Gildan Activewear Inc. (GIL) Q2 2022 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Q2 2022 Gildan Activewear Earnings Conference Call. All lines have been placed on mute to prevent background noise. After the speaker's remarks, there will be a question-and-answer session. [Operator instructions] Finally, please be advised that today's conference is being recorded. I would now like to hand the conference over to Sophie Argiriou, Vice President of Investor Communications. Please go ahead.

Thank you, Gavin. Good morning, and thank you for joining us. Earlier this morning, we issued our press release announcing our earnings results for the second quarter of 2022. 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 US Securities Commission and will be available on the company's corporate website. With me today is Glenn Chamandy, Gildan's President and Chief Executive Officer; and Rhodri Harries, our Executive Vice President, and Chief Financial and Administrative Officer. Shortly, Rod will take you through the results, after which a Q&A session will follow. Before we begin, please take note that certain statements included in this conference call may constitute forward-looking statements. 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 US Securities and Exchange Commission and the Canadian securities regulatory authorities. During this call, we will also discuss certain non-GAAP financial measures. Reconciliations to the most directly comparable IFRS financial measures are provided in today's earnings release and in our MD&A. With that, I'll turn it over to Rhod.

Thank you, Sophie. Good morning to all, and thank you for joining us on the call today. We were pleased to announce this morning that we delivered another strong quarter with record sales up 20% and EPS and adjusted EPS, up 15% and 27%, respectively. We generated strong free cash flow of $159 million in the quarter and continue to execute on our capital allocation priorities of reinvesting in our business and returning capital to our shareholders. Simply put, we believe our top and bottom line performance is a reflection of the control we currently have over our supply chain and our cost structure and as we realize the ongoing benefits from back to basics and execute on the Gildan sustainable growth strategy, and given macroeconomic uncertainty, we believe we are as well positioned as possible to navigate through any near-term challenges as we continue to position the business for longer-term growth. Now, turning to the specifics of our results for the second quarter. We generated sales of $896 million, up 20% over the prior-year quarter, driven by higher sales in Activewear, partly offset by lower sales in the hosiery and underwear category. Sales of Activewear totaled $758 million, up 27% versus last year due to higher base selling prices and lower year-over-year promotional discounting as well as favorable product mix and higher unit sales volumes in North America. We were particularly pleased to see continued strong performance in ring fund and fleece products, key drivers of active or growth in the quarter. Activewear volume growth in North America was offset in part by lower international shipments compared to last year, largely driven by weaker demand in Asia, where surges in COVID cases have prompted ongoing shutdowns. Finally, in the hosiery and underwear category, where we generated sales of $138 million, the 8% decline in the quarter was due to having to lap demand driven by last year's stimulus payments as well as the impact of a softening retail environment unfolding this year. On the whole, given all these considerations, we're very pleased with our overall sales performance for the quarter. Moving on to our margin performance. Despite the headwinds of rising levels of inflation across our supply chain, our margins for the quarter remained strong. We generated growth and adjusted gross margin of 29.6% in the quarter versus gross margin of 32.2% and adjusted gross margin of 30.5% last year. On a GAAP basis, the gross margin decline of 260 basis points included the impact of the non-recurrence of 175 basis point net insurance gain, which benefited gross margins last year. The balance of the gross margin decrease, which impacted both our GAAP and adjusted margin of 90 basis points was due to higher manufacturing costs, partly offset by higher net selling prices and favorable product mix. Turning to SG&A. Expenses for the second quarter totaled $88 million, up approximately $8 million over the prior year. The increase was primarily due to the impact of inflation on overall costs and higher volume-driven distribution expenses. However, as a percentage of net sales, SG&A expenses fell to just below 10%, improving by 80 basis points compared to 10.7% last year, reflecting the benefit of sales leverage and continued strong overall cost management, which more than offset the impact of inflationary cost pressures. Adding up these elements, we generated operating margin of 19.4% for the quarter and 19.6% on an adjusted basis, close to the high end of our 18% to 20% target range and only down slightly by 30 basis points over last year. After reflecting financial expenses and income taxes, which in aggregate were up $3 million over the prior year, we reported record net earnings of $158 million and $160 million on an adjusted basis, up 8% and 18%, respectively, compared to last year. Diluted EPS for the quarter totaled $0.85 and adjusted diluted EPS was $0.86, up 15% and 27%, respectively, over the second quarter in 2021 with the increases reflecting the benefit of a lower share count from our 2021 buyback program, which we just renewed with a new 5% NCIB program announced this morning. Moving on to cash flow and balance sheet items. We generated operating cash flow from operating activities of $210 million and after CapEx of approximately $50 million, we delivered free cash flow of $159 million in the quarter compared to $208 million last year. After adjusting for a net cash benefit of $18 million related to insurance proceeds, which we received last year in the quarter, the balance of the decline reflected higher year-over-year capital expenditures tied to our projects in Central America, the Caribbean and Bangladesh, and higher working capital requirements, driven by the impact of the Frontier acquisition, higher raw material and work-in-process inventories and the impact of inflation on unit costs. Finally, we ended the quarter with a net debt position of $848 million and a leverage ratio of 1.1 times at the low end of our target range. This sums up our results for the second quarter, which, combined with our first quarter has translated into strong overall performance in the first half of the year. Now as we move into the second half of the year, while we have seen some slowing, we believe the recovery of large events and travel and tourism remains a tailwind to demand, which is supported by the feedback we are getting from our major imprintables distributors. Also, while we are seeing a softening retail environment, for Gildan this is primarily impacting national account customer sales of Activewear hosiery and underwear products, which represents a smaller part of our overall business. Putting this all together, given our record first-half performance and the ongoing benefits of our back-to-basic strategy, combined with our shift to the GSG strategy, we remain positive as we move forward and confident about our ability to deliver on our 3-year objectives announced earlier this year. This concludes my formal remarks. With that, I'll turn it back over to Sophie.

Thank you, Rhod. At this time, we're ready to begin the question-and-answer session. I'm going to turn it over to Gavin, our operator, so we can start the session.

[Operator instructions] Your first question comes from the line of Paul Lejuez of Citi. Please ask your question.

Great. Thanks, guys. Curious if you could maybe talk about your growth in the first half of the year relative to the growth in the market, and what are your expectations for the second half, both for the market overall and your growth within the market specifically? Then second, just curious if you're picking up any new big customers as a result of more efforts to do more near-shoring from a supply chain perspective or if the growth is coming from all existing customers. Thanks.

Okay. Thanks for the question, Paul. If you look at our growth in the first half of the year, I think we are very pleased with the way that growth unfolded. Effectively, if you look first quarter, we obviously had a very strong quarter, and if we look at the way that unfolded, we split first quarter about 50% price, 50% volume. As we moved into the second quarter, effectively, what we saw was about 3/4 of the growth. The sales was driven by price, and then the remainder was driven by volume and a little bit of mix. It was interesting in the second quarter because what we really saw was really strong growth on Activewear as we called out, and we saw negative growth in hosiery and underwear and if you drill into activewear, effectively, what we saw was the real strong growth in North America versus international. International was very weak because of things that we're seeing in China and elsewhere. Then in North America, the growth was very strong on the distributor side, effectively, and it was a little bit weaker, I would say, on anything related to retail. Our North American activewear business going very well, we're very pleased with how it's unfolded, and we very definitely think we're gaining market share. If you look at some of the key growth categories, rings fund products or if you look at three fleets, for example, we saw a very strong POS in those areas. I would say the driver has been Activewear, it has been North America, it has been where, I would say, we're differentiated for many others because we effectively have a big approver business were less affected by the retail environment, and as a result of that, we've seen market share growth. As we move into the second half, as we said, we have seen some slowing as we've moved from June into July, but the outlook remains positive in the back half because of this shift that's going on, I would say, to a certain extent, from hard goods to people want experiences, and if they want experiences, they want travel, they want tours and they want events and that's a strength in the Printwear business where we're very strong, but we've got a large order book. We haven't seen cancellations and so we feel very good about the back half on that side of the business. On the retail side, that's weaker, though, as we called out with respect to underwear, hosiery, and anything on the Printwear side, which is what we really call our national accounts, which goes into the retailer side of the business, and that's obviously because of the inventory adjustments that are occurring in retail, but over time, we expect that to come back. I think, all in all, we feel very good about the way things are evolving.

Yes, and maybe on your second part of your question on near storing, look, we still see lots of opportunity. So far, we've been obviously very tight on our capacity, but we have a lot of opportunity, and our focus is going to be as we move forward into the back half into '23 is to obviously obtain new programs and new relationships with customers looking to nearshore. It's not going to be just about our core business, it's also going to be developing new business as we continue to expand and bring on the additional capacity.

Just to follow up there, were you facing some supply constraints in the second quarter? Were you held back in any way? Any bottlenecks that occurred in 2Q, and how do you see those resolving in second half? Or would it be beyond the second half?

Well, look, we've been tight if our finished goods inventory basically has not moved in probably 12 months to put this in perspective. We're shipping everything we're selling, and we have a pretty good order book. We are tight. We acquired Frontier in December. And as we said, we were going to work through their customer relations and contracts, which are pretty much subsiding now, which is giving us additional capacity as we move into the back half of the year with yarn, and all of our capacity expansion plans in Central America are complete, so we can just absorb that yarn relatively easy to increase our capacity as needed and we're focusing on building our Bangladesh facility as well, which will start in Q2 of next year, but we'll probably by time of ramps up via 24 story. I think we're really well positioned with capacity to support, I think, new programs, the opportunities of nearshoring, and as well as the overall capabilities of taking additional market share as we move into '23.

Thanks, guys. Good luck.

Thank you. Your next question comes from the line of Vishal Shreedhar of National Bank. Please ask your question.

Hi, thanks for taking my questions. In the past, you would give us POS indications intra-quarter. I was hoping you could share with us some of those July POS indications for the power industry.

Well, July was our disturb business, like Rhod said, is it's still good for moderately to slightly, but I think it's really in good shape, and I think we have a lot of momentum there. Where we saw really, I think a little bit of downward pressure, obviously, our retail business has been negative, and I don't think it's really ever since the end of Q1, I think it's been a trajectory similar and hasn't moved them in a typically because of stimulus and the higher cost of energy and food, et cetera, to the mass market shopper, but that's on the content. Where we saw a little bit of a pullback, I think, at the end of June and July in our national account business, which is very short term. The thing about the national account business is like an act at-once business. These guys are constantly replenishing product and prints and t-shirts in the retail channel, and these retailers as you've read of all the high levels of inventory, and those inventories are typically in their own private brands. It's not easy for them to just say come sell them. So they stop buying what they can stop and they look at things that are more at one type businesses. I think that as the retailers work through their inventories in the next month or two to get them back in line, we'll see that business come back. I think it's an increasing part of their overall sales and I think it's just a timing issue as retailer inventories working sells through and that's the feedback we use that from our national account customers as well. All in all, I think we're still pretty positive. I think we're in a good position, and we don't know what the future will be until we get there.

Okay. I guess the next question would be on commodity inflation, particularly cotton. Maybe you could just remind us or help us understand where your pricing is with respect to cotton and how you feel about the outlook with the pricing with respect to your key commodities?

Well, pricing pretty much is firm in the market. I would tell you start with that and I would say that when we raised our prices, which is a combination of promotional discounts and some price increases, we eliminated the promotional discounts and we took some price increases, but when we set our pricing, we set pricing pretty much where the levels of cotton are today. We had a good position in our cotton fixations, so we set cotton at that level probably where the market is today. Look, there's still lots of inflation, there's inflation in energy, there's lots of labor inflation. The only area that I think we've seen a little bit of deflation is a little bit of the freight side from particularly goods coming from Asia, but other than that, inflation is still an obstacle, cotton is pretty much going sideways now at the same levels in which we fix our prices. I don't see there's going to be much movement there as we move into the future, but we'll see how that goes.

Thank you for the color.

Your next question comes from the line of Stephen MacLeod from BMO Capital Markets. Please ask your question.

Thank you. Good morning. Just wanted to circle around on just the top line. Accent in Q1, you had indicated you saw some deceleration sort of into that mid-single-digit range, and then you put up a very strong top line. Just wondering where you saw outperformance relative to your expectation when we had the Q1 call.

We're continuing to see the strong momentum obviously, in our wholesale distributor channel, like what Rhod said, particularly in fleece in the fashion teaser segment, our rings on T-shirts, those are the areas which are really driving market share, and we're gaining share in those categories. Those are really the ones that are leading the pack and we're getting the recovery of our basics basically as events continue to open up and etcetera. That channel is resilient. It's all about the experience, and it's doing well, and we're taking share within the channel.

Great. Thank you. Then just turning to the national accounts business. Can you just remind us how big that business is as it relates to your sales into that market?

We really don't break that down, but it's an area that obviously has been a big help to our recovery in terms of the overall sales in the US market and I think we think it's short-term in terms of its decline. It's still a small part of our business overall, but it actually is a growth driver for us as we move forward.

Okay. That's great thank you.

Your next question comes from the line of Jay Sole of UBS. Please ask your question.

Great. Thank you so much. Glenn, I'm just wondering if you can elaborate a little bit on the levels of inventory at the distributor level. Obviously, the last couple of quarters has been well below normal. Have you seen that adjust now, or how do you see it?

Well, there's probably been maybe a slight pickup, but I would say that the weeks of supply because it's always on a go-forward basis, so the weeks of supply that we had at the end of Q1 is similar that we have in the end of Q2. We have typically sales to cover the following quarter in the channel. That's a normal level of inventory and still below '19 levels.

Got it. Okay. Then maybe just on buybacks. Obviously, the company continues to buy back shares. How are you thinking about the rest of the year in terms of priority for free cash and just sort of capacity to maybe buy back more stock now that the authorization has increased?

Jay. Well, yes, if you look at our existing program, right, it expired just there's just expiring now. I think we did a great job on the existing program, effectively repurchased 85% or 8.5% of our stock over the last year. We didn't get it all done, and we do want to continue with return of capital as a key part of our overall capital allocation framework and so that's why we've announced a new program, effectively 9.2 million shares and we'll continue to effectively work away against that new program now as we go forward. If you look at our free cash flow, for the most part, our free cash flow is available for dividends. It's available for M&A, but in this environment, we don't see that really, and obviously, we're focusing on our own operations, and we're doing a great job there. I think that leaves free cash flow available to support buybacks as we go forward. I think you'll see very definitely will continue as we have been doing over the last year.

Got it. Okay. Thank you so much.

Your next question comes from the line of Luke Hannan of Canaccord Genuity. Please ask your question.

Thanks. Good morning, everyone. Glenn, if I remember correctly, I think you had said on the previous earnings call that the view would be that restocking is more likely to play out in 2023. Is that still your view, and if so, is that more likely to occur in the first half of the year or in the second based on what you're seeing today?

I think that with the way the market is today, I would say that it's hard for us to say because obviously, our objective is to keep a good balance of inventory in the channel, so we may never ever get up to those levels of '19 to be perfectly honest with you, and it's not necessarily an advantage for anybody, it's more working capital for our customers, and so our objective is that as part of our back-to-basic strategy, the reduction of our SKUs and the ability for us to service basically, I think that we would like to see the levels of inventory stay where they are today. I think that's sort of a really, I would say, our long-term plan because then we can create better value for our customers basically because they get better return on their capital and we'll be able to react to the market and service it and great much better. I don't foresee it really coming back and saying, "Hey, we want to get this inventory back in the channel because maybe in '19 that could have been on the high side, and then as we move into COVID and in the low side, I think we probably have a very good balance today.

Okay. Understood. Then my follow-up, recognizing that it's very, very early here, but you are currently pacing well ahead of the 3-year guidance that you had outlined at the Investor Day, and it sounds like the distributors are still fairly clean on inventory, so the outlook for the balance of the year on balance, even with a softer retail environment is still fairly optimistic. I guess I'm not asking that when we might see an upward revision of guidance, but again, clearly, the implication would be if this is a strong year, then the implication for 2023 and 2024 that they would be on balance weaker, which might not necessarily be the case, so when might we see a revision of any kind of that guidance?

Well, the ink is not dry in the last guidance. I think we just basically have to approve has been pretty a short time ago. I think we're continuing to drive against it. I think it's an aggressive target, it's seven to 10 on a CAGR basis, and we're on track. I think that's the good news, I think, at the end of the day, is that we don't know what the future will be, that's why we gave a range, but we're on track basically to achieve it, and we're comfortable within that range in the period that we communicated to. Once we get to the point where we actually achieve it, then we set the bar maybe as we go forward. We're bringing on, obviously, and the capabilities of us and our sales growth is a function of capacity. So as we look at bringing on capacity, which we've done, I think, and are continuing to ramp up between Central America, then we have Bangladesh and then we have a second plant in Bangladesh, so we can obviously continue to build. We have the ability to, we obviously increased our guidance and what we'll do is I think we're good for now, and then once we achieve it, we'll look at resetting the target.

Understood. Thank you very much.

Your next question comes from the line of Jim Duffy from Stifel. Please ask your question.

This is Peter McGoldrick on for Jim. I just wanted to focus on a little bit on the near-term trajectory to get some guardrails around the demand picture in the Activewear business. Can you explain how you're planning order levels into the North America Printwear market? How you're thinking of pricing? How is that embedded? And if you see any changes in the demand picture from the travel and tourism or any other feedback that you had mentioned in the printables market?

No, what we said was we have a good order position. Our pricing is pretty much firmed, and the area, I think, that we've seen softness like I said earlier, was a little bit in the national accounts space where basically big retailers are cutting back inventory, and that needs to be worked through as they bring to inventories line, and that should come back. All in all, we still see positive tailwind of the experience, people traveling, rock concerts, camps, jog runs, all the things that were somewhat COVID related are still positively coming back. That's all in the positive direction and retail and obviously, is the one area where I don't think the consumer basically is stopped spending, and I think that will work itself as well as we go forward.

Okay. Thanks. I guess just drilling in on that last point, recognizing the increased challenges at retail, can you give us insight into the discussions you're having with those customers or your expectation for the timing of that? Is this a one-time reset to inventory? Or are you expecting a lower-demand picture going forward on a sustained basis?

Well, first of all, that's a tough function of like we don't set inventory, we have programs and then they get replenished and the replenishment of those programs is running below by 8% basically in retail. Our national account business, that's a business which is basically, as I said earlier, is just a timing issue until they open the dollars come back, and then they'll start to supply more product. It's not us, that's our customers. Customer's obviously, that's doing that, but look, we're not really focusing on the existing programs that we have, but we're also at the same time looking for new opportunities, new programs and additional capacity coming on. We've been very tight on production, so we haven't really had much to sell, so as we take advantage of customers looking to nearshore more product, retailers looking for better value, which is what killed band is all about is the value proposition, we're going to continue to grow the business. We'll focus on the existing core business we have, but I think that as we move into the '23 and '24 is also going to be looking for new opportunities and leveraging our supply chain.

Okay. Thank you very much.

Your next question comes from the line of Brian Morrison of Jordan. Please ask your question.

Good morning. A couple of questions, Rhod, and just following up really on with activewear in the back half of the year, is your message here that you expect unit volumes to be positive, it's pretty clear that pricing year-over-year will be strong. Is that the message?

Well, look, we feel good about the Activewear business. There's definitely strength in North America. There's weakness as we talked about in national account, there's weakness in international, so you've got to balance all of that and look at the pluses and minuses, but overall, we feel good about the business.

Okay. I guess shifting tunes here and following up on the Bangladesh commentary, does the slowing global economy have anything to do with your commentary that Bangladesh may be a Q2 event, and what kind of flexibility do you have on the timing of the start with that facility?

No, we haven't changed really. Look at other than originally it was going to be -- sorry, basically, it was going to be Q1, but just timing of equipment and it's definitely not a capacity issue. We need all the capacity we can get from there. It's just that by the time the plant starts, it will start actually in Q1, but it's going to be minuscule really as it starts up. So we won't see the effects really until Q2 and then by the time that product gets our supply chain and really makes an impact on our sales, it will be a 24-story, so we're pushing as hard as we can on Bangladesh, but like anything else, we're working through all the supply chain and other things to bring on to capacity, but saying that, we have a lot of capacity that's coming on still in Central America. We're in a good position as we leverage the Frontier acquisition to continue increasing the capacity and that was really our Achilles heel is that we couldn't increase that capacity until we had the yarn available to support it, so that is in place now, and we've eliminated most of all of the outside sales by July. There's a couple of small programs we're finishing this month, but in general, that yarn will be used to support our growth as we move into '23. Capacity is not an issue. I can tell you that, for sure, and we're well on our way to be able to support our sales targets.

Does yarn in the industry remain tight and should that enable you to gain more market share now that you're 100% sourced with Frontier?

Should help. That's for sure, and it's still tight. I think that those are two positives for us.

Okay. Last question. Rhod, the last couple of quarters, you've had this note in your financials on your MD&A that you plan to exit the legend shape around the brand name business. Just can you update us what the process is here, the magnitude of the sales, and the timing that should take to play out?

Yes. That was part of our overall back-to-basics initiatives, Brian, we've been looking at that. We've been working away on it, and I would expect that something will unfold here in the not-too-distant future. It's very small. It's very minor. It's a no-material part of our business, so effectively, as with all of these things, we work away at it constantly. And I think, again, it's just part of all the back-to-basic initiatives, which we've had a lot of impact from back to basics, but it's ongoing. Its tax basis never finishes for us. And I think we'll get something done here now in the not too distant future.

We're talking transaction rather than wind down, correct?

Well, again, it's very small, so effectively, yes, it probably will be something on the small side, but we'll see.

Thank you very much.

Your next question comes from the line of Mark Petrie of CIBC. Please ask your question.

Yes, good morning. Thanks for the comments so far. I just had a follow-up question with regards to the pricing environment, given the volatility in cotton specifically and I understand the comments, but could you provide a little bit of context just with regards to how material the promotional component is to the pricing picture overall? Is the expectation that some of those promotions will be coming back into the picture as demand potentially slows and as clearly as playing out, cotton prices are coming back? Thanks.

Right. First of all, pricing is pretty firm in the channel right now, so there is no really promotional activity to say. I would say that, generally, everybody who's in our industry has significantly high-cost inventory. If you look at the cycle of buying cotton, for example, you buy your July cotton, which is a five-month period and if you look at where the prices were in July, they're substantially higher than they currently are now. Some may not have high prices, but some will, but I would say, in general, people have high-cost inventory either between the freight, the labor, the cotton, all the various things, so it's keeping pricing higher. If anything, I think that people will cut back on production because they think that will be a natural trend to work through their high-cost inventory. As far as we're concerned, we never raised prices to the levels of the really peak cotton, that's why our gap obviously is quite significant in the market in terms of our competitive advantage and we raised prices to reflect the current cotton prices, I think that are there in the market today. There is still inflation, like I said earlier, labor is definitely a factor. Energy is definitely a factor. The only area other than raw material is freight. On the raw material side, polyester is actually continuing to go up because it's also oil-based. All these puts and takes, inflation hasn't really subsided and I personally don't think is going to. There might be a little bit more of an impact globally on demand, but I don't think inflation is going to be stopped anytime soon personally. That's just my feeling. I think we're well positioned as far as everything we have and we'll see where it goes. We control what we control And we're controlling our SG&A, which was below 10% this quarter, and our target is longer term is to keep it there, so we'll see where it goes and I think we're in relative good shape to hit our targets on our operating margins.

Okay. Understood. Appreciate all the comments. All the best.

Your next question comes from Chris Li of Desjardins. Please ask your question.

Hi, good morning, everyone. Glenn, just based on everything you said so far on the various demand dynamics in Activewear, is it fair to say that your POS for North American Activewear overall for both wholesale and retail combined, was it still positive in June or July, or has it sort of dipped a bit negative given the pullback in retail?

Well, what to pull down our POS in June and July was really our national account business. Our distortive business moderated somewhat in Q1 like we called out, but right now, I would say that it's the national account and obviously, the retail side of the business, which has been a little bit of a drag, let's say, for example, in the last six weeks or so, and obviously, international hasn't been performing either, but that's one area that we're starting to see a little bit of a pickup around because we've had a pretty sharp declines in our international business. But all over, I think puts and takes, I think, that in the national account side, but I think it's temporary because I think it's just a question of bringing inventories in line at retail. It's not a fundamental change in direction because a lot of this national account business is actually even purchased directly from the retail stores themselves, each retail store manager has an open to buy in T-shirts. It's a business within the business at the retail level, especially for the free printed side of it. It's all going to come back, we think, and we're still cautiously optimistic, but we're cautiously optimistic, I think, is the key.

Okay. That's helpful. So and suffice to say, whatever the POS rate that you're seeing right now, is it fair to say maybe we're starting to hit the bottom, and like you said, maybe as the inventory gets adjusted again, it will start to gradually pick up? Are we kind of close to that bottom, do you think?

Look, we don't know. Our customers are very bullish about the business, which is a positive thing and so we've done all of our research that we can do in the market, but we don't know, we don't know, right? We're in a global environment that says not completely unstable, when people start breathing the news we are in good shape really because I can tell you one thing, the job market as tight as ever. The job market is not a reflection of the overall outlook, I would say, in terms of what we're seeing in reading. I think we'll see what happens.

Okay. No, that's helpful. Maybe one for Rhod, just in terms of maybe the margin outlook for the second half and obviously, I don't think it's going to be as strong as first half given some of the cycling of the price increases and some of the other pressure, but can you give us a sense of what you expect adjusted EBIT margin to be in the second half? Do you still expect to be in the 18% to 20% range for your long-term target?

That's the right question. We definitely, as we move into the second half, we will see -- we took price as we entered the third quarter, so we have price effectively there to offset some inflation, but as we move further into the half, we'll effectively see the inflation coming through. I would expect to see some moderation from current levels from an overall margin perspective, but we'll stay well within our range.

Okay. Thanks, and all the best.

There are no further questions at this time. I would like to turn the call back over to Sophie Argiriou.

Thank you, Gavin. Once again, we'd like to thank everyone for joining us this morning, and we look forward to speaking to you soon. Have a good day, everyone. Thank you.

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