Hello and welcome to the First Quarter 2018 Gildan Activewear Earnings Conference Call. My name is Brandon, and I'll be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note, this conference is being recorded. And I will now turn it over to Sophie Argiriou. Sophie, you may begin.

Thank you, Brandon. Good afternoon, everyone, and thank you for joining us. Earlier, we issued a press release announcing our earnings results for the first quarter of 2018. We also issued our interim shareholder report containing management's discussion and analysis and consolidated financial statements. These documents will be filed with the Canadian Securities and Regulatory Authorities and the U.S. Securities Commission, and are available on our website at www.gildan.com. Joining me on the call today, we have Glenn Chamandy, our President and Chief Executive Officer; and Rhod Harries, Gildan's Executive Vice President and Chief Financial and Administrative Officer. The conference call will start with Rhod taking you through the results for the quarter and our business outlook for 2018, after which a Q&A session will follow. Before we begin, let me remind you that certain statements included in this conference call may constitute forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve unknown and known risks, uncertainties and other factors, which could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. We refer you to the company's filings with the U.S. Securities and Exchange Commission and Canadian Securities Regulatory Authorities. With that, I will now turn the call over to Rhod.

Thank you, Sophie. Good afternoon, everyone, and thank you for joining the call. Today, we reported our first quarter results for 2018 and we are pleased to confirm our financial performance for the quarter was in line with our expectations and we are on track to achieve our full-year financial targets. As we indicated when we initiated our guidance, we were forecasting first quarter sales and earnings to be down year-over-year, particularly as we were comping a very strong record prior year quarter and given that temporary capacity constraints that arose late last year as a result of the disruption from the Honduran election limited our ability to fully capitalize on sales demand in the quarter. Notwithstanding this temporary challenge, however, we were pleased with our performance, particularly in the growth areas of our business. Our strong momentum in fashion basics continued in the quarter, with sales growth in the double-digit range and sales in international markets were up 24%. We were also pleased to see strong sell-through continue for our men's underwear products in the quarter, partly based on the success we're having on Amazon with this category following the recent fall assortment launch in January. Operationally, we advanced with our integration initiatives related to our organizational consolidation, combining the Printwear and Branded Apparel divisions into one unified marketing, merchandising, sales and distribution organization. Cost benefits started to flow through in the quarter and are on track to accelerate in the second half of the year. I will cover this later in more detail, but first let me take you through some of the details of the financial results for the quarter. Sales for the first quarter were down 2.7% due mainly to lower sales in our new combined hosiery and underwear reporting category, which was down 20%, partly…

Thank you, Rhod. Before moving to the Q&A, I would ask that you limit the number of questions to two in order to give everyone the opportunity to ask a question. We'll circle back for a second round of question if time permits. So, Brandon, I'll turn the call over back to you for the Q&A session.

Thank you, Sophie. We'll now begin the question-and-answer session. And from Bank of America, we have Heather Balsky. Please go ahead.

Hi. Thank you for taking my question. I guess, for starters, can you just...

Sorry. Heather, we're having trouble hearing you. Maybe you can just speak up a little bit louder.

Hi. Sorry. I'll try my handset.

Okay, great.

Thanks. So, first off, can you just talk about with regards to the capacity constraints and the issues in Honduras, where you are in the process? Are you back to being able to fulfill demand and chase demand, or is there still some ways to go?

Well, it's Glenn, Heather. Well, look, right now, we're producing at over 100%. I mean we're – we've got – it's pedal to the metal in terms of trying to regain the lost production. Maybe just to quantify it a little bit for you, I mean, we basically, on a year-over-year basis – base, we destocked the channel by about 2.5 million dozens worth of product, which is probably equal to about $60 million in revenue. It's probably where you're looking where, I think, the shortfall has fallen. Q2, for us, is our strongest quarter. So, normally, historically, we actually draw down on inventories in Q2. So it's probably going to be Q3, until we really catch up with and realign our capacity with demand during the year. That answers your question.

Thank you. And then, as my second question, just switching gears, can you talk about your learnings to date in terms of the men's underwear launch and sort of, I guess, interacting with the Amazon customer versus the brick-and-mortar customer?

Well, it's not the first launch of products on Amazon. I mean, we've been very successful with our Gold Toe brand in Amazon. This has really been our first big underwear push. It's been very successful. We launched towards the end of January. And in a very short period of time, I think we exceeded our expectations as well as I think Amazon's expectation, and we became a top seller of our product on Amazon. So we're very excited. We think there's a lot of opportunity. But part of our whole realignment in terms of our businesses to continue to take advantage of more opportunity, both from all of our products that we offer, at the same time, to put the infrastructure in place from a distribution capacity as well as an infrastructure to continue to support more products on Amazon and to direct to the consumer. So this is really the reason why we really made our realignment and this is really where we're pushing the future initiatives in the company. And partly, because distribution is a lot more complicated to ship and prepare to ship to e-commerce basically because of the nature of the base. It's much smaller. It's pick to the pieces. And that's really where we've made the investments this year and that's why our SG&A has gone up in Q1. So as we move into Q2, we will have the infrastructure in place really support and we're working with our partners to expand our offerings and to drive our sales.

Great. Thank you so much.

Okay.

From GMP Securities, we have Martin Landry. Please go ahead.

Hi. Good afternoon. You gave us a bit of data points to work with for our Q2 estimates. You talk about your sales being a little higher, but having a bit of a gross margin headwind. Wondering what does that translate into on an EPS basis that you expect for Q2?

So, yeah, if you look at Q2, Martin, as we said, there is some headwind as we move through the quarter. I mean, we see good sales growth. But if we look at what's going on really from a price perspective and a mix, we're expecting that that will not fully offset the raw material increases that we'll see in the second quarter. And then, also, as we said, our SG&A reductions are back-end loaded. And then, we will have some impact of some of the production disruption coming through in our COGS in the second quarter as well, probably about $0.02 from a cost perspective there. So, overall, when you look at our EPS for the second quarter, you'll see that the impact of all of these factors will play through on the quarter. And that's why really we're guiding to a quarter which really you're going to see the strength coming through more in the third and the fourth quarter than the second quarter.

So should we expect EPS to be flat to down on a year-over-year basis?

I think if you look at the EPS, I think from a flattish perspective, I think we'll see how it plays out. But effectively, if you look at the pressures that we've got, I think, again, we're going to drive the real strength in the back half of the year, and so you'll see that weakness more coming through in the second quarter.

Okay. And my second question, just on acquisitions. I mean, wondering if you have an appetite to expand your product categories into other lines. I mean, historically, you've talked about maybe uniforms. You've alluded to maybe getting into jeans at some point, but we haven't heard much of that lately. So wondering where are you at in terms of acquisitions, what do you see out there and what's the pipeline.

Number one selling online item in American Apparel is denim. So we sort of ended up there organically. But, look, we're continuing to monitor our growth opportunities through acquisitions. It's been part of our strategy to reinvest our free cash flow. I think, short-term, we have a lot on our plate to – on our realignment, which we're focusing on. So I would say, in the short term, there's a lot of synergies we're going to get and a lot of SG&A reductions. And maybe just going to the realignment, which I guess is our short-term focus, like Rhod alluded to is that our SG&A this year is going to come down as we go through the year. And our objective is to maintain a flat SG&A in 2018 relative to 2017 and even push that into 2019 as we continue to really focus on SG&A reduction. So, at the same time, we're also focusing on margin expansion, on our innerwear product category, both socks and underwear. So those are really the two short-term goals that we have as a company to really improve the profitability in that side of our business. At the same time, we've never taken our eye off of opportunities in terms of getting brands, products channels of distribution, where we've got a pretty good slate of opportunities. It's just a question of when they materialize. It's not always in our control, but we never stopped looking. But I would say that just in the short term, I think we're really focused on making sure we deliver realignment.

Okay. Perfect. Thank you.

Thank you.

From CIBC, we have Mark Petrie. Please go ahead.

Yeah. Good afternoon. I wanted to ask about the private label shift. And wondering if you can quantify the impact that that had on your business, either from a revenue perspective or profitability perspective in Q1, and then the outlook for the impact in 2018.

You want to do (00:20:36)

So if you look at the impact of the – the private label impact in the first quarter, Mark, what we really saw is the shift in socks, right. So our sock business was down overall. We said for the full year that our socks will be down about $70 million, and effectively that's playing out. So if you look at our underwear and hosiery category, we were down in the quarter. If you look at the overall impact, about $35 million, if you look at the impact where that was coming from, probably $15 million to $20 million was the shift in private label; $5 million to $10 million was related to this large license program that we comped versus last year where we're filling the channel with a large national chain. And then, the remainder was related more to some of the weakness that we saw in the sports specialty and department store and some of it was timing as well. So, in the first quarter, I would say we would call it $15 million to $20 million on the private label impact.

Okay, thanks.

By the sales level.

Yeah. Okay. That's helpful. Thank you. And are you seeing it in any other categories beyond socks or do you think that that will be something that evolves?

Well, look, and as we said in our Investor Day is that there's an opportunity for us in private label. We have a criteria that we set forth in terms of how we think we're going to focus on socks. And just to reemphasize that socks for us, at the end of the day, is we're still running at full capacity, all of our sock plants. We're still outsourcing a significant amount of product to third-party contractors in Asia fulfill our requirements. So, although we lost sock revenue in private label, that business was relatively marginal to the bottom line of the company. And at the same time, we refill that capacity up with garments or socks that we were sourcing, that we're internalizing, that our long-term branded socks, like Gold Toe and Under Armour, for example. So, socks is a little bit different when you look at where we're going. And then, when you look at the activewear and underwear, we have a significant capacity available and we have a significant capacity coming online. We have Rio Nance 6, which will start at the end of this quarter. We're expanding in Rio Nance 1, 2 and 5 with incremental capacity and we have capacity in Mexico to support incremental capacity. So, we are in the process of actually obtaining new private label underwear and activewear programs, which we've been working on that will probably materialize sometime in Q4, which will also support 2019 revenues. So part of our strategy is to supplement our brand, our Printwear strategy with the selective private label programs that meet our criteria, which is good margins, low risk, low SKUs and high volume. So we're doing everything we said we're going to do.

Okay. Thanks. And then, just with regard to the e-commerce platform, could you just give us an update in terms of where you're at, as you continue to build that out and particularly from a distribution standpoint?

Okay. Well, what Rhod mentioned earlier, first of all, we have – e-commerce is in different fronts. We have, first of all, our American Apparel, which is doing very well on an e-commerce front from a direct-to-consumer perspective. We also launched that with a – in over 200 countries. We recently just launched it this quarter. So I think that from an American Apparel perspective, it's going very well and it's actually achieving – exceeding our expectations. The one area where we have a lot of opportunity is to fulfill e-commerce type business and our biggest Achilles heel really has been the distribution side of it. We now will be coming online in Q2 to be able to support incremental opportunity and it all comes down to being able to ship sort of piece and (00:25:08) service because like when you're shipping, for example, on Amazon, you have three days to prepare and ship the product and a lot of products aren't really direct-to-consumer ready. To give you an example, if you have a product that comes in a three bag, they only want onesies and twosies. So you have to get them ready for that type of sale. So having the capabilities and the capacity and stock to ship the onesies and twosies allows you to fulfill, get orders and expand the offerings that we can offer them, the amount of products, the amount of styles and brands that we can provide. So, that's really where the opportunity will come. So as we are looking going forward, this is areas that we're going to expand on our underwear – additional underwear, socks, activewear products, activewear brands that are currently not being serviced today. So, that's really where I think we see the opportunity. And that's the reason why we've gone through this whole business alignment and allowed us to restructure the business more effectively.

And sorry, just to follow-up, you have one facility now to be doing that and the plan is to add a couple more through the course of restructuring? (00:26:17)

We have two facilities. We have one on the West Coast and we have one on the East Coast.

Yeah. The West is the American Apparel?

Yeah, exactly. And we just opened one on the East Coast.

Yes. Perfect. Thank you very much.

Thank you.

From RBC Capital Markets, we have Sabahat Khan. Please go ahead.

Yeah. Thanks. Just on the earlier comments about the disruptions in underwear, you said there still might be a little bit of an impact in Q2. Is there any chance that could spill over into Q3, if there's still disruption kind of in the local area, or do you think that's largely behind you after Q2?

No, that's largely behind us. And so, we'll see the $0.02 in Q2 and then, we don't see any further impact.

And as far as the production is concern, that's behind us now. We're producing at 100% of our available capacity and then some. So, we're working really hard to catch up right now and we're making headway, but the question is just timing and just when things will flow through and catch up, which will really be Q3 by the time we really got things in balance.

All right. Thanks. And then, just on the, I guess, the retail channel. You obviously consolidated the two segments. But can you talk about some of the efforts you're making and still pursuing growth, the things like the underwear programs, perhaps some of the other branded-related, I guess, initiatives that you're undertaking before you consolidated the segments?

Sure. I mean, our underwear business is doing very well. Like we said earlier, our market share in Gildan brand underwear is up to 12.1%. We're in the top sellers of underwear in Amazon. So, we're driving the business very hard and we're focusing it on two fronts. We're focusing on the brand front through all the brands we're selling, which is our Gold Toe brand, our Under Armour brand. We're really looking at all avenues to continue the growth in retail. We're also going to supplement that with private label as we see this shift at mass retail and take advantage of the opportunities that may come our way. We've already seen two opportunities. We have one that was in underwear and another that was in activewear, which will benefit us and give us a little upside to our sales in Q4 and really start supporting sales into 2019. So, the strategy of the company is quite simple is that we're continuing to drive our Printwear business with fashion basics in this hemisphere. Our international growth is doing well. We'll just (00:28:45) continue to sell our brands at retail. And we're also going to supplement our opportunity with our capacity availability to support that with private label when available that meets our criteria. So, these initiatives will really, I think, continue to support the low- to mid-single digit organic growth as we continue to move forward into the years to come.

And just a clarification there, you said the new programs for underwear and activewear, is that branded stuff or did you secure some private label program?

No, that's some private label.

Thank you.

From Canaccord Genuity, we have Derek Dley. Please go ahead.

Yeah. Hi. Just to follow-up on the investment in distribution infrastructure. Can you just talk on the timing on that? I mean, it looks like it was bit of a headwind in terms of SG&A this quarter and likely to continue into Q2. But is that something that you could see abating by the end of this year?

Yeah. So, we had called out that we would – we're investing in our distribution, in our e-commerce, in our IT. We saw that in the latter half of last year. We're seeing it in the first half of this year, in Q1 and Q2. And then, really, when you move into Q3 and Q4, we will have made a lot of those investments. And then, you'll see this reduction that we're driving in SG&A from our overall broader consolidation really flowing through. And that's where you'll see the 100 to 200 basis point reduction. And as Glenn mentioned, overall, for the year, I mean, we're looking to drive flat SG&A and then continue that into 2019.

Okay. That's great. That's helpful. As it stands today, the margin on your e-commerce sales, just, Glenn, referring back to some of the commentary you made about some differences in packaging and things like that. I'm assuming it's lower initially than that in your non-e-commerce sales. When do you see this changing in e-commerce (00:30:47)

No, our margins are significantly higher in our e-commerce sales. I mean, you can just go on our website and look at the products we're selling and the price points that we're selling them at. So, there are additional costs associated with shipping e-commerce. But net-net, I mean, these margins are superior to our wholesale margins for sure.

Okay. So, even after the investment in distribution, you're still getting higher margins (00:31:11)

(00:31:12) yeah, exactly.

Okay. That's very helpful. And then the last one for me, just switching gears. The inventory position at some of your retail partners, obviously, excluding the private label, would you describe that as normalized? I mean, I get your comment on you guys kind of naturally destocked the inventory channel by about $60 million, but would you just expand that? (00:31:33)

Yeah. The retail is basically very normalized. Where the destocking occurred was in our Printwear inventories. So, basically, our Printwear inventory in the channel, which we measure on a quarterly (00:31:43) basis, is down on a year-over-year basis relative to Q1 last year.

Okay. Thank you very much.

From BMO, we have Stephen MacLeod. Please go ahead.

Thank you. Good evening. I'm just wondering if you could give a little bit more elaboration around some of the retail conversations you're having around your brands.

Okay. But, look, we're driving our brand strategy. I mean, like I said earlier, we continue to be very comfortable with our positioning. For an example, as we launched our underwear on Amazon. This year, we're looking to launch other brands as well. So we're continuing to drive our brand strategy and that's a big part of our growth opportunity going forward, and at the same time, we're going to supplement that with the opportunity that comes in with private label as mass starts to move into private label. And those two combined will, we think, generate revenues as we go forward.

Okay. Just to clarify, are you doing any – or do you have any intention to drive your brands through bricks and mortar retail as well, or what you talk about that, you're talking mostly e-commerce?

No, we're talking both. I mean, look, our brands are everywhere. I mean we're in every single channel and every single retail outlet, basically, we have brands for each one of the different channels of distribution and we have Gold Toe brands in every channel distribution. We have our Gildan brand in various channels. We're in dollar stores. We're in mass. So we're continuing to drive our brands in all channels of distribution and that story hasn't changed. The real fact is that as retailers look to continue driving both brands and private label, the private label becomes a supplement opportunity besides brands. It's not just one or the other, it's both.

Right. Okay. Well, that's helpful, and then just shifting gears a little bit on the cost side. Cotton price inflation has been pretty rapid on a year-to-date basis. I know you've cited some pricing that supports your 2018 outlook. But do you – what are you seeing in terms of pricing in the market with this recent step up in the cotton prices?

Well, prices have gone up and I think they've been well supported. Business is very strong. So that also is a big positive. But we don't see any signs of not being able to pass through these raw material increases. I think it's already in place. And as we go through the year, we'll have a better equilibrium between price and cost.

Okay. That's great. Thank you very much.

From TD Securities, we have Meaghen Annett. Please go ahead.

Thank you. Good evening. First question is just with respect to the top line growth outlook. So as you're increasingly focusing on e-commerce, both with respect branded and fashion basics, can you just give us some color as to what kind of support or advertising is required to drive growth through that channel?

Well, it's definitely embedded in our SG&A today. So we're spending definitely more dollars, and that's one of the reasons short-term our SG&A is up. But for the full year, we're investing significant amount of capital to support that side of our business, but that's also being offset by the cost reduction. So, the cost reductions are a lot more significant. Let's say, for example, it allows us to reinvest part of that cost reductions into promotional activity to support our online sales.

And just a second question on the SG&A this quarter. Can you just tell us how much of the increase as a percent of sales was due to the enhancement of those e-comm capabilities and distribution capabilities as well?

Yeah. I think that's probably something that we can talk to you offline a little bit about with respect to try to give you a little bit more color as far as where we were spending. I mean, as we said, our spending was up. We expected it to be up. But then as we go through the year, our overall SG&A will come down. So, we're spending on all of the things that we've been talking about as far as building out our distribution on the various coasts, building the e-commerce, supporting American Apparel, supporting our other e-commerce initiatives, I mean, all of the things that we're talking about. IT, another area we've been investing, as we support our e-commerce effort and also as we support our overall distribution effort. So, as far as a specific breakdown, that's not something I want to provide now, but you can get a sense generally from what your broader perspective as to where we're spending.

Great. Thank you very much.

From Desjardins Securities, we have Keith Howlett. Please go ahead.

Yes. I was wondering if you could speak to the overall Printwear market and what are the volume trends in the basics and the performance versus the fashion basics?

The trend is good. I mean, basics are down slightly, but the overall POS in the market has been positive, which is good. Long sleeves and fleece have been extremely well. Our cold weather products have exceeded our expectations, I think, in general. Fashion basics obviously are double-digits, performance is double digits, and our international business is up 24%. So, all in all, I would say that market conditions and sell-through in Printwear are very strong and are well positioned. So, we feel very comfortable and we're hopefully off to a good year.

And then just in terms of the American Apparel, I think your objective for the year was $100 million of revenue. I'm wondering how you're feeling about that target as we're through the first four months here.

Well, we're on track. We doubled our sales from last year, so we think that we're still on track to become close to that $100 million mark.

Thank you.

And we have a follow-up from Keith Howlett. Please go ahead.

Yes. So I was wondering if you could speak about the global lifestyle brand performance, how it did in the quarter and how it's looking for the year.

We don't break that out for the quarter, but I would say to you, it's going well. Anything you read about the brands, which is the bigger brands in the sporting goods area, they're looking to in-source in this hemisphere additional capacity. So, obviously, that's being supported by people like us that are low cost manufacturer. So we were very encouraged. We think there's some of this opportunity there and we're continuing to obtain new programs and support new business. It's up double digits.

And I'm wondering – just on the international business, if you can speak to your number of distributors that you currently have and whether there's opportunity to increase the number of distributors per market or perhaps the number of markets you're in?

Well, if you look at our international strategy, I mean, definitely, there's room to increase our distribution. We're in 60 countries right now. So there's always room to continue to add distributors. I mean some countries are more mature than others. But as we presented, the amount of product offering that we have in some of these markets is changes. So in other words, we have a full line in the U.S. We carry about 50% of that in Europe and less of that in Asia. So as we become more mature in those markets, we can continue to leverage our supply chain and add more product, which will generate more sales and also generate more mix on those sales, which will give us higher margins in each one of these markets as they become more mature. So there's definitely growth, which is a reflection of our growth in international, which is up 24%, so ahead of forecast. And we're continuing to look at how do we drive American Apparel, Comfort Color, our Anvil brand and continue bring all these brands into these national markets, right. So we have a lot of product to offer. Mainly what we sell in the international markets today is really only Gildan, and partly because of capacity restraints historically, and also because sometimes the market being not as mature to be able to support that kind of product depth. But we're going to continue to see this type of growth. I think you can – double-digit growth for us in international markets in the years to come is basically in our plan.

Thank you.

And we have no further questions at this time. We'll now turn it back to Sophie for closing remarks.

Thank you. Before ending the conference call, I would like to remind you that Gildan will be holding its Annual Shareholders Meeting tomorrow at 10:00 AM Eastern Time here in Montreal at the Windsor. Therefore, we will not be available for questions tomorrow morning. However, we'll be available this evening for the next little while as well as tomorrow afternoon to take any follow-up questions that you may have. With that, I'd like to thank you again for joining us today, and we look forward to speaking to you very soon. Have a good evening.

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for joining. You may now disconnect.