漢佰 (HBI) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Hanesbrands second quarter 2015 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will be given at that time. If anyone should require assistance, please touch star and then zero on your touch-tone telephone to reach an operator.

As a reminder, this conference is being recorded.

I now like to hand the conference over to T.C. Robillard, Vice President of Investor Relations. Please go ahead.

Good day, 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 second quarter of 2015. Hopefully, everyone has had a chance to review the news release we issued earlier today. The news release and the replay of the call can be found in the investor section of our Hanes.com web site.

On the call today, we may make forward-looking statements either in our prepared remarks in the associated question and answer session. These statements are based on current expectations or beliefs 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 and may be found in our web site, as well as in our news releases. The Company does not undertake to update or revise any forward-looking statements, which speak only to the time at which they are made. Unless otherwise noted, today's references to our consolidated financial result as well as our 2015 guidance exclude all one-time charges and expenses. Additional information, including a reconciliation of these and other non-GAAP performance measures to GAAP, can be found in today's press release.

With me on the call today are Rich Noll, our Chief Executive Officer, Gerald Evans, our Chief Operating Officer and Rick Moss, our Chief Financial Officer. For today's call, Rich will focus on a few big picture themes. Gerald will focus on key highlights within our business operations and Rick will focus on certain financial aspects of our results.

I will now turn the call over to Rich.

Thank you, T C. Hanesbrands delivered another quarter of strong results continued margin improvement in our base business along with contributions from our acquisitions drove a 16% increase in earnings per share. Once again, highlighting the power of our business model.

This marks another quarter of double digit earnings growth and with the performance of our base business, the remaining synergies from our acquisitions and the benefits from deploying future cash flows, we believe we have the right formula to deliver double digit earnings growth for many years to come.

As a management team and as an organization, we have a simple mission: to generate superior long-term returns for our shareholders. We've been able to accomplish this in two ways. The first is by executing the right long-term business strategies, which includes investing in our manufacturing and deploying our margin enhancing Innovate-to-Elevate strategy.

And the second is by taking a disciplined return-centric approach to deploying our free cash flow. Our cash flow is a huge part of our value creation formula, which is used to pay dividends, make acquisitions, as we've said before, at some point, to repurchase shares. Our dividend is in place, and we expect over time for it to grow in line with our earnings.

Over the last 24 months, we have completed three acquisitions for approximately $1.3 billion. Once we achieve full synergies, these are expected to annually contribute roughly $1.4 billion in sales, $230 million in operating profit and $0.48 in earnings per share. Acquisitions will clearly remain one of our core strategies going forward given the breadth of our opportunities, our strong balance sheet and our proven integration processes.

With respect to share repurchases, the common perception is this is an either/or decision as it relates to acquisitions. However, at our current capital structure, targeting a net debt to EBITDA ratio of between two to three times, coupled with our cash generation ability, we firmly believe that we can easily do both acquisitions and repurchases simultaneously.

We have no need to accumulate significant cash on our balance sheet to do acquisitions nor do we strive to become investment grade. Therefore, our intent is to always use our excess cash to create the best long-term returns for our shareholders by using a mixture of dividends, acquisitions and share repurchases.

In summary, our overall business continues to track to our plan. We delivered another quarter of double digit earnings growth and our visibility into the second half gives us confidence in our ability to deliver mid- to high-teens EPS growth for the full year. As we've shown over the past few years, our business model is designed to drive strong shareholder returns and remain dedicated to continuing this trend.

With that, I'll turn the call over to Gerald.

Thanks, Rich. Continued execution of our core strategies combined to drive another quarter of strong performance. Our acquisition strategy contributed nicely to second quarter results in both DBApparel and Knights Apparel delivered operating profit that was slightly ahead of plans.

Our Innovate-to-Elevate, supply chain optimization and integration strategies continue to bear fruit. Constant currency revenue growth in our base business accelerated from first quarter levels, while base operating margins expanded another 180 basis points.

Before getting into our business results, let me begin with a brief update on our two integrations. With respect to DBA, we've already begun to in-source some of their third part manufacturing. Earlier this month, we produced the first DIM boxer briefs in our Vietnam facility.

In terms of the overall integration, we've completed all but one of the required works council consultations and we remain on track to begin implementing many of the integration actions in the fourth quarter. This should lead to substantial synergy benefits in 2016 and continuing into 2017 and beyond. Ultimately, allowing us to reach our goal of EUR100 million of operating profit.

Looking at Knights Apparel, we've completed our integration planning and have begun communicating to employees. We're on track to begin the integration actions by the end of this year with synergies beginning to flow through our P&L in 2016. And we remain confident in our ability to double their operating profit to roughly $40 million within the next two to three years.

Turning to our segments, innerwear sales declined 1% in the quarter as mid-single digit growth in basics was offset by a decline in intimates. With respect to our basics' business, in the quarter, we saw growth across underwear, socks and panties driven by further share gains and strong performance from our innovation platforms.

X-Temp and Comfortblend are now 15% of our basics' business, which is up from 13%. With the doubling of our X-Temp space this year, we expect this share to continue to grow. Innerwear's operating profit increased 7% over last year and its operating margin expanded 190 basis points, driven by efficiency gains in our supply chain, synergies from Maidenform and ongoing cost controls in SG&A.

Switching to our activewear segment, sales growth accelerated from first quarter levels, driven by the acquisition of Knights Apparel, as well as Champion and Gear for Sports' businesses. As expected, Champion sales in sporting goods, mid-tier and department store channels grew significantly in the quarter, up 42% over last year due to the concentration of new program shipments in the second quarter this year compared to the first quarter last year.

In these channels, Champion sales year-to-date are in line with our plan and we remain on track for another year of solid double digit growth. Activewear's operating margins improved 130 basis points in the quarter as product mix, supply chain efficiencies and tight SG&A controls more than offset the expected dilution from Knights Apparel.

Turning to international, the year over year growth in the quarter was driven by our acquisition of DBA. Looking at our base international business, which excludes DBA and the target Canada bankruptcy, sales in constant currency increased roughly 8% in the quarter. With respect to DBA, in spite of ongoing economic head winds in Europe, the business performed well in the quarter with sales increasing in Spain and the UK.

We expanded our hosiery market share in Spain, France and Germany, as well as our underwear market share in France. These results combined with excellent cost controls and favorable supply chain performance generated profits that were above plan for the quarter.

So to sum up. Overall, we are right where we expected to be at this stage of the year and we feel great about our outlook for the remainder of the year. Looking beyond this year, we are confident in our ability to deliver double digit earnings growth for the next several years as our strategy are working, our brands are resonating with consumers and our integrations are progressing on schedule.

I'll now turn the call over to Rick.

Thanks, Gerald.

Our Innovate-to-Elevate, supply chain optimization and acquisition strategies combine to drive a 16% increase in earnings per share in the second quarter. The fact that we were able to deliver mid-teens earnings growth on top of last year's 43% increase is a testament to the power and sustainability of our business model.

In the second quarter, constant currency sales increased 15% over last year as our base business increased 1%, while acquisitions contributed approximately 14 points of growth.

Operating profit increased 15% over last year, driven by contributions from DBA and Knights Apparel, tight SG&A management, efficiency gains in our supply chains and synergies from Maidenform.

Now let me give you some color on the strong margin performance in the quarter. Our gross profit margin improved 120 basis points to 39.1%. Acquisitions contributed roughly 60 basis points to the increase. A structurally lower margins in Knights Apparel were more than offset by structurally higher margins in DBA. The remainder of the increase was driven predominately by supply chain efficiencies in our base business.

SG&A costs as a percentage of sales increased approximately 100 basis points to 21.6%, driven by our acquisitions. The result was a 20 basis point increase in our operating profit margin as the 180 basis point improvement in our base business more than offset the expected margin percentage dilution from the addition of DBA and Knights Apparel.

Looking at the rest of our results, interest in other expense of $30 million was roughly $8 million above last year due to the higher debt levels from our acquisitions, as well as the additional costs associated with our debt refinancing. Our tax rate was 13% in the quarter and earnings per share were $0.50.

Cash flow from operations was right on plan and we ended the quarter with $315 million in cash on our balance sheet.

Turning to guidance, I'll highlight some of the key pieces but I'd also like to provide additional color as it relates to the individual quarters. You'll find our full guidance details in our press release and the associated commentary in our updated FAQ document.

We've refined our full-year sales guidance to approximately $5.9 billion with roughly $15 million to $20 million of the adjustment coming from further deterioration in key exchange rates. We've slightly increased our operating profit guidance to a range of $855 million to $875 million. We expect interest and other expense of approximately $100 million. A full-year tax rate of approximately 13% and an earnings per share range of $1.61 to $1.66.

Looking into the second half of the year, we have a significant amount of visibility. Our space is set, our pricing and promotional programs are in place and we've locked in our key input costs including cotton. Based on our guidance, we're expecting second half operating profit to increase 10% to 14% over last year, which implies second half operating margins could increase roughly 20 to 60 basis points.

However, due to certain timing shifts this year, we're expecting year-over-year operating profit growth for the individual quarters to be very uneven. We expect third quarter operating profit growth in the mid-single digits range, while we expect fourth quarter growth to be in the high teens to low 20% range. The timing shift is due to a concentration of promotional spending in the third quarter this year, the timing around the realization of certain supply chain and integration savings, as well as the benefit from lower cotton prices in the fourth quarter.

So in closing, our overall performance this year is tracking right to our plan and this, coupled with our visibility into the second half, gives us confidence we can deliver mid to high teens EPS growth for the year. Looking to 2016 and beyond, we believe the combination of the benefits from current acquisitions, the momentum in our overall business and the returns from deploying future cash flows should drive solid double digit EPS growth for many years to come.

With that, I'll turn the call back over to T.C.

Thanks, Rick. That concludes the recap of our performance for the second quarter. We will now begin taking your questions and will continue as time allows.

Since there may be a number of you who would like to ask a question, I'll ask that you limit yourself to one question and a single follow-up then re-enter the queue to ask any additional question. I will now turn the call back over to the operator to begin the question and answer session. Operator?

(Operator Instructions)

Our first question comes from the line of Matthew McClintock from Barclays.

Hi, yes. Good afternoon, everyone.

Hey, Matt.

Rich, I have two questions. The first one, it sounds like everything's is moving along according to plan with the recent acquisitions that you've made, but it seems like there's been a bit of a change of tone recently with share repurchases. Could you help us understand how you think about share repurchases, at what point would you decide to execute a share repurchase, what would you consider to be an excess amount of cash? How would you think about the mechanics of executing that program. Thank you.

One of the great things about our business is we generate a tremendous amount of cash on a consistent basis. It's a hallmark of the company. And our focus is to make sure we're using that cash to create great returns for you, our shareholders.

We firmly believe that will be best done with a mixture of acquisitions, dividends and share repurchases. And we've been doing a lot of the first two acquisitions as well as instituting an increase in dividend over time. And it's probably now becoming time for repurchases to become a definitive part of that mix.

When you step back, I want to make sure that nobody hears this as saying we're doing this instead of acquisitions. That it's clearly not the case. We can do both.

In fact, when we look at our excess cash generation ability today and over the next 12 to 18 months, we could easily do a $1.5 billion of acquisitions and buy back stock consistently over that period of time. You can actually model out over the next couple of years and you can find us being able to do billions of dollars of acquisitions and being able to buy back shares.

In terms of the near-term strategy, more likely than not you'll see us begin to execute share buybacks in 2015. While we have an authorization in place, we don't have any definitive plans. Rick and I need to do a little bit more analysis on how much we would do and how we might start that program. Therefore, none of this is built into any of our guidance, but more likely than not you'll see us begin to buy back some shares in 2015.

From an ongoing basis, what is excess cash flow? You know, I think you asked me to quantify it. If you think of our cash flow from operations of about $550 million this year less CapEx that we've talked about, less the dividends, you get to that $250 million to $300 million range on an ongoing basis. That could be a reasonable number. I'm not committing to that in any given year, but that's a way from frame it.

The great thing is, we generate a lot of cash, we've got multiple ways to create value for shareholders and we want to use all of those ways to create value for shareholders.

Thanks, Rich. My second question, if we could just dive into the softness and innerwear this quarter. I know you mentioned last quarter some challenges at a key retail partner in terms of inventory levels. Could you update us on what's going on there. What are you seeing overall in the innerwear market? Is there increased competition, especially now that you seem to be getting more space gains with your higher ASP, Innovate-to-Elevate products such as X-Temp? Thanks.

Let me just frame it overall and I'll turn it over to Gerald to talk about more specifics within basics and innerwear. First and foremost, the overall macro environment isn't that great right now. In fact, when we look at both total innerwear, basics and intimates, we're seeing a deceleration of, actually, industry growth.

In fact, basics is decelerated, it's still positive. Intimates is actually down. Given that, in those environments, we are gaining share so our overall business is sound in terms of some of the tactics with the weakness in the near term. I'll turn it over to Gerald to talk about specifics.

Overall, Matt, we had a positive trend in our innerwear sales from Q1 to Q2 driven and by our basics business, which was up mid single digits end of quarter. I feel real good about that.

As Rich mentioned, the category in basics is growing. We're up a share point in the overall basics category. And our underwear business is up two points. And it really is driven by the things you touch on, our innovation, our strong brand position, we're gaining space and we went into back to school with very strong offers as we went into that important period.

As we ended the first quarter, a major retail had reduced their inventory and at that point we viewed it as temporary. As we've gone into the second quarter, we learned it is, in fact, more of a systemic change and they intend to use their new replenishment systems to manage their inventory more tightly going forward to pursue inventory turns. So we've reflected that in our guidance going forward.

But we feel good about this business. Those kind of adjustments aside, we're continuing to gain space. We'll gain more space in the second half of the year. Our share positions are growing and our innovations working. We feel good about the basics business and its impacts on innerwear.

As we look at intimates, as Rich touched on as well, we gained share there as well in the core intimates business, but this category has an accelerated decline quite dramatically. And declined at a high single digit rate in the most recent 12 month period.

So in addition, as we look at our business, in addition to the category weakness, our results in the quarter were impacted as we executed the last of our brand transition strategy in department stores. We set about focusing on fewer, bigger brands, our important brand in the channel and folding smaller brands like Barely There into those brands.

So in the quarter we managed down the last of our retail inventories and only at quarter end did we begin to pipe our new initiatives. As we look forward to Q3 and Q4, we'll continue that piping of initiatives and expand space behind that. So there again, we feel real good about what we're doing in the category and despite what the category itself might be doing, we're doing the things we can do. We're putting great innovation behind our brands and really putting something in place that the consumers will buy.

Thank you. Our next question comes from the line of Omar Saad from Evercore ISI.

Hey, thanks, guys. Couple questions just to follow-up on the replenishment business. Can you give us a sense for how big the difference is between what you are seeing in the sell through with these retailers versus what they're re-stocking. Is there a big gap there? How long do you think this will persist? Are we looking at another three quarters of this kind of level? And then I have a couple follow-ups. Thank you.

In general, we see it as approximately $20 million.

Yes, that's what we've seen so far. We think there could be that on a go-forward basis.

Yes.

That'll be a couple of weeks of supply out there. That's all built into our guidance. That's important to remember. What's to come is more likely going to be in the third quarter than not.

Great, thanks. Can you talk about what you're learning from DBA? Give us an update on the international side. I kind of want to tie it back to the original question on share repurchase versus acquisitions with dollar so strong. I'm wondering if this is a signal that you're going to spend some time working on integrating DBA before you go out and make other kind of international acquisitions. Give us an update on what's going on there.

Right. Let me first talk about capital allocations and acquisitions and I'll turn it over to Gerald to talk more about some specifics of how great things are going over in Europe.

Do not read, absolutely do not read anything about share repurchases as being part of the mix as a negative about acquisitions. We are still absolutely focused on acquisitions, doing acquisitions and not changing the time frames in which we're thinking about acquisitions. No ifs, ands, or buts. We can do both. It's the great thing about our company. In terms of how great DBA's going, Gerald?

From the standpoint of DBA, we couldn't be happier with how it's going. We've got a very strong management team that's building their brand shares, they're controlling their costs and generating additional profit as you heard in the quarter. We've also begun to internalize some of our production. We completed four of the five works councils and we have one more to do, right on schedule, we'll complete it early fall. And then we'll begin integration in earnest late in the year so everything's going well.

Thank you. And our next question comes from the line of Susan Anderson from FBR Capital Markets.

Hi, Susan.

Hi, guys. Thanks for taking my question. Just a follow up on the intimate category. So nus 9 that you talked about, is this kind of a department store issue, also? Is that kind of where the industry was for the department store? Also, maybe, if you can talk about how it sounds like you guys are still rationalizing Maidenform and combining it with your own brand. So is this the end at this quarter? Should we see a more combined brand presentation going forward?

Susan, this is Gerald. The category numbers I quoted are really total category and they're rolling 12 months for the core intimates, excluding sports bras. It's sort of across the various channels.

From the standpoint of brand rationalization, the last of our managing down and transitioning of the inventories really is in this quarter and we are piping our new initiatives behind our four key brands late in Q2 and we'll do the balance in Q3 and Q4. The rationalization is largely behind us and the focus on the key brands is ahead.

That's helpful. On the gross margin for the quarter, it sounded like Knights Apparel was a little bit of pressure, whereas DBA probably helped. Maybe if you could just parcel that out a bit between those two and then I2E?

Sure. If you think about those two businesses as we sub one, the DBA business has structurally hire gross profit margins, probably about 10 percentage points higher than Knights apparel, on the other hand, has structurally lower gross margin levels. Probably about ten percentage points below our base business. So about 10 percentage points higher for DBA, about 10 percentage points lower for Knights apparel.

Then in terms of the base business, really in the quarter the improvement in the margin was almost exclusively from supply chain savings.

Thank you. Our next question comes from the line of Michael Binetti of UBS.

I want to circle back to the retailer that you mentioned steps down. I want to say, you know, I think you came out in the middle of the quarter on a webcast and said that you were feeling that time had improved. Now you think a little bit more sticky. How do you get confidence that doesn't move down further at this point from any conversations you may have had.

And also you said that, I think you said that about $15 million or $20 million of the revenue reduction is from FX so if I put those two together, it seems like maybe one of the other business moved up a little bit within the guidance. Is there something you can point us to there for a model?

Let me talk a little bit about sort of that cadence because I think you and I had that conversation when I was up at your conference. So when we ended last quarter, the retail inventories in basics at one of those retailers were talking about, was they were down three or four weeks versus the prior year when we ended Q1.

By the end of April, they were actually almost flat. I think they were down virtually flat. So it had come back strongly in April. By the time we ended the quarter, their retail inventories were down about two weeks versus where they were at last year at that same time. So we sort of a little bit of a reverse in May and June. So that's all built into our numbers. So it's probably impacted our total shipments in basics year to date about $20 million.

They, in May and June, communicated that they've had this new ordering system in place for a long period of time and they feel they can now better optimize their turns and so they're now talking about as a more structural change that was communicated to us. Gerald, I'll let you comment on it because you had some of the conversations with them. And they've given us indication they may take a little bit more weeks of supply out, but as they continued to fine tune their system a little bit and that's one of the things that we think may happen in the third quarter and we built into our guidance. Gerald, do you want to add any color to that?

They let us know that as they've gained more confidence in their replenishment system that they intend to operate at a little higher turn and that's what they've managed to through their weeks of supply and adjustment.

And I think it's important to reiterate this has nothing to do with our sell through. This is really just matching shipments to our sell through at retail and as they move as they move the inventories up, or in this case now down more permanently, it's sort of a one time adjustment that happens and then our business should be trending back to where it should be.

We lapped that year round in the first quarter probably. I'm assuming, right?

Absolutely, yes.

Can you talk a little bit about the concentration of promotional spending that you mentioned in the third quarter? What are some of the components of that? What exactly that might be referring to.

As we talk to you from time to time, we reiterate to you that there's volatility in our business from quarter to quarter. One of the things that can be volatile is the timing of trade promotion arrangements with our retailers. And that's really what we're talking about here. Just shifts from one quarter to the next.

I'll also highlight that one of the things that happened last year as we are going into this brand transition, specifically as we are exiting the Barely There brand, which is some of the -- actually, barely there accounts for about half of the decline in intimates this quarter as we were exiting it, we gave some retailers additional mark-down money in Q4 of last year to begin the process of marking that inventory down so that when we were transitioning it there would be a smaller return this year. So that was just part of the overall planned brand transition story. And we won't overlap those trade dollars in Q4.

I apologize if I might sneak a third one in here. As far as acquisitions go, whenever we get out of a meeting, it sounds like the list of potentials is very, very long. Big, small, it doesn't really matter. If you think about that, it seems like at any given time, you could just pull the trigger. There should be a subset of those that are at the price that you guys would find attractive. Can you talk about what are the impediments to getting a deal done in the near term now? Or what dictates the time on those kind of things? Thanks.

We get calls all the time, we've got our own list that we're working on. We've laid out our four acquisition criteria, which I won't go through again because I've talked about it so many times. So we feel very good about our ability to do acquisitions. We don't just take anything that shows up by any stretch of the imagination.

In fact, there are businesses that are for sale or running processes or things like that and we don't have any desire to just do an acquisition for acquisition's sake. That's why we have those four very disciplined acquisition criteria. And I feel good that there's a lot of companies out there that meet those categories that will allow to us continue this acquisition strategy for many years in the future and drive a lot of value.

We are constantly in communication with people. As I've said before, it took three years from initial contact with the Gear for Sports people until we actually did the deal where something like Maidenform happened from initial contact to doing the deal, merely months. Some of it's just opportunistic about exactly when somebody's ready on both sides and when everything gets aligned and when we have a deal we'll let you know.

But I feel good about it being part of our strategy. We're doing great with the acquisitions we've done. We've got a lot of synergies yet to come and you'll see more deals over time.

Thank you. Our next question comes from Christian Buss from Credit Suisse.

I was wondering if you could talk a little bit about the penetration of some of the more technical products in the basics portfolio, progress you've made there and if there are any (inaudible) new programs that are in play for the back half of the year?

Sure. Between Comfortblend and X-Temp combined, they now represent about 15% of our basics business. So that's stepped up from our prior call. We see more space expansion coming in the second half of the year, particularly behind our X-Temp business, which has expanding very rapidly. They continue to perform well and, I think it just continues to speak to the power of innovation, these categories. We're also beginning to push these into the outerwear categories as well. So continue to do very well.

That's very helpful. Wondering if you can talk about work council negotiations for DB Apparel a little bit?

We've actually completed four of the five. We have one left to complete in France, which we will complete, we believe in early fall. At that point, we'll be complete with all the works council consultations.

That leaves us right on track, as we've talked about, to begin major implementation in Q4 and you'll start to see the synergies from that showing up in 2016 and beyond.

Thank you. Our next question comes from the line of John Kernan from Cowen.

Thanks for taking my question.

Sure.

Just on the operating profit guidance for DBA, it looks like you took it up $10 million, is there some offset to that within your yearly guidance?

Well, you know, as we look at our guidance and our plans for the year, there are always puts and takes that we don't go into with you as we don't return on plans, but in this further case we're just trying to communicate that DBA's doing well, they're performing at a level a little higher than we expected, which is a good thing. But, again, there are always puts and takes as we go through the course of the year executing our plans.

Just a quick follow-up on that. Obviously the integration for Knights and DBA is really going to start to accelerate in the fourth quarter, as you look at those businesses a little but longer, are there any revenue opportunities that you are seeing now? You've been specific about the profit opportunities for both, anything incremental on the revenue side for each?

Certainly from the standpoint of DBApparel, it gives us a nice operating platform as we complete our integrations to build out our brands and build our share positions within Europe and we've got some great brands to build upon. Even in Knights Apparel, it's a great complement to our Gear for Sports business. It makes us a bigger player in the college-license apparel and allows us to compete more effectively in the retail channel. So we see growth opportunities in both.

Thank you. Our next question comes from the line of David Glick from Buckingham Group.

Thank you. Just a follow up on DBA. Given your updated guidance, there's another approximately $65 million of operating income growth opportunity. And now that you are further into it, and without asking you to fine tune it, but how do we think about the progression here. Is it linear until you hit your goal? Do you see some big, you know, quick opportunities next year? How do we think about the pace of the recognition of those synergies.

Dave, we've talked about getting EUR100 million over time. We've talked about 3 to 4 years from when we closed the acquisition which is October of last year. In terms of the exact timing, in FY16 and FY17, it's a little too early to comment on that, we haven't even begun our planning process for 2016 for the entire company let alone DBA. We need to get through the works council process and start to build our plans for next year. Then we'll give you a little bit more line of site for that, I'd hate to jump out ahead it.

Fair enough. Back on intimates, are there any prospects? I mean, obviously, the business is tough out there. Are there any new product innovations once you kind of fill the pipeline here that you think could improve the trend versus the year to date. It sounds like your guidance implies that you improve in the back half, but just wondered what the prospects were for turning around that business.

Yes. I want to talk just about the macro environment and we talked about the overall category actually flipping negative. And it's been like that now for a little bit of time. As Gerald said, that's across all channels, specialty, department store, mass and everywhere. That's not going to last forever. At the end of the day, usages in that category haven't changed so that there's normal ebbs and flows.

I really do think that when you get outside of specialty and you look in department stores, mass and mid-tier, one of the big issues is there's been way too many brands and way too many little ideas. There's not big innovation that can help drive the category. That's what we're working hard to change this year after going after our four strong brands with, you know, very distinct positioning.

We can drive big platform innovation behind those just like we have in the underwear and socks category with things like X-Temp and so on and so forth. And that's the thinking that can get that category to start turning around. We need to get in that position and then act like a leader and we can actually help change the category trends.

Thank you. Our next question comes from the line Jay Sole from Morgan Stanley.

Hi, good afternoon.

Hi, Jay.

I wanted to follow up on the M&A talk. When you are out there looking at different deals, what's your sense of the competitive set that's looking at the same deals? Do you see that many competitors that can really compete with you about the kind of the strategic and synergy opportunities that you bring, given that you own most of your manufacturing and can probably generate a lot more cost savings than most of the people that might be bidding for these companies.

I can only really talk about what we've seen historically because things could change over time, but I actually don't think so. At the end of the day, you hit it spot on, is that we're going to have greater synergies than anybody else, and therefore, we've got the capability of just creating a huge amount of value. And so for some of these deals, you may see private equity be interested, but then when there's strategics around, they know that they're going to be a little bit behind the eight ball, if you will, trying to go after a property like that.

Then at the end of the day, there's not even that many big companies, apparel companies that have the kind of supply chain and capabilities that we do now across multiple continents. So there's not a lot of the same kind of competitive dynamics that you might see in some other industries or with some other properties and other people pursuing them. We feel really good about our ability to integrate acquisitions and we're going continue focusing on them as a great way to create value.

Got it. If we could just shift to Champion for a minute. You talked about really strong growth in that brand. Can you just kind of detail some of the new program shipments in sporting goods and some the reasons that's happening now. Just remind us of what changed and where it's going to go from there.

I think Champion really did have a great quarter. Part of that is just a shift in seasonal timing from Q1 to Q2, but a significant portion as well, to the point you just made, was new distribution. It's broad based, it's across both men's and women's programs. I think it's really proof, the bringing of innovation to the brand but also the brand itself resonating in it's sort of every day athlete position. It's both women's and men's and sport specialty and mid-tier department store expansion.

Thank you. Our next question comes from the line of Bob Drbul from Nomura.

Hey, Bob.

Hi, good afternoon. This is Kevin Heenan on for Bob. I was just wondering if you guys had any commentary on how you're positioned or how you think the consumer is positioned as you head into the back to school season, especially as you have the Knights Apparel business now in the mix. Thanks very much.

I think we're well prepared for back to school in terms of the macro. I think there's a lot of speculation out there in the media about whether it's going to be a good back-to-school or bad back-to-school or whatever. At this point, it's all speculation. We're just about to head into it literally starting this coming weekend and then strongly for the next six to eight weeks and I think time will tell how the consumers responding and if they're coming out to buy. We feel good about our overall position. Isn't that right, Gerald?

Absolutely, we do feel great about it. You are right, we've got Knights now in the mix and they are positioned as well in the back-to-school period, which is big for them. We think we're in good shape.

Thank you. Our next question comes from the line of Jim Duffy from Stifel.

Good afternoon, guys. Hope you're well. I'm hoping can you provide an updated view on the synergies associated with the three acquisitions in 2015. Are you finding more than you'd expected previously? And is that what's behind the higher guidance for the integration charges?

No, Let me address the synergies first. Maidenform is right on where we expected it to be. So we're in good shape there.

With DBA, we've begun to see just a little bit of synergies. Really when works councils are over, we'll begin to implement the integration plan and then we'll begin to see really the synergies, really effectively starting next year. Knights Apparel, again, just acquired them, we're still working through the integration plan for them, which means we really wouldn't see a lot of synergies there until next year as well. Again, I think we're right on plan where we thought we'd be on synergies.

When you look at the XA charges that we have been talking about. Let me take it from a couple different perspectives. One, for the full year, we went from $200 million to $240 million, it had nothing to do with DBA. Our estimates on DBA, Maidenform, both are about the same. We now are including, now that we have greater visibility on Knights Apparel and the integration plan that we think we'll be going in there, we're better able to estimate what those charges might be.

That's about half of it and the other comes from our decision in the second quarter to exit the China commercial business, which is about a $20 million charge, almost all of which was non-cash. So that accounted for the $200 million to $240 million move. It didn't have anything to do with DBA or Maidenform.

Is the split there still about one-third cash, two-thirds non-cash?

Yes. This year especially, yes.

Okay. Thanks.

Thank you. Our next question comes from the line of Steve Marotta from CLK & Associates.

Good evening, everybody. Just one question. Regarding the weakness in the innerwear, is there any increase in estimated promotional activity in the back half of the year and can you talk about pricing in the back half and given the weakness in that segment?

Our pricing has been set for some period of time so certainly pricing is in place. From the standpoint of promotion activity, there's really no increase in activity, as Rick touched on earlier, there's some shifting of spending between quarters but no increase.

That's helpful, thank you.

Thank you. Our next question comes from Carla Casella from JPMorgan.

Hi. I have a clarification question. Did you call on how much you have outstanding and available under your revolver?

No. As of the end of the quarter, we had nothing outstanding under the revolver except a very small amount of trade letters credit. So the revolver's virtually entirely available to us.

Okay. Just a follow up there. Your view on the capital structure. Your high yield bonds become callable later this year. Just wondering how you are looking overall capital structure and the amount of debt you are comfortable with.

As we've said before, we really like the strong BB credit rating. That suggests leverage ratio and the net debt to EBITDA leverage ratio of about two to three times. We feel very comfortable operating in that range. So specifically with respect to the bonds, they are callable on December of this year. You know, we're always evaluating that. We haven't made a decision on what, if anything, we're going to do with them when they will become callable. That will be something for later this year.

Thank you. Our next question is a follow up from the line of Matthew McClintock from Barclays.

Yes. Thanks, guys, for giving me a follow-up. Just wanted to ask a question back on the share repurchases. If I remember, I believe your purchase program goes back to 2007 and yet you really haven't done much in terms of repurchases over the last several years. Yet at the same time you've always generated a significant amount of cash flow. So what's really changed in the sense, internally, of why share repurchases are becoming more to the forefront, more part of the strategy going forward? Thanks.

Matt, it's funny, the two most frequent questions that I'm asked are when am I going to do the next acquisition. And that's actually included when we announce an acquisition, the next question I get is when are you going to do the next one.

The second most frequent question I get is so when are you going to start buying back shares because you generate so much cash and right now if you don't do anything, your leverage ratio by the end of this year is going to be substantially below our target range. Why are we starting to talk about it now? It's because more likely than not, the time to begin doing it is now. When you look at what Rick just talked about, as we've got nothing on our revolver yet we ended the quarter with over $300 million of cash on the balance sheet.

So we knew we'd start getting questions about well, are you going to let that cash accumulate or what are you going to do with it to create value. I've gotten those types of questions before. We want to be, as we always do, transparent, let people know how we're thinking. Most importantly, that our goal is to make sure that we're creating the best return for you possible with the use of our cash. That will include share repurchases and more likely sooner rather than later.

Thank you.

Thank you. Our final question for today is a follow-up from the line of John Kernan from Cowen and Company.

Thanks for letting me jump back in. We've heard a lot about the TPP legislation recently. Do you have any thoughts on how that's going to affect some of your costs coming out of your Vietnam owned sourcing base?

Let me talk a little about that. We've been operating successfully in Vietnam now for many, many years. We've got close to 9,000 people and that's going to grow to 12,000 to 13,000 over time. So we've got a strong head start on a lot of other companies in terms of being comfortable and operating in Vietnam.

It's a great place to operate. It's low cost for a lot of products into the US even under the current structure and it's also a great option for places like into Europe and elsewhere in the world. So it's great no matter what happens with TPP. If TPP does in fact pass, it can actually add an added benefit by reducing or actually eliminating duties on some of our products. Those duties range from 6% to at most 17% and so it'll open it up a little bit.

Those things will probably get phased in over time, so it's not like it will be an immediate impact, but clearly it will make Vietnam more competitive and I'll be glad we'll have almost a decade head start relative to a lot of our competition. So it puts us in a good, competitive position from a long-term perspective.

Great to hear it. Thank you.

Thank you. That concludes our question and answer session for today. I would like to turn the call back over to Hanes management for any closing comments.

That's all we had today. Hope everyone has a good night. Give us a call if you need help. Thanks.

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may now disconnect. Everyone have a good day.