漢佰 (HBI) 2016 Q1 法說會逐字稿

Good day ladies and gentlemen, and welcome to the HanesBrands first-quarter 2016 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. (Operator Instructions). As a reminder, this conference is being recorded.

I would now like to hand the meeting over to TC Robillard, Chief Investor Relations Officer. 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 first quarter of 2016.

Hopefully everyone has had a chance to review the news release we issued earlier today. The news release, updated FAQ document, and the replay of this call can be found in the Investors section of our Hanes.com website.

On the call today, we may make forward-looking statements either in our prepared remarks or 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 on our website 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 results as well as our 2016 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, Gerald and Rick will provide some brief remarks and then we will open it up to your questions. I will now turn the call over to Rich.

Thank you TC. HanesBrands delivered strong first-quarter results as revenue increased 1%, operating profit increased 10% and earnings per share increased 18%. Our ability to consistently magnify our growth rates as you walk down the P&L demonstrates that our strategies to create long-term shareholder value are working. We are driving innovation in our categories, we are generating efficiencies within our supply chain, we are enhancing our margins, and we are effectively allocating our capital. Within the first 100 days of 2016, we increased our dividend 10%, repurchased $380 million of stock, and announced the acquisition of Champion Europe.

Overall, the year is unfolding as we expected. Point-of-sale trends have rebounded from their severely negative levels in Q4. Our acquisition synergies are ramping on schedule, and our initiatives to re-energize sales growth are on track. All of this gives us confidence in our ability to achieve our 2016 guidance. Add to this our continued focus on executing our long-term strategies and we believe we are well-positioned to deliver double-digit EPS growth for many years to come.

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

Thanks Rich. We delivered solid results for the first quarter, but more importantly, we made significant progress on our sales initiatives, our inventory actions, and our integrations. So let me speak to these in order.

Starting with our sales initiatives, if you recall last quarter, I walked you through several initiatives that I had the organization focused on delivering. One of the initiatives is to expand the space of our successful Innovate-to-Elevate platforms. For 2016, we secured new space for various X-Temp products in the mass and mid-tier channels.

A second initiative is to ensure we are focusing on our core products with the right balance of promotion, media and innovation. During the first quarter, we began rebalancing our marketing features to drive our core, and the initial sell-through results were positive. As we look to the second half, we are on track to launch our next big innovation directly into our core.

And the third initiative is to drive online growth. As the migration to online accelerates, we are reallocating our personnel and marketing resources to capture this consumer shift. In the first quarter, our US online sales across all channels increased 15% over last year and now represent 8% of our domestic sales.

I feel really good about the progress we have made. While these initiatives are not expected to fully impact sales growth until the second half the year, our progress to date gives us confidence in our ability to deliver on our 1% to 3% revenue growth guidance for the year.

Turning to our inventory reduction actions, recall that the bulk of these actions are expected to come in the first half while the reduction in our inventory level is expected to begin in the third quarter and continue through the end of the year. During the first quarter, we took time out within our manufacturing network, we lowered the use of external sourcing, and we reduced raw material purchases. We expect to complete essentially all of these actions in the second quarter. We are on track to reduce our inventory as planned, and this gives us confidence in our ability to deliver cash flow guidance for the year.

Next, I'd like to provide an update on our acquisition integrations. Beginning with Hanes Europe, we are making great progress on our synergies and remain on track to deliver EUR100 million of annual operating profit by the end of 2018. The insourcing of production continues to ramp up and we've begun reducing SG&A as 120 people exited our operations in France at the end of the quarter. We've completed nearly 8,000 action items and are about two-thirds of the way through the integration.

Touching briefly on their business, Hanes Europe had a solid quarter, delivering operating profit that was slightly ahead of plan. The European price increases are now in place and we are on track to generate substantial profit growth this year as synergies ramp.

Turning to Knights Apparel, we have completed essentially all of the integration actions and are on track to double their operating profit by 2018.

With respect to our Champion Japan acquisition, this integration is complete and we now generate roughly $140 million in sales in Japan between our Champion and Hanes product lines.

Lastly, we have begun our initial integration planning for Champion Europe. We are excited about the significant revenue growth opportunity for the Champion brand, and we are on track for a midyear close. Overall, our integrations are progressing on or ahead of schedule, which not only gives us confidence in our ability to deliver $40 million of synergy benefits this year, but also provides us with the bandwidth to do additional acquisitions.

So, in summary, our strategies are working, our acquisition synergies are ramping on schedule, we are progressing on our initiatives to re-energize sales growth, and we are on track to reduce our inventory levels, all of which gives us confidence in our ability to drive low single-digit sales growth and double-digit EPS growth in 2016 and beyond.

I'll now turn the call over to Rick.

Thanks Gerald. We delivered another record first quarter. The combination of our margin enhancement strategies, our acquisition strategies and our capital allocation strategies drove an 18% increase in our earnings per share, once again highlighting the power of our business model to deliver strong returns for our shareholders.

Now let me give you some color on the quarter. Sales increased 1% over last year, driven by the contribution from Knights Apparel, and the 1% growth in our innerwear segment, which was partially offset by $12 million of currency headwinds. As expected, our gross profit margin declined from last year. Efficiency gains from the supply chain were more than offset by the recognition of certain inventory reduction costs which resulted in a 20 basis point decline in our margin. Our guidance calls for close to $20 million of inventory related costs this year, $8 million of which hit our P&L in the first quarter with the majority of the remaining costs expected to come in the second quarter.

SG&A costs in the quarter declined approximately 130 basis points to 25.8% of sales. Key drivers of this improvement were synergies from acquisitions, planned catalog circulation reductions, and tight cost controls. This resulted in a 110 basis point increase in our operating profit margin to 12.1%.

Our earnings per share of $0.26 was an increase of 18% over last year. The $0.04 improvement includes $0.01 from operational performance, $0.01 from the 2015 share repurchases, and $0.02 of expense timing between the first and second quarters. And lastly, our cash flow from operations was a use of $285 million, roughly in line with our expectations.

Turning to guidance, we reiterated our full 2016 guidance, which does not yet include the impact from Champion Europe. Looking at the key components, we expect sales of $5.8 billion to $5.9 billion, which represents a 1% to 3% increase over last year. We expect operating profit to be $920 million to $950 million, which at the midpoint implies a 100 basis point increase in our operating profit margin. We expect EPS of $1.85 to $1.91, which represents 11% to 15% growth over last year. And we expect cash flow from operations to be $750 million to $850 million.

So, in closing, we are off to a great start in 2016 and we are well-positioned to deliver on our guidance. Looking forward, as we execute on our proven long-term strategies, we believe we are well-positioned to continue to deliver strong shareholder returns for many years to come.

And with that, I'll turn the call back over to TC.

Thanks Rick. That concludes our prepared remarks. 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 will ask that you limit yourself to one question and a single follow-up and then re-enter 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). Eric Tracy, Brean Capital.

Good afternoon everyone. Congrats on a nice quarter. So Rich, I guess let's just hit the stabilization that we are seeing on the revenue line, and more importantly kind of looks like with the visibility you have to kind of continuing that, so maybe separate the point-of-sale trends that were impacted by weather versus some of the visibility that you have to stage gains and/or new programs for the back half of the year.

I'll just say -- start with the consumer environment, we are seeing the overall consumer environment continue to be relatively choppy like it's been for four or five years. We are starting to call it the new normal. And I think some of the stuff that we saw in Q4 was sort of isolated to that quarter. More specifically, about the current business, Gerald, do you want to talk to Eric's question?

Yes, I think it's really playing out like we expected. We've seen POS pick up, as Rich referred to, coming out of the down period of the fourth quarter. We've seen nice positive pickup in POS going into the first quarter and you see that, and our Innerwear sales are up 1%. And it just feels like it's tracking about like we expected. We've begun to implement our sales actions, and while the bulk of those are really expected to impact the latter half of the year, the early steps we took to refocus on the core have been very positive. We are seeing good results as well. So we feel good about our ability to deliver on our guidance.

And I guess my follow-ups would be a little bit bigger picture, but how are you guys thinking about managing through this channel evolution? I know you believe that the consumer is channel agnostic. But as online, be it your own and/or third-party channel continues to develop, in terms of the infrastructure that you have in place, what sort of resources do you need to reallocate to ensure that that business continues to take the requisite share that it should?

Yes, the apparel sales are clearly shifting online and online is growing very fast for total apparel sales. And we are really focused on that as well. We grew our sales 15% in the quarter, and we are now -- about 8% of our domestic sales are online. We're shifting resources, both people and marketing resources, to go after that opportunity. We hold leading shares in our categories online already, but we are now seeing those share grow. In fact, in a large pure player, our share is actually as large in our core categories as it is in our brick-and-mortar channel. So we see it as the place that's growing. We're focused on and it really is a reflection of our focus on omnipresence. We want to be where the consumer wants to shop, and increasingly that's online, and that's where we will go.

Omar Saad, Evercore ISI.

Thanks. Good afternoon. Nice quarter guys. I wanted to focus on the activewear category. A little bit of bounce back but still a lower run rate than kind of where you've been at. What's going on in there? I think there's been some changes to the [59] target, some of the strategies in products and maybe bring a little bit more fashion and style in there. Just any sort of updates on what's going on in that category, because I know it's important to you guys, especially now that you're going to be kind of owning the Champion brand globally.

Sure. Let me just start with saying that overall the business was up 3% in the quarter. The sports license apparel business performed particularly, well both the gear business and we did have the wrap of the Knights Apparel acquisition in the quarter.

Underneath that, to dig a little deeper, the Champion business did experience in sports, specialty, department stores, experienced a headwind of the Sports Authority bankruptcy in the quarter. Now, while it's not particularly big to the total company, it's only about 0.5% of sales, it's a big customer within that mix, and so that business overall was flat for the quarter. When you peel that back, the rest of the business was actually up nicely at a double-digit rate. So the core business is sound, just a little bit of headwind there from the TSA perspective. The POS in that business is up double digits as well in the core business, so we see nice fundamentals there.

The Champion at mass business is we are in the final stages of redoing that product. It's beginning to flow in now, continues through the second half and we really project that returning to mid-single-digit growth in the second half of the year. So when we look at all of that together, we are optimistic about as we turn the corner on that business that we will see nice positive growth through the year.

That's really helpful. And then one quick follow-up. Within the intimate apparel on the bra side, anything going on there? I haven't heard you guys talk about it in a while. We're hearing more and more about the Bra Lip trend. That might be younger a consumer than you guys skew towards. But any update on the bra business, which was a little bit controversial a few quarters ago?

The innerwear business in total was up 1 point. I think as you peel back the consumer -- or the retail environment, what you see is a mix trend within channels. Some are up. Some are down. In the case of the mass channel, it was a little stronger. As we look at midtier and department store, we see a little -- a weaker performance.

Our intimates business was down in the quarter, and it's really affected by a higher concentration of sales. Roughly 40% of that business is in that mass or in that midtier and department store channel. So it was down modestly in the quarter. On the innerwear or the basics business, on the other side, was up and it benefited from both the stronger trends in mass, where the predominance of that business is sold, as well as the early efforts we had to refocus on the core.

Susan Anderson, FBR and Company.

Hi, good evening. Good job on a great quarter. So I was going to maybe drill down on SG&A. It leveraged pretty strongly. With this mainly due to the DBA cuts, or how much of that contributed to it? And did those come maybe sooner than you guys expected, and then I guess just the timing of the other third?

Sure. You're right. There were really two key drivers, three key drivers, in the quarter on SG&A. One was synergies. We are seeing good synergies coming out of our Hanes Europe DBA acquisition. They're doing a great job on that. We are also continuing to be very prudent in our spending as -- and so good cost controls are in place. And another driver was the reduction in the number of catalogs that we distributed in the quarter.

Got it. Okay, that's helpful. And just to follow-up on international, it looks like the growth improved from fourth quarter. I guess what was the big driver there? Was the pricing in place in first quarter to help drive that, or was it better, less FX impact, or maybe just units going up?

As I peel it back, looking at it overall, total international was up 3% on a constant currency basis. And it comes from a number of buckets. I would start first with our Asia business had an outstanding quarter driven by our Japanese business. We've got our outstanding team there that's doing a great job and their sales were up strongly. They're about $140 million in business now. In both the Hanes and Champion businesses, they are performing very well. We saw growth in Mexico and Canada both on a constant currency basis. And then from the standpoint of Hanes Europe, as we mentioned in our remarks, the operating profit was slightly ahead of plan for the quarter. We've got our price increases now in place and we are on track, as we execute our integration, to generate substantial profit growth there as well as the synergies ramp. So we feel good about the international business. We are really hitting on all cylinders there.

Michael Binetti, UBS.

Congrats on a nice quarter. You mentioned -- you obviously are hinting at some pretty meaningful innovation that you have coming in the core in the second half. It sounds like it's a little bit bigger than maybe some of the one-offs in the Innovate-to-Elevate program we've heard about from you so far. And obviously I don't expect anything competitive out of it, but maybe you could tell us a little bit about some of the components you see, how it will impact revenues. Is this a shelf space gain? Is it for new innovation or is it mostly pricing? Any help there would be helpful.

What we've said in the past is it's been a number of years since we've innovated in that core product. We've done a lot of innovation platforms. The last big innovation in that area was the tagless tee over a decade ago, and then we introduced tagless into bottoms. So this will be the next upgrade in that product from the standpoint of another innovation. I don't want to give a lot more than that other than to say that it's very well received by the consumer and you'll be seeing it in the second half of the year.

Okay. And then I was very positively surprised to see the gross margin delivery in the quarter. At the same time, I was a little surprised to see the inventory a little stickier than we thought, given the commentary we had last quarter about some of the downtime in the factories to help normalize the working capital inventory. It sounded like it might have been a little bit more focused in the first quarter than we thought. Was there another component to inventory that was an offset there that we should think about?

Yes, I would say, as you think about the inventory levels, actually the rate of increase -- remember we -- during the first half of the year, we were building inventory towards back to school. And so -- but we built it at a slower pace this year than we did last year, about $30 million slower pace in inventory. So that's I think an encouraging early sign. But as Gerald has said, the bulk of the inventory benefits will come to us in the second half of the year after back to school. So the --

And in terms of the P&L impact, we said about $8 million of P&L impact for the costs associated with those actions. We are still thinking $20 million for the full year, most of it, the bulk of it in the first half, and so more shifting to the second quarter then as we now are implementing plans. So actually we are right on where we thought we were going to be both in terms of cash flow overall, in terms of our inventory position, and we are very pleased with where we are right now and feel good about delivering those numbers.

David Glick, Buckingham Research.

Thank you. Good afternoon. I just wanted to talk about the acquisition related charges. I think investors have become a little more focused just given the degree of charges that you've incurred the last two years. It was good to see the difference between GAAP and non-GAAP earnings be less in Q1. I just wondered if you could give us an update? I know Champion Europe is to come; that hasn't closed. So excluding that, what should we see this year in acquisition related and other charges as you describe them? And what are the sources? And should we see that number really coming down relative to the last two years?

So in our guidance we actually narrowed the XA, charges guidance to really 1 point to $85 million for the full year. We did $25 million in the first quarter. That would suggest a slowing trend through the year. For the full year, $85 million, it's about 80% of that is for Hanes Europe for the DBA acquisition, about 15% of it will go to Knights Apparel, and the balance is associated with the reacquisition of our Champion license in Japan. And so the XA is very limited to acquisitions only in 2016, and so you are seeing the pace of those charge slow down.

And the vast majority will be SG&A versus gross margin?

I'm not sure I would say the vast majority, but the bulk of them will be SG&A.

Okay, great. Thanks very much.

Taposh Bari, Goldman Sachs.

Good afternoon and great quarter. Rick, can you give us the organic constant currency growth number for the entire Company for the quarter?

Well, we said the constant currency growth was the 2% number, and Knights Apparel was $21 million of sales in the quarter.

I'll figure that out. Thank you. And Rich, maybe for you on revenue line, nice to see a return to positive growth in the first quarter, up 1%. You're guiding the year to up 1% to 3%. Remind us how you're thinking about the past throughout the rest of the year. I know a lot of the year is still ahead of you. In other words, just try to maybe get a better sense of what happened -- what needs to happen for you to get to the high end, and what are some of the discreet tailwinds at your back for the next nine months? Thanks.

I'll just conceptually say nothing has really changed from how we laid that out on our Q4 call. And I let Gerald talk a little bit more about the details.

You may remember the low end of the range was really built on two things, the ramp of about $50 million in one-time wrap on acquisitions, the combination of the Knights wrap and our take-back of our license for Champion. The balance of that was around not having one-time events happening in the one-time reduction of inventory in one of our large retailers and our bra consolidation.

As you move out toward the 3%, it's really two things. One would assume a more normalized fourth quarter when it's not the warmest on record. And the second was the key growth initiatives that we have spoken about. One is continuing to lever our Innovate-to-Elevate with things like expanding X-Temp, which we are seeing that expansion take place. The second was refocusing on the core, combination of rebalancing back toward the core. We began to execute a few of those events in the first quarter, but most of those are actually coming later in the year. And then with that is also to provide innovation to the core as we discussed earlier. And then finally to focus on online. And as you think about how that moving from 1% of 3% might take place, a lot of that would come in the second half of the year between executing our focus on the events, the space expansion, as well as the normalization of the fourth quarter.

John Kernan, Cowen and Company.

Thanks for taking my question. Good to see point of sales trends come back. So I just wanted to go back to the cash flow. Obviously, your cash flow from operation guidance is really robust this year. Is there anything that would suggest that that would have to come down going into 2017? Is that the new, sustainable run rate of your cash flow from operations? Is there any pension contributions or working capital changes that would really prevent that from being the new run rate of your cash flow?

I would say the answer is yes. I think that's a pretty good proxy for going forward. I think what you're going to see, generally speaking, is modest pension contributions. Working capital, generally as we stabilize inventory this year going forward, working capital should not really be much of a source for use in any given year, generally speaking. But then obviously cash flow will be driven up by as we continue to drive higher income. So, I think we are on the right track on it, and I think that is certainly a sustainable number.

Okay, thanks. And then just one follow-up. Obviously Walmart and Target have been great partners for you for a long time. I think, obviously, one of their biggest competitors, Amazon, is making a fairly significant push into apparel and some of your mass product would probably translate well on that platform. Has there been discussions with Amazon? Is that a channel that you think can be a growth platform for you going forward?

We are a branded seller, and obviously Amazon is one of our customers that we work with, just like we work across all retail channels. And as online grows, clearly Amazon becomes one of the customers. And I think we've noted that there is a large pure player that's one of our largest emerging customers. It was number seven I think we noted in our FAQ. And we work across all channels that trade accordingly.

Ike Boruchow, Wells Fargo.

Hi everyone. Congrats. Thanks for taking my question. On the inventory, just two quick questions. First, how should we think about the inventory growth as you progress through the year? And then second, given -- I think you mentioned you have more cost in Q2 versus Q1 in the gross margin line, should we expect gross margin to be a little weaker year-over-year in Q2 relative to Q1? Thanks guys.

Sure. Let me take the gross margin question first. Yes, you should see it be a little weaker, and then the back half of the year, you should see the gross profit trend normalize.

In terms of the inventory, we wouldn't expect to see -- we would expect to see the inventory decline year-over-year in the second half. So -- but I think the same trend you saw in the first quarter where we were seeing a slowing of the growth versus last year you will see probably through the second quarter.

I want to stress about the inventory since we've got a couple of different questions about it as we've taken a lot of the actions. So a lot of the things are now done to ensure that the inventories will start to draw down to a much lower level than we had last year. But you do have to wait for the sales rates to go over Q2. And as Rick said, we don't actually cross the line below until it actually -- I think the projection is about July which you wouldn't see until in Q3. So we've done many of the things or they will be finished within the second quarter, and inventory will just bleed off through the rest of the year. It's almost like it's math at that point.

Anna Andreeva, Oppenheimer.

Great. Thanks. Good afternoon guys, and congrats. Thanks for taking our question. I guess great to hear about the POS inflection in the first quarter. Just curious. Has that continued into 2Q? Is mass channel performing better right now than department stores? And what are you guys seeing with the order book into back-to-school? And secondly, how do we think about the cadence in the buyback during the year, especially given the cash layout for Champion? Thanks so much.

Let me start with the question about our POS trends considering -- continuing into the second quarter. It's really difficult to tell at this point in time. You've got an Easter shift that took place from April into late March, and it creates a lot of noise between the two periods. So it's early days and difficult to really give you any insight on that at this point.

In terms of the share repurchases, going forward, what we have done is -- the $380 million is in line with our activity has been factored into our guidance that we reiterated. As we get towards the latter part of the year and we assess our cash position, we will then decide whether we want to do any more at that point.

Simeon Siegel, Nomura Securities.

Thanks guys. Good afternoon. Just to an earlier point, so given the first quarter's operating cash decline, can you just talk to the reiteration of that full-year cash number from operations? Is the variance just a function of this inventory improvement being back-half? And then what would the implied second-quarter share count be just from the math given the way the late quarter reverses? Thanks.

So in terms of the cash flow, I think we are roughly right where we expected to be at this point, so we are right on plan. Yes, it will be driven largely by the significant drop in inventory in the second half of the year but also by our -- our continued growth in profitability will also contribute to that and our reduced XA charges through the year. So that's -- we feel very good about that.

In terms of the share count for the second quarter, we'll probably be in about I think probably about a 385 million type number, 385 million type number.

Great. Thanks a lot guys. Best of luck for the rest of the year.

Thank you. That concludes our question-and-answer session for today. I would like to turn the conference back over to TC Robillard for any additional comments.

We'd like to thank everyone for attending our call today and we look forward to speaking with you soon. Have a great night.

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.