the trends in Innerwear are a little bit better -- we we talked about the 6% sales trend -- decline trend in Q1 versus 11% in Q4. Now that does translate into about a volume decline for Innerwear of 8.25%. So some of the price increase is starting to help us. We're seeing that come through and that is making us feel good about our potential in the future.

Additionally that change in trend helped us realize Q4 was a little more severity impacted by inventory draw downs than we might wanted to have believed at that point in time. So we are feeling okay with the current Innerwear trends. And then Outerwear because we have advanced book sales, we know that we have enough booked in that business that we will see that decline rate start to reverse itself or actually start to close by Q3. So when you add all of that up -- I'm not saying we are necessarily optimistic about the future -- but we feel that there's a higher probability it will stay the same or get slightly better than it would get worse.

Got it. Now if I look at -- if you go through some of the pieces there -- if I look at this quarter for example, a minus 13 sales number, probably a couple of points or so benefit from price. So unit volume in the mid teens -- of that mid teen unit volume decline how much of that do you think was destocking? You alluded to the fact that last quarter you might have underestimated that impact.

To better understand this quarter, actually instead of talking about a total Company, actually need to go to the segments -- because Innerwear and Outerwear were spot on our plans for the quarter -- both of them individually as well as collectively. Where we had the miss was in Hosiery -- it was probably about $10 million dollars, and in International, mainly in Europe also about $10 million. When you add those two up that's probably the two points of difference than you were expecting probably on a revenue run rate of down 11. So it was really there that we had the bigger misses if you will than Innerwear and Outerwear.

Let me talk first to Hosiery. We have had now, Hosiery is down 20% two quarters in a row. Sell through is only down in the 10s -- about the low to mid teens rate. We are seeing retailers really pull back in that discretionary category. Eventually we think that our decline rates there will start to mirror the sell through decline rates and not stay down at this 20% level for the rest of the year. And then International, we just have to play that quarter to quarter. But it is small enough -- we think we have it compartmentalized enough that it is not going to be a big impact on the Company.

So, that's where we saw a slightly accelerated decline. When you talk about Innerwear and Outerwear, happened as expected.

Got it. So last quarter I think you guys talked about a 200 or 300 basis point impact from retailer destocking. Was it much higher than that in retrospect or higher than that this quarter?

No. Actually it was right on. It was that -- so I think $30 million exactly right that you talk about. The $30 million of inventory pull down that we saw. But it is one of those things that you are not 100% sure if it is a trend or a calculation until you start to see the orders come in Q1. It was really more about the believability of that number once we started to see the declines mitigate.

Got it. Okay. On the layoff actions that you are taking, what type of people, what type of operations are they involved in? I know it is always a tough decision. How are you going to mitigate the disruption to your business taking that number of people out? I think you did a similar number a year and a half ago or so.

Actually about a year and a half ago it was a larger number, I'm doing this from memory, I think it was more like 350 or so about a year ago. Of the 250 positions, most of them are management. They're in the headquarter area, we're also doing some layoffs in selected distribution centers. The reason we are doing the actions now is clearly because of the economic environment -- given the sales declines that we are seeing we felt we needed to take swift and important action.

The way we identified what to do however was we simply looked at the plans for the remaining consolidation that we had both in headquarters as well as distribution consolidation and simply accelerated the actions around both the management consolidations and distribution consolidations. So we had the plans in place, we merely accelerated it. So I am very confident in our ability to be able to manage through this.

I will say that that puts the consolidation actions that we have talked about -- we have talked about them being about 80% complete before -- this takes us pretty close to 100% in terms of management consolidations of taking those eight independent divisions that we used to have into one integrated Company. It has been a long road over the last four years and we will be glad to have this behind us.

Got it. Just to be clear, that -- those lay offs and the impact on your P&L, the benefit from that, that hasn't started yet?

No, it hasn't. We can see in this year -- 2009 and primarily in the second half -- $6 million or $7 million of benefit.

Thank you. Best of luck.

Thanks Omar.

That concludes today's question-and-answer session. Mr Lantz, any closing remarks?

Yes, we would like to thank everyone for attending the call today and we look forward to speaking with you all soon.

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