漢佰 (HBI) 2012 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. My name is Alan. I will be your conference operator today. At this time, I like to welcome everyone to the Hanesbrands fourth quarter 2012 earnings call. All lines have been placed on mute to prevent any background noise. After the presenters remarks, there will be a question and answer session.

(Operator Instructions)

Thank you very much. I would now like to turn the call over to Mr. Charlie Stack, Chief Investor Relations Officer. Please go ahead, sir.

Good afternoon, everyone. And welcome to the Hanesbrands quarterly investor conference call and webcast.

We are pleased to be here today to provide an update on our progress after the fourth quarter of 2012. Hopefully, everyone has had a chance to review the news release we issued earlier today. The news release and the audio replay of the webcast of this call can be found on the investor section of our 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 and 10-Q, and may be found on our website and in our news releases and our other communications. The Company does not undertake any obligation to update or revise any forward-looking statements which speak only to the time at which they are made.

Please also note in May 2012, Hanesbrands announced exiting certain international and domestic imagewear categories that are now classified as discontinued operations. Unless otherwise noted, today's speakers will be discussing our performance from our continuing operations. Also, today's references to earnings per share and EBITDA, represent continuing operations, excluding the charge for bond prepayment associated with the retiring $250 million of the Company's 8% Senior notes due 2016. Additional information, including reconciliation to GAAP performance measures can be found in today's press release and in the Investor section of our Hanesbrands.com website.

With me on the call today are Rich Noll, our Chief Executive Officer; Gerald Evans, one of our two Co-Chief Operating Officers; and Rick Moss, our Chief Financial Officer. For today's call, Rich will highlight a few big picture themes, Gerald will provide a sense of what is happening in a few of our businesses, and Rick will emphasize some of the financial aspects of our results.

And now I would like to turn the call over to Rich.

Thank you, Charlie.

Normally I start by discussing earnings, but not today. Today, I want to stop and pause and talk about achieving a major milestone. We ended the year with a long-term debt-to-EBITDA ratio of 2.5 -- 2.5. That has been a long time coming, and it feels really good. 15 months ago, we told you we would reduce our debt substantially, and we did, paying down $0.75 billion in a very short period of time. The era of high leverage is now a thing of the past. Going forward, we are targeting a long-term debt to EBITDA ratio of 1.5 to 2.5 times.

We accomplished this monumental achievement by focusing on free cash flow. Both our profit and working capital improvement efforts are paying off. In 2012, we generated $500 million of cash, the highest in our history, and we expect another great year in 2013, generating $350 million to $450 million. In just these two years, we will generate more cash than in the previous five years combined. And we are committed to using this cash wisely. Over time, we will consider a mix of dividends, share buybacks, and quickly accretive bolt-on acquisitions to create further value for our shareholders.

Now turning to earnings, the back half of 2012 showed our true earnings power. The operating margin of 13% demonstrates the benefits of our multi-year efforts of building our brand, filling our innovation pipeline, and transforming our supply chain to build a more profitable business. More specifically, our leading brands remain strong, and should only strengthen as we increase our media spending this year. The innovation we have at retail and in the pipeline through our Innovate to Elevate strategy is contributing sales, and importantly, margins for 2013. This strategy is designed to drive value added, higher-priced and higher margin items, for both us and our retail partners. And we are seeing the results, as our core businesses are performing very well. You will hear specifics about all of these topics, plus many more exciting initiatives at our upcoming Investor Day.

A year ago, we laid out our guidance for both 2012 and for 2013. Not only did we hit our metrics for 2012, we are on track for 2013, raising this year's guidance to $3.25 to $3.40 per share. When you combined this level of earnings with our low level of debt, we have truly improved our financial profile in a very short period of time.

So to wrap up, 2012 was a very successful year under very challenging circumstances, and we are coming out stronger, more innovative and more profitable. I believe we are only seeing the beginning of our true earnings power, and I look forward to a successful 2013. With that, I will turn the call over to Gerald.

Thanks, Rich.

I am very pleased with our performance in 2012. When we began the year, we had four clear goals. First, to manage our pricing to navigate through the cotton bubble. Second, to leverage our strong brands and innovation pipeline, to accelerate growth and expand margins in our core categories. Third, to de-risk our business by exiting the unprofitable segments of our US imagewear category and our European operation. And our fourth and final goal was to optimize the performance of our supply chain to deliver additional cost savings and operate with lower inventory. We accomplished them all, and our momentum in the second half of the year demonstrates the full potential of our efforts.

Nowhere shows greater evidence of the power of our actions than Innerwear, where we delivered progressively improving performance throughout the year, culminating in a strong 7% sales increase and record operating margins in the quarter. Our men's underwear category grew at a double-digit rate in the quarter and mid-single digits for the year. Competitive price gaps, which returned to historical levels, aided growth, as did incremental sales driven by shelf space gains from innovative new product like ComfortBlend underwear and Slim Fit T-shirts.

I am delighted to tell you that our intimate apparel category was a particular bright spot in the quarter. You may recall that two quarters ago, I discuss the early sales success we were seeing in our panty category, as we upgraded our product offering and added space in our key customers. The sales momentum in our panty category has continued, achieving double-digit growth in the quarter. Our work to revitalize our bra category started a little later. In the fourth quarter, we began to see the results of these efforts, with bra sales up mid-single digits, driven by our innovative smart size seamless bras, and space expansions at several of our retail partners. I am pleased with our momentum across intimates and anticipate continued growth in the quarters ahead.

For the full-year, Innerwear sales were up 3%, despite a $40 million headwind from JCPenney. Excluding that decline, Innerwear sales grew 5% for the year. Innerwear profit was up 18% for the year, and the full-year operating margin was an impressive 17%.

Turning to Outerwear, sales also sequentially improved, up 6% in the quarter. Champion, Gear for Sports and Casualwear all saw increases, with Casualwear posting growth of more than 20%, driven by the launch of our Hanes Beefy-T program. For the full year, Outerwear sales increased 6%, excluding the managed decline in our branded printwear category, where we deemphasized the more commoditized sector. Outerwear's full-year profitability was adversely affected by cotton inflation in the first half of the year, but showed substantial improvement in the back half. We expect to see continued improvements here, as we recognized lower cotton costs and realize the benefits of our strategy to drive our strong brands with a more profitable mix, with a goal to have Outerwear reached double-digit operating margins.

Let's now shift to International, where we consistently performed below our expectations in 2012. As we communicated last quarter, there are macro issues in certain countries that have slowed growth, but there are also executional issues we have identified. Where in the past, we ran International as a collection of countries, we are now undertaking steps to take advantage of our regional scale, drive innovation and better leverage our supply chain. But we do not expect to return to double-digit growth this year.

Next, let me speak to the retail landscape. Overall holiday sell-through for our products was as expected. We did see a different pattern at retail this year, where leading up to Christmas many of our retailers saw relatively soft sales, but then ended strongly in the weeks following. Retail inventories also finished in line with expectations. Looking to 2013, we feel good about our own competitive situation. But the overall consumer environment continues to feel mixed, causing us to be somewhat conservative when thinking about our top line growth.

As mentioned last quarter, the majority of our pricing is set for 2013. For Innerwear, wholesale pricing and pack counts are set for the year, and our promotions are locked in through back-to-school. In Outerwear, pricing for our seasonal programs is locked in for the majority of the year. We do expect branded printwear pricing to continue to drop in advance of lower cotton working through the supply chain as it did in 2011. All these assumptions have been contemplated in our guidance.

Also in our guidance is an increase in media spending, of $30 million to $40 million to further drive our already leading brands. As a testament to the strength of our brands, the Hanes brand recently placed second in the Women's Wear Daily Consumer Survey of Top 100 brands. With cotton inflation behind us, we will invest in our brands and innovative new products to ensure we remain number one in the minds of our consumers, across each of our brand equity metrics.

Finally, I would like to talk for a moment about our supply chain. There are many lessons the industry is learning from the recent factory fires in Bangladesh. One of these is that not all manufacturers adhere to high ethical standards. Unlike most of the apparel industry, we produce approximately 90% of our annual units within our self-owned facilities. We have employed a staff of professionals for more than 20 years that holds our factories and those of our vendors to the same high standards of corporate social responsibility, no matter where they are located throughout the world. Not only does this allow us to manufacture high-quality products in a lowest-cost manner, but it also allows us to create conditions for the workers that are both comfortable and safe.

It is clear that retailers are increasingly viewing this as an important advantage and are beginning to shift more business to vendors that they can trust to operate responsibly and ethically. We are happy with the performance of our supply chain. In particular, we are pleased with our success in Vietnam, where we currently have about 8,500 employees, roughly 70% of our Asian workforce. We have seen Vietnam efficiencies exceed our expectations, and that country is quickly becoming the central hub of our Asian supply chain.

So to wrap up, we are excited about the momentum we gained in the back half of 2012, and the actions we have taken to drive higher-margin branded products. Our strong brands, our Innovate to Elevate strategy, and our world-class supply chain are delivering strong results for Hanesbrands and for our retail partners. We look forward to delivering another strong year in 2013.

I will now turn the call over to Rick to discuss our financial performance.

Thanks, Gerald. Before I review our results, let me take you back to my first call as CFO in November of 2011. On that call, I laid out three key areas of focus -- driving growth in our higher-margin businesses, improving profitability in our underperforming businesses, and driving cash flow, so that in turn, we could deleverage our balance sheet to a level below 3 times debt-to-EBITDA. We made tremendous progress in all three areas in 2012 -- Innerwear grew, branded printwear was rationalized to become less volatile, and we meaningfully delevered the balance sheet.

To echo Rich's sentiment, I also want to celebrate the fact that in the last 13 months we have paid down $750 million of long-term bond debt, and brought our long-term debt-to-EBITDA ratio down to 2.5 times. This is a significant accomplishment for our organization, and I am proud that we have kept our focus on generating strong free cash flow to improve our risk profile.

Now let's turn to our results for 2012. Sales for the full-year were $4.53 billion, up 2% despite the challenging first half and a 2-point headwind to our growth from reducing the size of our branded printwear category, combined with lower sales to JCPenney. For the fourth quarter, sales increased 5%, as the holiday period unfolded in line with our expectations, and our momentum picked up through the back half of the year.

While gross margins were down for the year, I want to put this year's results in perspective. When you look at the five year period proceeding 2012, our annual gross margins have been very consistent, plus or minus only about 40 basis points. In 2012, margins were impacted by abnormally high cotton costs, with most of the margin declines coming early in the year. Gross margins returned to a more normalized level in the back half. In fact, slightly higher than our five-year average. Our focus on driving higher margin businesses and improving the profitability of underperforming businesses should help us continue that consistency going forward.

For the year, SG&A was down $66 million, as we benefited from planned lower media and marketing spending and lower distribution costs. SG&A in the quarter decreased approximately $9 million. Operating margin for the year was 9.7%, down 40 basis points, driven mainly by cotton headwinds in the first half. However, our operating profit margins improved sequentially, 1% in the first quarter, 10% in the second quarter, and 13% in the back half of the year. In the fourth quarter, all four segments achieved at least double-digit operating profit growth. I am very pleased with that momentum.

The tax rate in the fourth quarter was 10.3%, slightly lower than our guidance, due to the impact of the debt prepayment. This is worth $0.02 to earnings per share, which put us just over the top end of our guidance at $2.62 for the year. As expected, the back half of the year was very strong and generated $2.18 of our $2.62 in earnings.

Turning to free cash flow, we generated a record $508 million of free cash flow in 2012, with solid business performance and a focus on reducing inventory. With this free cash flow, we prepaid approximately $550 million of long-term bond debt in 2012, and we intend to complete the remaining $250 million prepayment of our 8% notes later this year.

So let's turn to 2013 guidance. Our sales guidance for the full year is approximately $4.6 billion, or up about 2%, and reflects our overall cautiousness on the current macroeconomic environment. When you correct for the planned decline in branded printwear, we are planning the rest of the business up about 3%. As a result of our pricing strategy and cost outlook, we have a great deal of confidence in our margin rates, and achieving our operating profit guidance of $500 million to $550 million. At the midpoint of our guidance, the implied operating margin rate would improve about 170 basis points. This improvement should be mainly driven by gross margin, with SG&A slightly delevering due to the increased media spending of $30 million to $40 million.

Interest and other related expenses are expected to be $120 million, including approximately $15 million in prepayment expenses to retire the remaining $250 million of 8% notes. The full-year tax rate is expected to be in the teens, but should fluctuate by quarter, with the first and third quarter rates expected to be towards the lower end of the range, and the second and fourth quarter rates being at the higher end of the range, due to anticipated discrete tax items, including in the first quarter, the impact of tax changes signed into law on January 2 of this year.

These factors, combined with the overlap of cotton inflation from 2012, should result in 2013 earnings growth that is more pronounced in the first half of the year. Free cash flow is expected to be $350 million to $450 million, including expected pension contributions of approximately $38 million, and net capital expenditures of approximately $50 million. As we pay off the remaining $250 million of 8% bonds, we should end 2013 with $1 billion in bond debt, and a long-term debt-to-EBITDA ratio towards the lower end of the 1.5 to 2.5 times range Rich mentioned.

In many respects, we are a very different Company today than we were at this time last year. At the end of 2013, we will have paid off $1 billion of debt in just 24 months, all while successfully navigating through unprecedented cotton inflation. We will continue to drive our high-margin businesses. We have made necessary changes to exit those that are volatile and underperforming, and our new normalized level of free cash flow of $350 million to $450 million is stronger than it has ever been. When you add it all up -- our sales growth, EPS growth, and our strong cash flow -- I am feeling really good about 2013.

And with that, I will turn the call back over to Charlie.

Thanks, Rick.

That concludes the recap of our performance for the fourth quarter. Before we take your questions today, I would like to remind everyone about our upcoming Investor Day at our headquarters on February 28. Feel free to contact me if you would like to attend or have any questions regarding the event.

Now we will begin take your questions and will continue as time allows. Since there may be a number of you who would like to ask a question, I will ask that you limit your questions to one question plus a follow-up, and then reenter the queue to ask any additional questions.

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

(Operator Instructions)

Our first question in queue comes from Susan Anderson from Citi. Their line is now open.

Hi, and congrats on a really great quarter and year.

Well, thanks, Susan.

So looking at your cash flow, it seems pretty amazing, and it seems to be exceeding your expectations also. So after we get past kind of this cotton give back, where do you see that going longer-term? Is there more that you can take out of working capital to drive that further? And then also, with the debt paydown coming to an end, can you maybe give us a little bit more detail on your capital priorities? I know you talked about share repurchases, dividends, acquisitions. But now that we are kind of getting closer, do any of these rank higher on the totem pole?

Sure. Let me take -- this is Rick. Let me take the first part of that, Susan. In terms of -- the sustainability of free cash flow, and particularly with respect to working capital. We made good progress in reducing inventories this year, a little over $350 million down. I would want you to take the disc ops piece out of that. About half of the unit -- or half of the decline in inventory was in units. We think that is an important trend that we are going to continue to drive, so that we can continue to improve our inventory turns. And that it is going to help over the next couple of years sustain this free cash flow, that, and as we continue to drive higher earnings.

Yes. So if you think of 2013 probably is a more normalized level of cash flow to $350 million to $450 million, right Rick? Then going to the second part of your question, Susan, so what are we going to do with it in 2014 and beyond? And I think it's really simple. First of all, we want to be really good stewards of capital and make sure that when we invest cash, we are going to get high returns for our shareholders. And that said, there is really only couple of choices. We can return cash to shareholders through dividends and/or share buybacks, and bolt-on acquisitions could also be a possibility. We purchased Gear a couple of years ago. That acquisition continues to play out fairly well. We are overall pleased with its integration into our Company and its long-term prospects.

There can be other things such as that, that is in our core categories that we can use to leverage our global supply chain, reduce costs, and justify any premium that we may pay. And we would also have a goal with in mind, of any type of acquisition where it would be relatively quickly accretive. So those are also a possibility for the use of that cash flow going forward. I think -- we don't need to do acquisitions to be successful. We have a lot of great opportunities on our own. But if those things play out, it could be a great way to create value. So you will see a mixture of those things, I think play out over time.

Okay. Great. That sounds good. And then my last question is just on your new product launches. It seems like your Comfort line has been really successful, and you been able to get higher prices for this. Do you think that is going to help you get into -- I guess, go more upstream to new distributions points? And then also maybe, if you could talk a little bit about anything you have coming out on the innovation side for this year?

Sure. We are definitely delighted with how our innovations are doing. I think the one thing we learned, coming through the past couple of years is that strong brands and innovation are what drive sales. Our ComfortBlend product continues to exceed expectations. And we have just got a pipeline full of innovations coming through, and look forward to talking to all of you more about it at our Investor Day coming up later in February. Because we really do believe that is the way that you drive growth. We do continue to push the -- our brands higher and higher. The Hanes brand is an incredible brand. It cuts across many channels of trade and performs very well. So we are delighted about what we have got in the innovation pipeline.

Okay. Great. Thanks, and congrats again.

All right. Thanks, Susan.

Next in queue we have the line of Eric Tracy from Janney Capital Marketing. Their line is open for you now.

Hi, good afternoon, and I'll add my congrats, particularly on the debt paydown.

(Laughter). Thank you, Eric.

So, Rich for you, maybe if you could just provide sort of a broader perspective on what you are seeing in the market. Again, you mentioned sort of the macro potential headwinds that are developing, relative to sort of your visibility to the business. Clearly, innerwear is performing quite strongly. But maybe just frame sort of the back drop and maybe how conservative that 2% sort of top line guide is?

Yes, let me just talk a little bit about that for a second. Because there is no one thing that we can point to that says, let's be a little bit cautious here going into '13. I think it's actually -- you hear on the macro level, housing looks like it's getting better, the stock market is doing better. Yet when we talk to our retailers, I think, since a little bit sometime before Christmas, they started being a little bit more cautious about 2013. To be honest, I think a little bit more cautious than we probably have heard them in the last 12 to 18 months or so. And I think a little bit of it had to do with the pattern of Christmas. And this is across a broad set of retailers.

Where things were little bit slow before Christmas, but the week of Christmas and the two weeks after Christmas were unbelievably strong. So everybody had a good Christmas overall, but made it right at the end. And so it was -- I think they were sort of a little bit nervous throughout the entire season. And then, I think everybody is just a little weary about what's going to happen with the tax increases, and importantly, the delayed tax refunds to consumers, and is that going to impact spending. So, when we hear our retailers being a little cautious, I think that in turn makes us just a little bit cautious. And we think it's prudent to be sort of at the lower end of our range that we were talking about before. Given that though, we feel very good about our prospects for the year. We feel very good about our margin increases, very good about operating profit, cash flow, earnings per share and so on.

I guess then maybe my follow-up would be, the operating profit of $500 million to $550 million. What are the various sort of puts and takes that gets you at that low end, or the high end. It seems like the SG&A or the marketing spend to build is relatively known. I guess, the first question is, is that fair, in terms of the expected marketing spend, or could that flex, depending on the environment? And then, what are the different sort of puts and takes on the gross margin? Is it supply chain manifestation? Pricing that could potentially come through -- sort of drive that delta between $500 million and $550 million?

Yes, Eric, this is Rich. Let me start with the high-level question, and I will turn it over to Rick to talk a little bit more specific about some of the those. But I think one of the important things I want to communicate, in terms of our overall ability to get to our higher level of operating margin goal of 12% to 14% is this innovate to elevate strategy is an important part of that, in terms of increasing margins. So for us, we have got the traditional cost reductions that we have talked about historically. But the idea of getting products with features that consumers desire more and are willing to pay a little bit more for, is also part of our margin increase strategy, both on a pennies per unit as well as a percent basis. And so some of the flex that we are talking about is, exactly when these new product hit. Exactly how strong they are in the first couple of months. And so the stronger they are, the slightly -- it is going to have a slightly more positive impact on our margin. And that is sort of it, at a very high level. Rick, if you want to talk more about some of the specifics of '13?

Sure. I think I would narrow the some of the flexibility, if you will, in the $500 million to $550 million down to a couple of things. One, as Rich indicated, the success of some of the new products that have the higher margins. More successful those will be, the more margin expansion we will get from that. And that is really one the key benefits from that. I think though, that also, we have a lot of cost optimization initiatives that we are undertaking right now. I think the more successful those are, the higher -- the more we will be at the higher end of that range. The -- and then as you said, the media the $30 million to $40 million, that is pretty fixed.

Okay. I appreciate the guidance and I look forward to the Analyst Day.

All right, thanks.

Next in queue we have the line of David Glick from Buckingham Research. Their line is open for you now.

Thank you. Rick, I just had a question that maybe you can help us think about how the year unfolds. I mean certainly, you talked about first half earnings growth being -- the year being first half weighted. Well, when you are up against an EPS loss in the first quarter, obviously, and you look at the first quarter of 2011 -- (multiple speakers) -- that's a huge swing. So if you can help us think about how we -- without being specific on quarterly guidance, obviously, but how to think about the revenue trends as the year progresses? As well as gross margin, whether we should think about that on a static basis? On the gross margin line, are there any -- you mentioned Q1 sales, the bigger impact on printwear being in Q1. Just help us think about how the year unfolds maybe a little more specifically?

Sure. Let me walk you down the P&L -- the key items on the P&L and give you a sense of where there may be some variability through the course of the year. As you rightly pointed out, David, the branded printwear sales declines will occur primarily in the first quarter. About half, maybe a little less than half in the first quarter, but certainly, mostly in the first half. So you need to factor that in. As you think about gross margin, think about it being more stable in 2013 than it was in 2012. Though, we tend to have a little bit lower margin in the first quarter, because it's our lowest sales quarter. So your fixed costs tend to play in a little bit more there. But after that, you should see a lot less variability quarter to quarter. Though again, we had very high cotton costs last year in the first half and those won't repeat.

As you think about SG&A, I would think about the key driver there as being the $30 million to $40 million of additional media spend, two-thirds of which will come in the back half of the year. The -- so that will be kind of the key driver there. I would point out a couple of other things, though. One is, our debt prepayment charge will be about $15 million. So that will come in probably in the fourth quarter. So the other $105 million of interest expense will be pretty flat, or be pretty even through the rest of the quarters. And then finally, we did talk about some tax rate variability. The tax law that was signed on January 2, gives us about $5 million to $6 million of benefits that we are required under the accounting rules to recognize, specifically in the first quarter.

Okay. Any chance that that December prepayment could come any earlier in fiscal 2013?

It is certainly possible. If the year unfolds on the higher end of where we are, of our guidance, then I think it is entirely possible you would see it earlier in the year.

Okay. And then just given what you said, with sales up 2%, is there -- will sales be at least flat to up low singles in each quarter? Or is it enough to create negative sales growth, say in Q1?

I would rather not go into that level of detail on the sales per quarter. Again, I think the big watch out, is making sure you get the branded printwear number in the first quarter right.

Okay. Thank you very much. Good luck.

Thanks, David.

Next in queue we have the line of Omar Saad from ISI Group. Their line is open for you now.

Thank you. Good afternoon.

Omar, we can't hear you.

Can you hear me now?

We can now, hello.

Okay, thanks. Good afternoon. So I wanted to ask you a question on the top line. It sounded like you kind of -- international is still going to be a little of a transition year. It sound like you are repositioning how you are approaching those markets, and then maybe a little bit on a market by market basis as opposed to a broader approach. How do you think -- what is the paradigm to think about top line growth from here? Obviously, it has been pretty good the last couple of years, despite exiting some of those businesses. Should it be some sort of mix of price, and some market share gains, and kind of natural GDP growth? Then when international hopefully comes online in a couple of years. Is that the right way to think about it? What are the big revenue opportunities for Hanesbrands?

Omar, we have always talked about organic growth for us, with 3% to 4% total Company growth. That with that kind of growth, you get a little bit of share gains, which really comes from shelf space, the categories tend to modestly grow. But we can magnify that, in a greater rate of operating profit growth through both our optimization and our innovate to elevate strategies at a much faster rate. And then with our strong cash flow, we can go from operating profit down to EPS at a much faster rate. So we have always said that 3% to 4% of organic growth for us, can easily translate into double-digit EPS growth for a very long time to come. And that model hasn't changed at all.

But diving into the top line piece, Rich, with cotton inflating, should we think about inflation as a steady piece of that? On the revenue -- understanding the P&L, how much leverage you can generate against it, where do you see like the big chunks of top line opportunity for the Company? Or is it just a little bit of shelf space, a little bit of inflation maybe?

So you want to think of us, is it is a game of inches. Right, every little bit counts. So, you margin up a little bit on this product, you gain a couple of feet of shelf space this year in this account in this product category. We are so broadly distributed that each and every year, you are just making a little bit of progress. Inflation will work into that. Over time clearly, the era of deflation in apparel industry is now over. It has obviously got a little more lumpy in the short-term, but over time that will contribute a little bit. And so for us, it shouldn't be that hard to piece together consistent 3% to 4% top line growth. We feel good about those prospects.

Now, obviously, if you step back and you start to say, look, do you make an opportunistic acquisition here or there, and use that we can get it at a good price, that's obviously going to fuel that top line growth at a faster rate. So, when you do that, you are going to have a year where you are going to be a little bit higher, or substantially higher than that. So you could get into the high single-digit growth rates through acquisition. But just raw organic growth, top line 3% to 4% and that's all we need to make this whole model work for us.

Understood. Thank you. And then standing back too, when I think about when you spun off -- and it was kind of nice to hear you put a little perspective behind how you been able to delever and get the Company's kind of balance sheet into position where you want it to be. So when you spun off the results of the supply chain globalization theme to the terms of the opportunity for Hanes brand, and look at it today, your kind of net operating margin is probably sort of where it was post the spin, obviously a lot of things have happened, including the cotton bubble. How do you think about the -- like the supply chain initiatives? A lot of it has been moved offshore. Are there still significant chunks of opportunity there? Or has that been kind of offset by inflation?

No I think a lot of what you are talking about is absolutely there. And it has been masked to the short term, because of this hyperinflation with cotton. And let's not forget what Rick was talking about in his remarks, that inherent in our guidance, and if you just take the midpoint our operating profit guidance for 2013, you are talking about operating margins that are in the mid-11%s, right? So you are talking about 170 basis point increase, and that is substantially above where we have ever been before. So you are starting to see all that stuff -- it was masked a little bit because of inflation. You are starting to see all of that start to now play out and should be there going forward.

Your next question in queue comes from the line of Jim Duffy from Stifel Nicolaus. And their line is open for you now.

Thank you. Nice job. Congratulations on the execution through a challenging period.

Thank you.

I am going to build on Omar's question. Rich, could you maybe put some shape around some of those ongoing efficiency and cost optimization savings opportunities for '13? What are the some of the biggest areas of opportunities? What is the total size of the opportunities, as you look out over the course of the year?

Yes. Jim, we have always talked about it -- we can continue to make optimization savings of $30 million to $40 million a year over time. That will tend to decline. We have also got margin opportunities as we have talked about from innovate to elevate. So we feel that there is a lot of opportunity to continue to get -- to continue to have those margins increase. Any one -- particular one?

Again, it's a lot of -- it's within the four walls. As we take out inventory and improve our turns, we are able to make labor more efficient. We are able to rationalize a few facilities here and there, and continue to just drive out costs and improve productivity.

Okay. And in the prepared remarks you highlighted the Vietnam efficiencies. Is there any shift of manufacturing between geographical regions that is contributing to some of the efficiencies that you are seeing?

No. We are just really continue to build out Vietnam, the Asian part of our supply chain came on later. And that is the piece that we have been ramping up. But just to reiterate, we are delighted with how that is going. It couldn't be more efficient. It is just fantastic.

I see. Okay, thanks. See you in a couple of weeks.

All right. Thanks.

Next in queue we have the line of Bob Drbul from Barclays. Their line is open for you now.

Hi, good afternoon, it is [Joan Payson] on for Bob. And congratulations on the quarter.

Thank you, Joan.

Just to talk a little bit more about the price strategies that you locked in for 2013 so far. How do those compare to what you did in 2012 on the increasing pack size versus bringing prices down? And where have pricing levels sort of fallen out at this point, compared to where they were at their peak?

Sure, this is Gerald, to answer your question. Just first of all, having come through the past couple of years and all the challenges of cotton and pricing, our first focus now is to really reinvest in our brands and our innovations. We have clearly learned that is the way to drive sales. So that is our first objective as we come out of that period. As we look at pricing though, you really have to sort of look at the pieces of our business to understand, to really answer that question. If you look at our Innerwear business, that pricing is largely -- is in place effectively for 2013. The wholesale pricing set, our pack sizes are set. We put those in place later -- in the latter part of last year and those are set. And really, our promotions are set through back to school.

Our outerwear business is very much in the same way, when we look at the retail portion of our outerwear business. We have seasonal programs that we set prices with our retailers, and effectively, for two-thirds of the year, those are set. And we will be setting the balance of those prices over the next few months. The one business is our branded printwear business. And in this business, prices do tend to change constantly, and they tend to change as cotton falls, prices tend to fall before them. We saw that in 2011. We are already beginning to see some of that in the branded printwear category now. It is certainly one of the reasons that we began to deemphasize portions of that business last year. It only represents about 3% of our total business today, but that is the one where we see some pricing activity, and we've built that in our guidance. We have anticipated that in our guidance.

Okay. Thanks, Gerald. And then what have you seen in terms of promotional activities during the fourth quarter in the competitive environment heading into this year, and how did that compared to last year?

It really played out as we expected. I think it sort of reflected the generally higher prices that the market had moved to at that point in time. But generally, played out as it had in prior years, with a number of events and so forth.

Okay. Thank you.

Next in queue we have the line of Scott Krasik from BB&T Capital Markets. Their line is open for you now.

Thanks, gentlemen, congratulations.

Thanks, Scott.

Just first -- I guess, two questions, one sort of a numbers question, and second one is big picture. In terms of the first quarter, I know you don't want to give guidance, but the range goes from $0.15 to $0.50, with a mean somewhere in the mid-30s. So, is the mean sort of in line? Or could you point us one direction or the other? And then the second question, Rich, you did a great job growing shelf space, even with the lower marketing spend. As you get back into a phase of spending a little bit more, should you expect to capture some benefit from the marketing spend? And how were you able to capture share, even with out it or (inaudible).

So I will let Rick not answer the first question, Scott, and then I will answer the second. (Laughter). Go ahead.

Well, let me find a polite way to not to answer your question, Scott. In Q1, I would just again reiterate a couple of things that you should keep in mind, the branded printwear business will have a negative impact on sales. However, it will not have a material impact on profitability. Because the sales that we have gotten away from were less profitable or unprofitable sales. We will see a significant -- in the first quarter of last year, our cotton costs were in the mid-1.80s. It will be substantially below that in the first quarter this year. And don't forget to factor in the $5 million to $6 million of reduced tax expense in the quarter.

Okay.

In terms of the bigger picture question on media and how it relates to sales and so on, really, the impact of media is cumulative over time. It's not something that's going to drive your sales in the short term. We are -- at our heart, we are really a packaged goods company that also sells apparel. And so when we approach talking to consumers and innovation, it is not just an art, it is also a science. We have models that can tell us how effective TV advertising is, how it's going to impact purchase intent, how it is likely to increase your sales over time. And we understand a lot of those metrics. And what you are able to do, as you can pull back for a year or so, and you are not going to have a detrimental impact.

But, you can't, then -- then you are going to have a long-term problem if you stay at those reduced levels. So, we are really getting back to a more normal level. I think you are seeing the benefits of all those media spends over the year. It is why we were able to navigate all of this high cost cotton and increase prices when we needed to, put out there with innovation at higher price points. It is the culmination of the efforts of our innovation, coupled with consumer advertising. And so, it is going to continue to allow us to have a healthy, sustainable business, going forward.

Okay. Thanks.

Our next question in queue comes from the line of Steve Marotta from CL King and Associates. Their line is open for you now.

Good evening, everyone. What was the aggregate marketing spend in 2012?

We don't actually give that level of detail, Steve.

Okay. No worries. I believe you commented on the delta in the past, can you remind me what that was?

It was 10's of [millions] lower than it was -- than it historically had been.

Right, great. And also very quickly what is the inventory level you expect to end 2013 with?

Not -- I don't want to give you a specific number on that. But it will be -- we expect it to be substantially lower than this years. We will continue to see inventories decline, as we improve our turns this year.

And do you believe that will be sequentially, as well?

Well, you normally see a build in inventory in the first quarter. And then that comes down from there.

Excellent. That's great. Thank you.

Our next question in queue comes from the line Carla Casella from JPMorgan. Their line is open for you now.

Hi. You talked about the impact from the JCPenney business. And I just wanted to clarify -- this is all just weakness in their business, this isn't lost shelf space, is that correct?

Generally, it's correct. Yes, it's more about that they are going through a pretty significant strategy transition of their own, and it has been traffic fall off in their stores.

That inventory correction is -- as their sales dropped.

Fair enough.

Right. And they brought the inventory down a lot. Would you say, and it sounds like you think inventories in most of the channels are clean. Would that be the same with JCPenney?

Yes, we definitely believe our inventories are clean in our retailers, including JCPenney. That's correct.

Okay. Great. And then how much has the colder weather this year helped the business? Or would you say it has had a meaningful impact on either sell-through or replenishment orders?

I wouldn't say it has had a meaningful impact one way or the other. We have some businesses that respond well in cold weather, and some that aren't affected by cold weather. In the case of our cold-weather businesses, we started out cold in the fall, and then it got warm for a while, and then it has gotten cold, and it really sort of played out as we expected.

Okay. Great. Just one question on the factories. Where does your utilization stand today, and does it vary dramatically by region?

It doesn't vary dramatically by region. We are generally in the 80%, 90% utilization at any point in time.

Actually, it would be higher overall. We tend to run our inventories, or we tend to run our factories to match our sales, and slightly improve turns over time. All built into our guidance.

(Operator Instructions)

Your next question comes from the line of John Malcolm. Their line is open for you now, John Malcolm from Citi.

Thank you for taking my question. Given the your leverage target of 1.5 to 2 times, do you have a grade rating set in your sights? And if so, how many years are you looking to get there? Thank you.

No. We have not explicitly set investment-grade as a goal for us (inaudible).

Presenters, at this time there are no further questions in queue. I turn the call back over to you.

Great. We would like to thank everyone for attending our quarterly call for today, and look forward to speaking with many of you soon.

Ladies and gentlemen, thank you for your participation on today's conference call. You may now disconnect.